Investing and managing diverse assets is a complex undertaking. It can become a full-time job if you are also contending with differing goals and increasingly mobile lifestyles. As a result, many wealthy families rely on a family office to manage and invest their assets.

The term “family office” can mean different things to different people, but we are taking a family office to be a private wealth management entity that advises on and manages the assets of one, or several, families. Its services can encompass asset holding and investment, succession planning, tax planning and philanthropy. A family office’s overall strategy and goals should be informed by the family’s investment purposes, ethics and beliefs.

Top Five Family Goals

What are the goals, priorities or concerns often raised by families?

Ethics and beliefs – Whether a single or multi-family office, the investment strategy should always align with the family’s wishes. There may be a family charter or constitution detailing the family’s principles, including their wishes regarding philanthropy and investment. These principles will guide investment managers advising on the most suitable investment style for the family, such as investing with religious beliefs in mind, or only investing in certain sectors or jurisdictions.

Family dynamics – Family unity relies heavily on communication and mutual understanding. Thus communication is key. The family office should communicate with each family member in a way that considers personal circumstances and technological abilities. It is important that each member has a platform to share their ideas and experience. The younger generations may have new and interesting ideas and perspectives, including how the family can have a wider positive social impact. Family members may wish to co-invest, or they may have different investment purposes. The family office should consider how family members could co-invest in a practical and efficient way.

Funding and growth – It may be obvious who is the main source of funds, such as a matriarch or patriarch. However, over time, ongoing funding may be less clear. One goal of the family office should be an efficient and sensible ongoing funding model with clear succession planning and potential for growth.

Risk and reporting – An important part of reputation management is compliance. The directors of the family office, and directors of any private trust companies within any asset holding structure, will have fiduciary duties and should be alert to their legal obligations. The concept of risk for a family office is expansive, and includes not just reputational risk and PR, but also ever-increasingly disclosure, transparency and compliance obligations.

Investment strategy – A family office should regularly review and advise on a family’s investment strategy. Considering Environmental, Social and Governance as part of the family office’s investment strategy will help to maintain and protect a family’s legacy and reflect the family’s wishes. A simple policy or Environmental, Social and Governance strategy may be sufficient for many family offices. However, some family offices will have more specific investment goals that their investment portfolio will need to facilitate. For these family offices, a policy may not be sufficient to meet their investment criteria. The family office and its advisors should consider alternative ways of structuring the investment portfolio and seeking out appropriate investments.

Investing with a Purpose

Environmental, Social and Governance (ESG) factors are wide-ranging and could include the impact on the environment, local communities, diversity within the family office or the family office’s own tax strategy. This broad range of considerations should be raised with the family to help form and develop an overall investment strategy and create a holistic approach to responsible management and investment. ESG factors may be agreed in the form of a policy document or regularly discussed as an agenda item by the investment or family committee. The importance of ESG matters may differ between family members, and so communication is again key in agreeing an acceptable strategy.

Socially Responsible Investing can be used effectively to implement the family’s specific ESG strategy and will dictate the decisions the investment managers are permitted to make. Socially responsible investing decisions are made at each step of the investment process, from sourcing an appropriate target deal that meets specified ESG goals to deciding how the investment portfolio is managed. A socially responsible policy may also hold the family office to account by setting a list of target commitments that it must achieve and enforcing transparency on the progress and success of the investment team.

Social Impact Investing aims to generate a positive and measurable social or environmental impact whilst also receiving a financial return for the family – often achieving two key goals. Social impact investing is common amongst family investment portfolios as it reflects the combination of business acumen and philanthropic objectives common in many successful families. Typically, a family will have a vision for the type of investment opportunities or charities they want to work with, for example investing predominately in renewable energies or local community projects.

After identifying a purpose, how can a family office fulfil these goals?

Communication - the first step to investing with a purpose, such as embedding ESG factors into a family office’s investment strategy, is for the family to consider and communicate their specific goals to the board or investment committee. The family office’s investment strategy should be clear and concise in order to be effective. This strategy should be reviewed regularly at board or council meetings where family representatives are present to ensure that the chosen strategy continues to meet their requirements.

Core documents - in order to assist the board or the investment committee, the family should seek to formalise their goals in a policy document. The policy should not only communicate the goals of the family but also set out who will be responsible and accountable for meeting those goals. A policy document will be sufficient for many family offices, however those who are seeking to conduct social impact investing or socially responsible investing may seek to formalise the ESG strategy into its constitutional documents, such as a family charter or articles of association. This would establish a working framework for family members and employees to follow and entrench the protections for the family’s goals.

Professional advice - It is important to ensure that the family seeks legal and accountancy advice to ensure compliance and efficient structuring of investments – including any charitable donations, philanthropic projects and social impact investing. It may be that the family’s investment strategy requires several holding structures or that it would be more efficient to structure entities across different jurisdictions. Robust governance is required and there should be regular professional reviews of the structure, documents and policies used by the family office.

Closing thoughts - Key trends and investing with a purpose

Investing with a bespoke strategy is essential for a family office, in part for reputational reasons but also to ensure that the investment managers commit to investments that reflect the family’s commercial goals and philanthropic objectives. Although it can be challenging to measure ESG activities and impact, the growth of ESG investments and the focus on seeking to align investments with ESG criteria should not be overlooked by family offices. The different goals of a family, and therefore their family office, will inevitably move with the times – and a key goal of a family office should be to keep up with the pace of change and the changing priorities of the family.

This article was first published by eprivateclient.