The single family office investment committee
Unlike institutional players, not all family offices do have an investment committee. However, the investment strategy is at the core of every single family office to ensure its alignment with the family’s purpose of wealth. Ultimately, the financial objectives need to coherently complement the family’s values and purpose of wealth in the family office governance framework. Since a strategy is only as good as its execution in this article, we will guide you through the process of building a family office investment committee.
As with investment strategies, we don’t believe in standard approaches. We recommend a tailored system that caters to your family office’s individual needs. The investment committee’s essential foundation and roadmap is the investment strategy. One that defines the purpose and objectives, standards, processes, review and reporting procedures, and practices to remediate performance mismatches.
What is a family office investment committee?
We keep the answer short since, for some, this may be basics: The family office investment committee is the guardian of the family’s wealth and executes and implements the investment strategy in the family’s best interest, avoiding and managing conflicts of interest. It monitors investment options to diversify and manage risks in a prudent and disciplined investment process.
Do you need an investment committee?
This is the most critical question to ask. With a solid and precise investment strategy, you may want to fully outsource execution, monitoring, and control to external professionals since in-house structures require a dedicated framework that comes at a cost. Independent service providers with no affiliation to wealth and investment managers offer cost-efficient solutions replicating the family office investment committee’s functions and avoiding conflicts of interest. Next to their independence, you should focus on their investment manager selection process and their reporting quality. Regular reports will provide you and your family office with the required objective operational and financial information to evaluate the results in light of the investment strategy’s objectives. Such data should lead to clear findings on cost, performance, and strategy alignment across asset classes and managers. Depending on the strategy’s complexity level, the outsourcing model can deliver control and the basis for informed decision-making at attractive costs.
Suppose your single family office has specific asset class expertise, e.g., alternative investments, and the investment strategy is rather complex due to the particular asset class exposure. In that case, complete outsourcing may not be the ideal solution to tackle such niche requirements. Instead, you can consider a governance model embedded in the single family office but with a mix of in-house and external committee members. Finally, the investment committee can comprise only internal members, with the most sophisticated option being a fund model where your own legal entity manages assets in an institutional governance framework.
This first part of the process requires a detailed analysis of the gaps to fill with the investment committee and evaluating the feasible solutions’ costs and benefits. The analysis outcome may reveal shortfalls in investment selection and monitoring, continuity of capabilities, or risk management. The suitable investment committee model can then be defined to implement the investment strategy’s objectives based on those findings.
The role of the family office investment committee
You should follow one main principle for all potential models: The investment committee is not an investment manager but interprets, directs, and consistently oversees the investment strategy’s execution. With that, it ensures the diversification of the entire portfolio within the set risk and return parameters. Its core duty is the investment manager and advisor selection and conducting all necessary controls and reviews of strategy alignment, performance, and costs. Only a strict separation of investment management and oversight will enable disciplined long-term strategy execution. If investment management is performed in-house to a certain extent, you should treat that part like all other external investment-related services to assess the overall investment options’ congruity.
Since a family office strategy should reflect the family’s values, vision, and purpose, the investment committee in its investment-related decision-making and evaluation needs to align goals, objectives, and the strategy’s vision with consistent risk parameters in a diversified portfolio. The underlying investment process management includes a regular assessment of the investment strategy and eventual recommendations to adjust risk and opportunity specifications.
The investment committee governance framework is tailored to the family office’s needs and the complexity and size of assets under management. While there’s no standard number for committee members, an odd number is helpful for decision-making. There can be voting and non-voting as well as permanent and non-permanent members. Next to roles, behavior, and expectations, committee members should have clear guidance on the decision-making process and documentation requirements. For investment manager selection and monitoring, the performance parameters and objectives should already be defined in the investment strategy.
The governance framework has a focus on the duties and processes of the investment committee. It’s comparable to a code of conduct to ensure loyalty, objectivity, and acting in the family’s best interest, reasonable costs, monitoring and control, avoidance and management of conflicts of interest, and the prevention of unlawful or prohibited transactions. Policies then govern the process and procedures, including formal requirements for investment manager selection, monitoring, and controlling.
