Family Office F.O.M.O.

investment strategy

Family Office F.O.M.O.

By

Paul Ashworth, Managing Partner
Anne Marie Tassoni, Partner
David Clark, Partner


Posted 28 April 22

One of the rationales for establishing a family office is to provide a strong & robust framework for investment policy. This in turn provides the proper support for the family to achieve its stated medium to long term wealth objectives.

Family Office F.O.M.O

A family office is after all, endeavouring to professionally set strategy and manage a family’s substantial investments and business interests. There can however be FOMO or ‘fear of missing out’ risk which family office boards and management can be tempted or mistakenly step into. This is principally manifested in two ways:

1. Family Office Board deviate from the agreed Investment Return Target (IRT)

  • A family office sets a long term (3 years +) Investment Return Target (IRT) which supports its funding and endowment objectives. It does this through its agreed Investment Policy and supporting asset class management programs.
  • A family office may have its own internal investment management or may outsource some or all of this function.
  • As we have seen over the last few years with elevated valuations for risk markets, these market returns can exceed the organisation's investment policy IRT for a period of time. It is sometimes seen therefore, that family office board members can get a ‘pang’ of FOMO and feel they are missing the trend return. As as a result, they change their long term risk construction to achieve a higher short term return target based on prevailing trends. The converse is true when parts of a market underperform for periods of time and notwithstanding the long term nature of the IRT and portfolio construction, FOMO results in short term changes, invariably at the expense of a well thought out and designed investment policy and strategy.
  • The risk: is that the family office, most often its board members, pressure internal or outsourced management to drive to short term market benchmarks and in the process, dilute the otherwise paramount importance of the long term IRT
  • Recommended action: family office board members as part of their induction program undertake proper training into the construction of investment policy construction, how it has developed in the specific family office, how the board oversees it, and importantly, signs off that they understand their responsibility to implement, review and adhere to it [a family office board member should have a position description]. A board member is a fiduciary and ‘governor’ of the investment policy. This makes it clear what their specific responsibility is and that they will be held accountable.

2. Accommodating Risk Investments or ‘tilts’ at the behest of a dominant board member of founder

  • A family office is most often established by matriarch/patriarch founder(s). Their success sees them often being a dominant board or committee member. They have the need and desire to still express and participate in individual risk investments or entrepreneurial ventures
  • This can be at odds with the core investment policy and long term IRT, and can result in the core investment pools subject to the investment policy being manipulated, pulled and diluted. This is obviously undesirable and has the potential to create undue instability to the core capital strategy
  • The risk: Independent board members are faced with a dilution in their strategic oversight role and operating to the agreed investment strategy.
  • Recommended action: that the family office board countenances this situation in the development of investment policy and the capital management pools. Much will depend on the governance structure for the family office. This can be addressed through separate risk pools or a ‘withdrawal’ policy for family members to accommodate other risk investments. Overall, it is typically best not to intertwine conflicting investment policy purposes as this makes management and accountability to the IRT very difficult.

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