Family Office – Compensation-Decision-Making-Process
In terms of compensation, multi-family offices are focused more on asset gathering, so the compensation of asset managers is typically more sales-driven rather than based on investment performance. However, since the financial crisis, bonuses at family offices have generally been much more locked-up and, dependent on longer-term performance criteria, rather than short-term, and subject to claw-back options – in line with the broader trends in the financial services sector.
|Objectives and Policy||Principal||Principal||Principal|
|Strategic Asset Allocation||Principal||Trustees||Trustees|
|Mandate Design and
|Internal Investment Team||Internal Investment Team||Advisor/ Fund of Funds|
|Security Selection||Internal Investment Team||Fund Manager||Fund Manager|
Another challenge that families face is balancing the trust versus-expertise trade-off while selecting between in-house and external heads for family offices. The majority of family offices typically choose professionals from existing family businesses to head family offices, as they are familiar with the family business and the family in question. On the other hand, some families specifically avoid hiring professionals from the family business, in order to create an explicit distinction between the family wealth and the family business.
In summary, successfully navigating concerns between principals and agents is not an easy task for families. But they can mitigate these tensions by implementing appropriate governance structures and incentive contracts. Selecting appropriate benchmarks is also important, as poorly designed benchmarks may cause fund managers and external partners to work against what families wish to achieve. Families should also consider establishing formal processes to make investment decisions, as this can help family offices to set clearly defined boundaries and goals, and avoid ad hoc decisions that are not in line with the broader mandate or long-term strategy.
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