In our experience, we see two typical pitfalls here: family dominance and technical overload. An investment committee requires the delegated authority to execute the investment strategy. While the family should have an active interest in the committee’s activities, it can be tricky with family members taking formal roles. It may impair the other members’ objectivity and even dilute potential liabilities if things go wrong. Family office CEOs are often a sound alternative with investment skills to perform such a mandate and ensure family representation. If you deem a family member’s participation essential, a non-voting membership could solve the issue.
The governance framework should be concise and clear with policies and processes enabling the investment committee’s compliance with its objectives and duties rather than over-complicate execution and causing formality deadlocks. Not all processes and procedures may lead to the perfect result from day one, and you should allow some room for improvement. The family office’s legal or compliance officers can assist as non-voting members in shaping the operational governance framework. The target is a straightforward process framework that is strictly followed for consistent results.
The investment committee members don’t need to be investment professionals only, although a thorough understanding of financial markets is beneficial. The two most essential requirements are the willingness to take an objective position and to put the family’s interest in the first place to protect its assets. As mentioned, family office CEOs, usually experienced in financial investments, can play a crucial role and chair the committee. Trusted advisors can be appointed as non-voting members for an additional level of control. The investment committee members should acknowledge their duties, responsibilities, and potential liabilities in service agreements. Defining objective criteria for the committee composition and appointment avoids key-person dependencies, facilitates succession planning, and ensures ongoing operation.
Investment committee meetings
The recurrence of the investment committee meeting depends on the individual family office situation, but a minimum of quarterly gatherings is advisable. More complex portfolios may require monthly assessments. The investment committee requires high-quality data and information to assess the recent results against benchmarks and strategy objectives. To this end, the family office should perform detailed data processing. It provides performance data, investment manager changes, background information, historical data, and any other information needed for the investment committee’s judgment on the specific strategy execution, performance, quality, and services costs. The relevant investment strategy’s parameters determine the amount and granularity of information to perform the ongoing review. The family office ensures data consistency for the assessment of strategy benchmarks against actual results. They are critical for the investment committee’s decision-making based on correct, adequate, and complete information. It will document all its findings and actions and report to the family its decisions and recommendations regularly.
With the documentation of all relevant committee activities along the investment process, the family office builds a comprehensive audit file for independent reviews of process management. Such information will allow expert third parties to evaluate the investment committee’s policy and process adherence and the investment strategy implementation, monitoring, and control quality.
In our view, the decisive element in the overall family office investment framework is the investment strategy. We recommend a particular focus on it before building the implementation model. The family office investment committee’s mandate is to implement the investment strategy and monitor and control its execution. It ensures consistency with the objectives and goals, risk management parameters, asset class guidelines, asset allocation, investment manager selection principles, and a structured review and control process. Depending on the individual circumstances, its functions can be outsourced entirely, although a robust and disciplined investment process remains indispensable.
For the success of an in-house investment committee, the family office plays a crucial role in data processing. Especially when it comes to considering all relevant factors such as returns and benchmarks, asset allocation adherence, cost and risk limits, and any other information required to monitor the strategy execution.
The investment committee is a guardian of the family’s wealth and acts in its best interest, avoiding and managing conflicts of interest. The investment strategy’s purpose and objectives guide all of its activities. Regular and comprehensive reports to the family should also include the investment committee’s opinion on the strategy’s adequacy to meet the family’s needs and recommend eventual improvements. Finally, independent expert third parties reviews provide an additional level of control and assurance for the family.
Markus Schwingshackl is a lawyer and founder of the boutique law firm Centro LAW (www.centrolaw.ch) in Zurich, Switzerland, and assists international wealth owners, entrepreneurs, and their families to navigate the complexities of family offices, wealth planning, estate planning, and wealth management.
Centro LAW: www.centrolaw.ch
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