Working with family offices “is like being a cultural anthropologist,” says Mark Tepsich, executive director at UBS, who previously served as general counsel for RMS Investment Group, LLC, a single family office. In his current role, he helps families with governance, including establishing investment committees. He discusses how investment committees can be helpful and how families can set them up:
Why should a family have an investment committee?
When you look at a multigenerational family that has what I’ll call permanent wealth — if you make good decisions, it can literally last hundreds of years — it gets very complex.
You might have hundreds of trusts, dozens of family members — and the trustees are really, truly responsible. That often puts the onus on a handful of trustees. While legally and technically that is the case, the family should really put in an investment committee to institutionalize the processes around the permanent capital.
For example, let’s say you have three trustees over 75% of this capital. That really shouldn’t be the case — there is a lot of key man risk there. How do you democratize the decisions around a portfolio for a family that is often heavy on private equity and other alternative investments like hedge funds? You should have an investment committee, populated by a cross-section of the family. Since many family members aren’t investment professionals, the committee should also have at least one independent, unconflicted, external non-family member who is an investment professional.
What is the role of the independent members of the investment committee, and how should they be chosen?
That independent person is key — it helps having somebody that’s not beholden to the family. An investment professional can help filter and direct and curate the conversation of the investment committee, acting as a translator between investment advisors and family office staff, as well as the family themselves.
How do you find this person? There should be some sort of search. They should not come from the family’s existing providers — it shouldn’t be the long-time family attorney who is really just going to do what dad has said. There should be a small search committee comprised of family members — it doesn’t have to be the entire committee — and facilitated by family office staff and a recruiter.
You’re choosing this person based on a process, based on a profile and based on their qualifications — not somebody who has long-standing family ties.
What is the role of the family members on the investment committee, and how should they be chosen?
You’re not trying to create investment experts in the family, but you are trying to create family members who can navigate and be literate with an investment program that is meant to last essentially forever.
The broader investment committee is often based on family lines. Say the second generation has four siblings and the third falls down into those branches. This is typically what happens — and I’m not saying that’s wrong, because there should be some sort of representation for each branch, but it should be more thoughtful than that.
It should be, what are the qualifications? There definitely needs to be an onboarding process — that enables everyone to speak a certain language.
How important is it for family members on the investment committee to have a financial or legal background?
Often you see three siblings who work as attorneys or financial professionals, for example — and then one sibling who is an artist. The conventional wisdom is that the artist shouldn’t be on the investment committee, but I would say that’s wrong. The artist will come in and ask the most insightful questions. In one family I saw a family member like that ask, ‘I want to know how you make a decision. What are the values and the metrics?’ Having somebody that is a total left-brain thinker could make a lot of sense in a lot of scenarios.
The mistake I see with a lot of families is that, through their governance, they’re going to try to institutionalize decision-making, make it process-oriented, try to create family members that are financially literate — but they’re often creating groupthink. By having someone like the artists, the independent person, you’re trying to get fresh voices and fresh perspectives — somebody that’s going to ask the question that nobody thinks to ask. So the artist shouldn’t be dismissed because they don’t have an investment background. If they have an interest and want to contribute, invest in them.
What is the investment committee’s role?
The investment committee is really an oversight board. They are not supposed to be managing any day-to-day operations. They’re there to oversee the family office staff and the investment advisors.
How often should the investment committee meet?
I think it should be quarterly, with some preparation beforehand. An investment committee shouldn’t be doing too much. It should be providing oversight, asking thoughtful questions and overseeing advisory to make sure that what they’re doing adheres to the investment policy statement. The more you meet, the more there’s pressure to act. It’s almost over-governance.
Which comes first, the investment policy statement or the investment committee?
I’ve seen it go both ways. Families aren’t generally starting from a zero portfolio. What often happens is there’s an inflection point: Either they’re switching providers or each family member had their own portfolio and they have decided to combine assets and achieve scale. There’s usually some inflection point where they say, ‘OK, we could do it a better way.’ This better way is through an investment committee. You get some governance and some joint decision-making, you really institutionalize things. And you are also trying to create an educational environment for the next generation.
You go through the process of building a thoughtful investment committee. Usually, you have the investment committee first, and then the IPS to guide their decision making. Usually, the investment committee or a subset of it will work with the family office staff and outside advisors to build the IPS, then present it to the committee and sometimes to the whole family. It’s there to guide your decision-making.
What are some of the challenges investment committees encounter?
We work with a lot of families that come to us after they had external consultants help them stand up an investment committee. They wonder, ‘What are we supposed to be doing?’ They try to get too formal, too fast. Don’t overthink it. To have effective governance, you really just need to meet. You’re going to figure it out over time. Don’t go into it thinking every meeting needs to be perfect. Yes, have an agenda, but don’t overthink it. The word ‘governance’ can be intimidating, but at the end of the day it’s a group of family members talking and asking questions and hopefully coming to a good decision.
The investment committee itself is going to become more and more important as assets are transferred, as family members age. You’re going to have obligations and responsibilities as well as benefits that are constantly transferring and evolving within the family.
