Setting up a family office for managing family wealth is a task that displays singular challenges to a successful businessman. This is because the entrepreneurial skills required to create the family wealth are entirely different from those necessary to manage and cultivate this wealth. Being aware of this fact, many successful businesspersons often decide to establish a separate organization, the family office, whose purpose (among others) is to provide professional wealth-management services. Hence, the following question presents itself: How should the wealth management leg of the family office be organized in order to ensure that the family wealth is managed in a way consistent with the family’s investment objectives?
More specifically, the above question may be split into the following ones:
- Who bears the responsibility for identifying and maintaining the risk appetite of the family, throughout the course of investment activity? Can a single person carry out this task efficiently, or is there a need of establishing an investment committee?
- What kind of guidelines should the family office issue in order to ensure a well-structured and disciplined strategy for the management of the family wealth?
- Which investment activities will be carried out by the family office itself and which ones will be outsourced? Put differently, how much of the overall family’s capital will be entrusted to external asset managers and how much (if any) will be managed directly by the office?
- In the case that the management of some (or all) of the capital is outsourced to external managers, how should the office monitor and evaluate their investment performance? To this end, is it necessary for the family office to define a benchmark portfolio against which the performance of the overall family portfolio is compared? What type of performance evaluation criteria must be adopted? How often should the evaluation exercise of the asset managers take place? In the case, that some managers exhibit superior performance relative to their peers, should capital be reallocated in their favor? More generally, how can the office take full advantage of any performance discrepancies among asset managers?
- In the case that the family office decides to manage some of the capital by its own means, what investment procedure should it adopt? What criteria should the internal managers satisfy in order to guarantee that they have the competence to make sound investment decisions? Who has the responsibility of evaluating the internal managers and compare their performance with that of the external managers?
- How can the office ensure that its investment strategy is consistent with the risk profile of the family over time? More generally, which specific procedure ensures that managers’ incentives (internal and external) are aligned with those of the family?
- As far as risk management is concerned, who is assigned the responsibility of monitoring the risk characteristics of the overall family portfolio over time? What methods of risk monitoring are appropriate for the special features of a family portfolio? What actions should be taken if at any point in time the value of risk (VaR) of the portfolio exceeds a given threshold?
- Concerning the cost of the portfolio management, which process enforces the decision making process to be cost conscious? In particular, who is in charge for surveying and comparing the fees charged by the external asset managers, and recommending the necessary adjustments?
In Assetwise, we have scrutinized all these questions, one by one, over the last five years and have come up with a structured and orderly procedure that answers them in a satisfactory and consistent manner. This procedure ensures that the wealth management services of the family office are efficient, transparent and free of behavioral bias, thus reflecting the family’s investment objectives in the best possible way.