Family Office – The Investment Process
How do family offices invest their principals’ money? Family offices tend to follow their own individual investment policies, because unlike banks and other financial service providers, they are generally subject to the more relaxed regulations applicable to companies, trusts and foundations. However, the degree of freedom enjoyed by family offices is reduced in proportion to the level of services provided by third parties and the number of families served by the family office.
Family offices can often diversify their assets very broadly, much more than institutional investors can, thanks to the
amount of assets under management. Family offices are also generally better able to invest on a more long-term basis, and primarily pursue wealth preservation in order to pass on assets to the next generations. According to recent research, many prefer direct investments, and where organizations have an entrepreneurial principal, are more likely to become directly involved in the investment process. More than a third of those surveyed would be glad to contribute to the planning stage of their investments.
Many family offices take an open approach to their investment policy and try to avoid conventional investment paths. Thus
many invest in alternative investments, such as yachts, horses, art, forests and farmland, or car, wine or watch collections.
This enables them to spread risks while reflecting the personal preferences and passions of family members.
The growth of family offices is a relatively new trend, and because of the diverse origins of many family fortunes and the different backgrounds of CIOs, it is difficult to pinpoint a uniform family office investment process. Very broadly, the process should first set out an investment road ahead, listing goals and risk tolerance, and resolving issues relating to business shareholdings and family member stakes. The next phase is to establish the portfolio structure (for example, how much to place in equities, real estate, etc.) to deliver the risk/return trade-off the family requires. Implementation and governance then follow – finding the appropriate investments to make up the portfolio, and overseeing their performance.
Role of the family
The crafting of an investment process is heavily dependent on legacy issues, reflecting the economic sector where the family made its money, the extent to which the family is still actively involved in the business, and the background of the CIO of the family office. Each of these factors tends to bias how a family’s wealth is invested and impacts the subsequent need to produce a diversified portfolio for the long term.
Another important issue is the composition of the family. For example, a family office set up by a first-generation entrepreneur would probably be very different in its aims to one established by a large fourth-generation family. As a result, the behavioral, financial and legal issues involved make structuring the investment process of a family office both complex and fascinating.
Family Business Survey suggests that most family businesses, even those with a third generation and older, do not yet have a family office. Cost and complexity are two contributing factors here, although it is also clear that the rate of growth of family offices is accelerating, and the need for a transparent, independent and structured investment
process is a key reason for this.
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