The financial crisis marked a watershed in how family offices handled these tasks. Before 2008/9, many offices had a relatively laissez-faire approach to managing and monitoring their investment managers. Important decisions were taken by family members, trustees and staff with limited in-depth knowledge of the investment industry. 

The collapse of familiar names came as a shock to some offices, unaware of the risks inherent when investment managers pass money on to less secure counterparties such as other fund managers, brokers and banks. 

To do their job properly, family offices realised they needed to try to get meaningful answers to how the family’s money was being invested, where cash and securities were being held and how recoverable the assets were in event of another crisis. 

Today, investment managers are an invaluable source of advice and ideas for family offices on where and how to invest, and not just in conventional stock market instruments. Facing low interest rates and volatile markets, access to new ideas, alternative instruments and innovative hedging strategies can be a strong driver behind the selection of investment managers. 

Identifying gaps 

However, talking to family offices around the world, there are some notable gaps in advice from investment managers. Firstly, individual managers are not responsible for assessing the pros and cons of the family office’s asset allocation strategies across financial and nonfinancial assets. 

Managers promote the attractions of financial investments – that’s their job – even if it might be advisable for the family office to invest elsewhere. Families need other sources of advice to identify the right strategic asset allocations, taking account of big picture trends and the impact of diversification on risks and returns. 

A second issue facing family offices relates to how investment managers assess inflation-adjusted performance. Inflation is a key component of performance reviews, but conventional measures of inflation do not always reflect the family’s experiences and concerns. 

Purchasing power is a more relevant measure, as it impacts the things wealthy families need to budget for – such the dramatic increase in the cost of up-market property, private school fees, high-end art and jewellery, holidays in exclusive resorts and so on. 

Any longterm investment strategy should factor in the real returns required to cover purchasing power, especially as families expand in numbers and commitments across generations. Investment managers, for well-known reasons, tend to have shorter-term horizons for investment strategies and performance reviews. 

A third gap involves due diligence into the real costs and risks of investment – not just the stated investment management fees but also the hidden costs and risks of brokerage, funds, currency exposures, derivatives, custody and so on. While fees and charges have become more transparent over the past few years, hidden costs and risks remain a sore point for many family office professionals. 

Extending remits 

Investment consultants should be a natural source of advice on these and related issues. They have expertise in helping clients set investment objectives, work out appropriate asset allocation strategies, select and reward managers and review manager performance and costs. 

It’s hard to quantify the impact investment consultants are having on the market, but they are becoming more influential providers of advice and benchmark data to family offices and trustees, at least on conventional investment styles. 

Encouragingly, consultants are also more inclusive towards specialist private investment offices and multi-family offices. These smaller firms can be a more appropriate fit for some family offices. Because of their limited numbers of client portfolios, they can provide advice and solutions better tailored to individual clients. 

There is still a long way to go in the consultants’ ability to service a diverse and sometimes highly eccentric group of clients, particularly regarding complex instruments in uncertain economic and political environments. But from the family office/trustee perspective, there is certainly scope for more professional and in-depth advice to support the tough decisions they need to take.