Designing an investment strategy and managing family wealth with the support of advisers and a network is very different to an adviser led approach to managing an investment portfolio.
This article has been written for families and entrepreneurs who want to be involved and educate themselves in the management of their financial wealth.
Growing and managing significant financial wealth
When it comes to entrepreneurs and business families, the approach to investing will differ, depending on whether the generation and growth of wealth is business or investment focused.
In a business-focused family, the primary source of the family's wealth is one or more family-owned businesses. Not to generalise, but the investment strategy in this situation is often motivated by diversification and establishing a separate pool of financial capital to the business.
Unless there is a business exit, the investment pool normally builds over time, with an allocation of some of the business owners profit distributions to investment activities.
The wealth allocation framework is very different when there are operating and investment activities. It requires a governance framework that aligns the business and family strategy. Capital allocation and shareholder distribution decisions made in the business will determine the capital and income available for investment and family activities outside the business.
In an investment-focused family, the family's wealth is primarily managed through a diversified portfolio of investments, which may include stocks, bonds, real estate, private equity, hedge funds, and other financial assets. In this situation, the investment strategy drives the achievement of the wealth and personal goals and will be shaped by the way the family or private investor decides to invest and distribute their wealth.
When financial assets are inherited or distributed to a family, there is a choice between managing the wealth separately or together. Working together and managing a shared pool of resources has the potential for financial and non-financial benefits, through effective co-ordination and collaboration. However, sometimes distributing the wealth to manage independently across or within families will be better for family harmony.
Establishing a governance and management framework for a large-scale investment pool may include a family office to coordinate the shared investing activities. Wealth creators and inheritors of wealth will use a family or investment office to establish a structure that allows future generations to more easily manage, understand and use the family’s wealth.
Currently, about a third of family office wealth is invested in equities. Cash accounts for approximately 10% and real estate around 13%. Investing in private equity and debt has grown significantly to about 21%, whilst fixed income investments have declined to about 15% of total family office investment.
What do you want to do with your wealth?
How you design your investment strategy and manage your wealth should reflect the purpose of the financial capital in the context of your own family and business activities, values and goals.
It doesn’t matter what the focus or the scale, your investment strategy should be established with a clear intent of purpose and linked to the achievement of your financial and non-financial goals.
Some investment strategies will be created for a lifetime, others across generations. When setting an appropriate investment strategy, you should identify who the beneficiaries will be and over what time frame. With significant wealth, the time frame can go beyond the wealth creator’s lifetime and the investment stewardship may be for the benefit of family, as well as community.
Creating pools of capital with different purposes and investment strategies, is an effective way of aligning the management and use of financial capital to meet specific life and investment goals, time horizons and degree of risk.
Wealth for Now
These are assets that make you feel comfortable and/or provide you with liquidity if required for emergencies. As a trade-off for these qualities, you are prepared to accept lower than market returns on these assets.
Wealth for Future
These assets are designed to meet market investment returns at an acceptable level of risk, but also provide some liquidity if required.
Wealth for Opportunity
These are the assets with the potential for significant upside, but also carry the most risk. They are generally illiquid and difficult to realise in an emergency.
Wealth for Others
These are assets allocated to achieve philanthropic objectives. The purpose of this capital can be both or either for generating a regular income or capital for community purpose.
The success of an investment strategy is normally measured by financial benchmarking. Whilst financial performance is important for accountability, to measure how well you have done with the wealth will require more emphasis on the achievement of your own specific goals and whether the investment portfolio has been managed to achieve these, whilst being aligned with your values and benefiting those intended.
Picking your investment strategy
The traditional approach is to design a diversified portfolio across asset classes, to meet certain investment objectives or risk parameters. This is based on the Modern Portfolio Theory (MPT), developed by economist Harry Markowitz in the 1950s and seeks to maximise expected returns for a given level of risk.
Diversification and an understanding of the relationship between risk and return remain fundamental in constructing an investment portfolio but MPT is markets focused and does not take into account the use of the wealth or recognise the different needs, time horizons or risk and return trade-offs associated with private or family wealth.
