Investment strategies generally are either third-party managed where family offices use asset management funds to invest their capital in third-party managed investing, or direct investing where the family office makes the decision to invest capital into a specific asset or security. Direct investing can fall into two categories. Public direct investing is centered on liquid debt, equity securities, exchange-traded funds and derivatives that trade over a public exchange, while private direct investing focuses on taking a more active role in the deal process and underlying investment.
Communication and technology
Family offices have to verify the assets, ownership structures, and varied business and personal interests of their client families. Several kinds of information are typically required: financial data to support decision-making, portfolio data to confirm the effective oversight of assets, and continuous monitoring of processes to spot and mitigate risk.
Technology plays a central role in supporting this process of data gathering. Technology solutions can range from a single off-the-shelf product to a sophisticated ecosystem of integrated solutions. Components of this ecosystem can also be outsourced to external service providers, freeing up family office resources to focus on growing wealth. One key consideration before choosing or creating technology solutions is to identify and prioritize what is needed.
Digital transformation
Choosing from the range of technology options can be challenging for family offices due to a rapidly changing digital world and family offices need to be ready to adapt to these changes and challenges.
Some areas to consider include:
- Formalize remote infrastructure including setting up a virtual private network
- Consider cloud-based applications
- Focus on cybersecurity
Philanthropy
When families consider philanthropy, many consider charitable giving for public good, but there are other options.
These include:
- Traditional philanthropy
- Non-traditional or ‘taxable’ philanthropy – using structures that don’t have tax benefits to achieve families’ philanthropic goals; Often, by foregoing tax benefits, the structures also are freed from the associated operational constraints.
- Impact investing — investing in companies, organizations and funds with the intention of making a positive contribution to society alongside a financial return
- Venture philanthropy — using investing techniques to measure the effectiveness of philanthropic projects and fund (or defund) accordingly
How to institute a strong governance structure
Governance is an ongoing, active journey and not a destination. It takes time and effort to put a governance system in place, and it requires active efforts to operate it and adjust it as necessary to continue to meet the goals and needs of the family and office.
Implementing a new governance structure is a long journey but can be broken down into six manageable steps:
- Understand governance
- Evaluate the size and complexity of family and family office
- Identify any existing governance structures
- Decide governance system: top-down or parallel
- Analyze how to get from here to there
- Appoint a team and develop processes
Family office risk management
Often, one of the key purposes of a family office is to protect the legacy though. However, protecting it across generations can be a complex task. With multiple risks, from family succession challenges, to market disruptions, to privacy and cyber threats. We have observed that risk management initiatives are historically too narrowly focused and family office personnel are pulled into siloed initiatives for specific processes. However, these reviews fail to uncover the real risks and effectively balance risk and the business. Family offices must adopt an approach tailored to their own risk appetite, resources and ability to execute coordinated initiatives.
A risk management process should begin with establishing a consensus on risk appetite with the family (see Figure 3). Once this key decision is made, the following steps are more straightforward — identifying and rating the key risks, measuring the impact of risks on investment decisions, and reporting and initiating controls to mitigate risks.
