A family office that is founded to serve a small, well-aligned family group may find it easy to determine investment goals and strategies. But as families grow, investing together becomes more complicated. Members will necessarily have different investment objectives — some may want to pursue impact investing, for example, whereas others favor more traditional investment strategies. Due to varying time horizons or differing philosophies about investing, family members are also likely to have different levels of risk tolerance.
Nancy Bruns, chairman of the board for the John L. Dickinson Family Enterprise, has seen this first-hand. The family has taken a balanced approach to collective, versus individual, investing.
“Family assets are managed through an investment company owned by family members,” Bruns says. The investment company’s assets are invested and overseen by an investment committee composed of both family members and outside advisors, operating in accordance with the family’s investment policy statement.
Individual family members also hold assets in trusts that were established in the 1930s to help preserve and protect the family’s wealth.
“Investments within these trusts are managed collaboratively between each beneficiary and the trustees,” Bruns says. The family office maintains a trust company that serves as administrator and corporate trustee, providing oversight and governance.
Individual family members participate jointly through the investment company and can also make more intentional investments of their own.
“This balance has worked well,” Bruns says. The family holds an investment-focused meeting once a year to give family members more information about joint investments. “This also gives them access to different managers if they want to make their own investments.”
Many motivations
Maxwell Youngquist, tax partner with RSM U.S. and the firm’s family office structuring and governance leader, says families that create multiple investment policy statements generally do so by branch, household or generation — all groups that, by virtue of age or how well they know each other, may have similar investment goals that differ from the broader family’s.
“Less often, a family member will have a one-off investment vehicle to pursue a passion project or strategy that requires a separate investment policy statement,” Youngquist says.
There can be another issue at play when families consider customizing investment vehicles for family members: family dynamics.
“If you don’t get along with someone, you don’t want to be on a board or an investment committee with them,” Youngquist says. “If you have two people that have two very different risk tolerances, you will naturally have tension, and it’s easier structurally, and from a governance perspective, to just separate those investment decisions from each other.”
Three possible frameworks
Christopher Dickson, national family office advisory leader for RSM US LLP, outlines three broad options for families trying to decide how much latitude to give individual family members when it comes to investments.
One option may be a one-portfolio, pooled strategy with a single investment policy statement.
“That may be well suited for early-stage or smaller, aligned families,” Dickson says. “There is shared decision-making and governance: articulating risk tolerance, strategy and liquidity needs.”
A second option may be a more segmented approach, where there might be a core portfolio for shared capital, and family branches may invest in different percentages within that shared pool. There may also be alternative vehicles set up for those who want exposure to different types of investments that may not be a fit for that shared pool.
“This approach may allow a little more personalization, while preserving a degree of family cohesion,” Dickson says.
The family of Patricia Saputo, CEO of Placements Italcan Inc., has this type of setup, where individual family members may have their own portfolios with an individualized investment policy statement based on their goals. This is separate from the family’s main holding company, which has its own objectives and its own investment policy statement and strategy. “It is always recommended for each family member have their own strategy, as a way of learning and educating them, as well as giving them some independence to do what they want, how they want, when they want,” Saputo says.
Josh Kanter, president of Chicago Financial, Inc., says his family has not formally created individual investment policy statements, but they have created customized financial plans for different branches and family members. “We’ve then made different family investment vehicles available, alongside their own personal investment strategies, to effectively create their own asset allocations to best meet their goals and needs,” Kanter says.
A third approach may be more fragmented: fully segregated accounts, where each branch or household may have its own investment policy. They may have their own investment vehicles or the ability to co-invest in different ownership percentages.
“Those disparate decisions might complicate some reporting, but this approach may simplify shared governance because each person is responsible for their own investment decision-making,” Dickson says.
Weighing trade-offs
Customization may allow each family member to have the exact investment strategy they want, but it can also complicate administration and increase costs.
“You could set up infinite vehicles, but the family office can’t necessarily administer, for example, 800 different side pockets, or every niche diversification strategy and opportunity,” Youngquist says. “If you’re going to set up an investment committee, how many strategies and investment options can it effectively oversee in its mandate? Governance plays a critical role in controlling how many investment vehicles you set up.”
A single pool with shared decision making, even for a multigenerational family with a lot of branches or households, will likely require more complex governance, but the operational implications will be simpler. The opposite is also true.
“Governance may become simpler if each household determines its own investment policy, but the operational implications may be materially more complex as you think about the different entities that may be established, and the overhead and technology needed to manage those investment vehicles,” Dickson says.
Families need to think through both the governance and the operational issues that will arise from whatever approach they take.
“Governance is absolutely critical,” Youngquist says. “Sometimes families set up an investment committee with nothing about what happens when they can’t reach a decision, or someone can’t be reached quickly. Timing is critical for investment decisions.”
Advanced reporting and accounting technology may also help solve some of the operational issues.
“It’s not a manual exercise anymore to do this for a separate pool, making more complexity easier to accommodate,” Youngquist says.