Investing is not just about the markets, it is about you. Investing is about how individuals and families use their financial assets to take on investment risk in order to meet their essential needs and achieve specific goals.
The purpose of an investment strategy is to provide a structured and well-defined plan for managing financial assets, to achieve specific financial goals and objectives while considering various factors such as risk tolerance, time horizon, and liquidity needs.
An investment strategy designed to meet the needs of the family, as opposed to focusing solely on investment markets, places the family's financial goals, risk tolerance, and unique circumstances at the forefront of decision-making.
A family-centric investment strategy tailors investment decisions to align with the family's unique financial situation, objectives, and values, placing the family's well-being at the core of the investment approach. In contrast, a market-centric strategy tends to prioritise market performance and benchmarks, potentially overlooking the family's individual requirements and long-term financial aspirations.
A market centric approach is important to manage certain investment related risks but does not always take into account any safety buffer or personal financial obligations a private investor or family may want comfort they can meet - regardless of market conditions. Also, some private investors are willing to allocate a portion of their wealth to taking risks and pursuing returns beyond those of a well-diversified market portfolio.
The follow is a summary of the key differences between the two approaches:
Market-Centric Investment Strategy
- Primarily centres on investment markets and seeks to maximise returns within market conditions.
- Prioritises market performance and benchmarks, potentially overlooking individual family needs.
- Aims to maximise returns and manage risk compared to performance metrics and benchmarks.
- Tends to focus on short-to medium-term performance without strong consideration of long-term family goals.
- Strategic asset allocations are designed to target certain investment outcomes and caters for a broader range of investors based on their risk tolerance.
- May not consider the family's values or impact investment criteria.
- Less adaptable to changes in the family’s financial situation or objectives, often following markets.
- Typically lacks a comprehensive plan for wealth transfer or legacy planning.
- Often strategy is led by adviser and may not emphasis financial education for family members.
Family-Centric Investment Strategy
- Primarily centres on the family's specific financial needs, goals, and values.
- Places the family's overall financial well-being and long-term prosperity as the central focus.
- Aims to achieve the family's specific financial objectives, such as funding education, retirement, wealth preservation and succession.
- Considers the family's long-term financial needs, time horizons, and liquidity requirements.
- Takes into account the family's risk tolerance, aligning investments with what the family is comfortable with.
- Incorporates the family's values, and impact driven investment criteria, and ethical considerations.
- Is adaptable and flexible, adjusting to changes in the family's financial situation and goals.
- Can include legacy planning and wealth transfer strategies to benefit future generations.
- Empowers family members with understanding and financial education of their investments.
Your life, your strategy
There is no one-size-fits-all answer to how families of significant wealth should allocate, invest and use their capital and this is why adviser designed portfolios may not be relevant to how a family with more scale and complexity wants to manage its wealth.
Some examples of the different ways a family or private investor may choose to allocate their capital compared to a more traditional investment portfolio, include:
- Setting up distinct portfolios, rather than adopt one strategic asset allocation, to better align and pursue goals and strategies with different purposes, time frame and risks involved.
- Maintaining a larger allocation to cash for safety and liquidity, and to meet lifestyle and other commitments.
- Investing directly at a larger scale and with more concentration, including real estate and private companies.
- Adopting impact metrics alongside return and risk parameters for investment decision making.
- Allocating more of the portfolio to alternative asset classes, where the private investor has less liquidity constraints and can invest in other less liquid asset classes for diversity in growth and income returns.
- Taking higher risks with some of the capital for the potential for-above market returns (alpha). This can be due to several factors, including a generational time frame for investing, surplus financial resources to their essential needs or extra confidence given a higher allocation of the overall portfolio to defensive or income asset classes.
In summary, an investment strategy for significant wealth, should be a highly customised, diversified, and designed to address the unique financial and non-financial needs of the wealthy family or individual. The strategy design and execution will often involve a broader range of asset classes and investments compared to traditional portfolios, which are typically more standardised and geared toward the public investment markets.
By Jason Chequer
Partner & Head of Advice, Sayers Family & Wealth
 UBS Global Family Office Report 2023