The Family Office CIO – Planning For Disruptions

Managing Family Wealth via a structured Family Office is an exercise which includes almost big institution-like processes but overlaid with very human wishes and expectations of the family members. Unlike brutal investment mechanics at large institutions, the family offices have to include many factors in their planning which may sound very non-finance but are very important for the family. Hence its combination of both EQ & IQ which contribute to this planning process.

In my experience of over 25 years and managing over 50 family offices some facts have become almost common across all families. This article, a first in a series attempts to touch some of these learnings & trends.

Not just one vehicle

Family wealth needs to pass through generations, take on many taxation or regulatory storms and be able to be easily distributed in case of splits. This demands very deep planning on the need for different investment structures or vehicles, in some cases across geographies.

Trusts, LLP, AIFs or even company structures provide a vastly different nuance to the wealth pool. These nuances along with the family wealth & business succession plans and taxation efficiencies are used to draft the family wealth holding policy. This policy is vetted by many legal & taxation experts and is constantly optimized depending on changes in regulation, market realities and family needs.

Not just one portfolio

In professionally managed family offices, a lot of focus is put on “Risk” and the portfolios are structured around it. This is opposite to target return portfolio strategy used by many in the mass affluent and HNI space. By using a Target Risk Strategy, the family offices strive to construct multiple pools of risk with different “Risk-Liquidity-Return-Tenure” specs.

These pools answer a different need for a family and are a culmination of numerous consultations between the family members and the family office advisors. These outcomes and decisions are recorded in formal documents usually called investment policy statements or documents etc.

Handholding the families

The above-mentioned discussions also provide an opportunity to the family members to get better understanding of the investment concepts, asset classes and market functioning. In almost all discussions the family members end up reflecting on many past mistakes made while investing in a new product which was pushed by a distributor.

Once they understand the mechanics of these products, they actually become more involved in review meetings. The younger members often spend more time with the advisor to get more knowledge of any particular asset class or markets.

While this participation is wished for, in many cases the family members are happy to hand over discretion completely to the advisors as they would like to focus more on the family business.

Portfolio Optimization & Restructuring

Portfolio Optimization for family offices and UHNI portfolios is not about just risk minimization or return maximization. It is a process of continuously ascertaining the risk in the portfolio and whether the return expected to be generated is conducive for the level of risk taken. This risk premium cannot always be depicted in numbers and it has a lot of input from the experience and gutfeel of the Chief Investment Officer.

The “premium” that you expect for taking extra risk is the key to structuring efficient portfolios.

Many families usually already have investments in their portfolios which then must be restructured, re-pooled & optimized basis the new investment policy. This process is executed with a sharp focus on taxation, exit costs and lock-in conditions. In most cases this exercise will take months to complete.

Not necessary to add all new products

New products are only added for the following reasons:-

1. if they provide the necessary minimum risk premium in an asset class

2. if they provide similar returns as generated by current holdings in an asset class but at a lower risk

3. if they provide a higher return for the same kind of risk in an asset class

4. if they provide an uncorrelated return/volatility profile in possibly a newer asset class

5. add liquidity in an asset class which the new product may provide without being much different in the risk-return profile

6. only to increase diversification among managers in an asset class

While the first five reasons are more related to numbers the last point on diversification is usually debated among investment professionals. How much is adequate diversification has many different answers. The investment industry will continue to launch newer products as that is their core business but not every product needs to to be added to a family portfolio. These distributed products will be sold aggressively in the market and many a times played on the premise of “FOMO” or Fear Of Missing Out.

Lastly, most importantly — The ethics of the Advisor

There are many stories about how inferior products have been added to family portfolios, may it be via a single family office or a multifamily office. Advisors must take their fiduciary role very seriously and have to make sure that no conflict of interest arises while advising families. This must be built into the DNA of the advisor.

These conflicts can come in various shapes like getting monetary commissions when investing in a product to non-monetary benefits like getting new business leads, recommendations etc.

In case of monetary benefits usually the advisors will try to push one or two high paying products or transactions into the portfolio which gives them large commission cheques. These products are kept out of the usual Fee-only advisory agreements so that there are no legal issues.

Non-monetary benefits are more difficult to trace but clear pointers can be recognised if the advisor does not sound convincing on why a particular product is being chosen for the portfolio. You may notice over-focus on a particular fund manager (as an individual) and less on his past performance. Sometimes investment banking mandates are taken up by these advisors which then are pushed to the client portfolios.

All these cases will add possibly inferior or incorrect products in portfolio and may make the portfolio susceptible to lower returns or higher risk.


Cervin Family Office & Advisors Pvt. Ltd.

    • CIN Number : U74999MH2019PTC324434
    • SEBI Investment Advisor Registration : INA000015385
    • Type of Registration : Corporate
    • Validity : November 2022
    • Principal officer : Mr Rohit Karkera

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Cervin Family Office & Advisors Pvt. Ltd.

    • CIN Number : U74999MH2019PTC324434
    • SEBI Investment Advisor Registration : INA000015385
    • Type of Registration : Corporate
    • Validity : November 2022
    • Principal officer : Mr Rohit Karkera

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