Family office is an entity/team of professionals established by a wealthy individual to manage the family’s wealth. As wealth grows, so do the challenges of planning for and managing it. The staff usually include an investment advisor, tax specialist, estate planner, accountant, and more. The core idea is centralization, bringing various aspects of a family’s wealth management under one roof to ensure a cohesive strategy aligned with the family’s long-term goals and values.
Family offices manage the wealth and investments of high-net-worth families, employing sophisticated strategies to achieve long-term financial goals and preserve wealth across generations. Due to high value of investments involved, Family offices can use best practices which are atypical to institutional investors.
A. An Investment Policy Statement (IPS) serves as a blueprint for a family office’s investment program, outlining its objectives, strategies, risk tolerance, and guidelines. It provides a framework for consistent decision-making, ensuring that investment choices align with the family’s long-term goals and values.
IPS also keeps emotions out of driver’s seat, built in risk guardrails and a clear scorecard to measure investment success.
An IPS answers questions like – what are investment goals? Is it growth, generating income, managing cash flows or philanthropy. It also defines risk tolerance, time horizons, investment selection criteria and performance tracking.
B. Asset Allocation policy is foundational to any IPS, 92% of portfolio performance can be attributed to its asset allocation (says a CFA Institute study).
Strategic asset allocation is a more passive approach and concerned with reaching the investment goals in the long term.The strategy allocates money to stocks, bonds, cash, and alternative investments based on macroeconomic expectations, historical returns, risk profiles, and correlations. For example, the 60/40 target mix gives 60% of the capital to the stock market and 40% to the bond market.
Tactical asset allocation involves making short-term adjustments to a portfolio’s asset allocation based on market conditions, economic indicators, or other factors. For example, in 2020, tactical strategies would have reduced their portfolio’s exposure to the stock market.
Rebalancing involves periodically adjusting a portfolio’s asset allocation back to its target mix to maintain the desired risk level and optimize returns. Rebalancing brings discipline and can be done periodically or when a IPS threshold is triggered.
Core Portfolio maintains a significant portion of assets in securities which can be held almost perpetually for example – Exchange traded funds, stocks of large cap companies etc.
Satellite Portfolio can have investments with short term profit objectives for example – certain direct stocks, other asset classes (Crypto-currencies) held for a certain period only.
C. Drawdowns are real and painful. Risk management is not to eliminate risk but to understand, measure, and proactively manage various risks to achieve the family’s investment objectives. Today’s risks include protection of privacy, data and cyber security.
Many family offices now routinely use strategies traditionally available to institutional investors such as VaR, Monte-Carlo simulations, Liquidity based investments, proactive research and information access. Simple strategies such as diversification, standard deviations, security risk analysis, performance attribution can yield high returns.
D. Investment Portfolio decision making finds its roots embedded in the Family office’s Tax and Estate strategy. Portfolio investments can be scattered across multiple asset classes and geographical jurisdictions. This highlights the need for comprehensive and unilateral family office strategy.
E. Effective accounting and reporting are essential for family offices to maintain financial clarity, track performance, comply with regulations, and facilitate decision-making across generations. They must go beyond simply managing investments to encompass the family’s broader financial life, including cash flow management, tax planning, and compliance.
An IPS can help set guidelines for periodic investment reviews and reporting. A comprehensive analysis of the entire portfolio across countries, asset classes and currencies into an easy-to- understand single page report is the ultimate goal.
Microsoft Word – NRI taxation on Mutual Funds.docx
By diligently following these Investment and operational processes and refining them over time, family offices can operate more efficiently, manage risks effectively, and ultimately achieve better results in safeguarding and growing the family’s wealth and legacy. A professional family office staff can help and implement ‘Repeat the boring’ for family office fitness and longevity.
