Evolving the family investment committee
Mark R. Tepsich
Family Office Design and Governance Strategist
UBS Family Office Solutions
As families look to transition business ownership and family leadership roles to the next generation, it is important to find ways to prepare family members. Too often, family governance is not built to support family members in developing the skills and experience they need for the future. Here the family investment committee can play a crucial part in preparing the next generation—especially a committee that evolves beyond the status quo.
When first-generation wealth creators control and make all decisions, governance is an afterthought. This dynamic can result in a lack of professionalized investment management. This, in turn, can inhibit the family flourishing over time.
Here we look at how the family investment committee can evolve to help enhance communication, strengthen family connections, develop financial literacy and foster family development.
To begin, it is helpful to briefly understand the role of the status quo family investment committee and how it often operates.
The family investment committee oversees and monitors stakeholders in implementing investment policy. These stakeholders can include family office staff, as well as external investment advisors. The investment committee develops the investment strategy, often in discussions with the family office and external investment advisors, and memorializes the strategy in a well-thought-out investment policy statement (IPS).
However, since the portfolio often begins with distributions from the family business, it can be an afterthought compared to the active business operations that comprise most of the family wealth. There often is no IPS or investment strategy because the portfolio is deemed an extension of the family business. The investment committee, if there is one, is often comprised exclusively of senior family leadership, who are often the same family leaders in the family business.
The investment committee typically meets to receive updates on investment performance from the family office staff or external investment advisors and make decisions as needed. At times, meetings are cancelled and updates from the investment advisors or family office staff are e-mailed to the investment committee. The investment committee often has limited communications with the broader family, and doesn’t share its decisions or the rationale behind them. How the investment committee is granted authority and discretion and how it is judged on holding others accountable for performance is not well defined.
The status quo investment committee often results in:
- Lack of professionalism
- Exclusionary composition and practices
- Lack of support for family member development
- Lack of family alignment
- Lack of trust
The status quo investment committee is not built to support family member development. It tends to be exclusive by nature, whether by default or by design. When a broad swath of the family does not participate or have a voice in the family enterprise, it can lead to disengagement or even antagonistic relationships among the broader family. This dynamic thwarts the motivation of next generation family members, particularly those who are not in the narrow family leadership circle.
While families may experience more or fewer challenges, it can be useful to review family governance practices and the investment committee in particular with an eye to how they are supporting broader family initiatives, including the transition to the next generation.
The evolution of the family investment committee should be driven by collaborative, participatory and transparent principles. These principles should result, over time, in a family that is more confident in their investment management and supported by a governance body designed to prepare family members for future leadership.
Key considerations include:
Creating a Working Committee
A small cohort of the family is identified to represent and speak for all relevant family branches and senior leadership, as well as the next generation.
Gathering best practices
Facilitated by a cross-section of the family office and external investment advisors, the working committee identifies best practices on how an effective investment committee operates, its purpose, composition, role and authority.
Design and build
At the end of the prior stage, a regular working committee meeting cadence can be established, as well as regular updates to the broader family to help ensure a transparent process.
Investment committee charter
The investment committee, its purpose and goals, and how it operates in practice should be memorialized in a charter.
Typical investment committee charter provisions include:
- Purpose of the investment committee
- Desired behaviors (i.e., collaborative, participative, inclusive, etc.)
- Role and authority among stakeholders
- Composition of the investment committee
- Decision-making and voting
- Family branch representation
- Schedule of meetings and ideal meeting process
- Conflict of interest policy
While the investment committee design should not be off-the-shelf, this does not mean a completely blank slate in its design and build. This is where the family
office can inform the discussions and present options, so that the investment committee can have productive meetings and make well-informed decisions. The family
office can:
- Keep the family investment committee meeting consistently throughout the year by creating a meeting calendar and building agendas
- Gather data and provide analysis to support the investment committee in their decisions
- Enhance communications between the investment committee and the broader family
- Facilitate communication with external investment advisors in furthering the work of the investment committee
The evolution of the family investment committee, as well as other governance practices, should coincide with a more robust evolution. Perhaps this means that the family collaboratively designs and memorializes a family constitution. Governance must evolve across the balance of the family enterprise if the family is to create confident and effective family members who are capable of being co-owners, as well as of holding others accountable.
Progress, from the initial design to the ongoing collaboration and meetings, should be measured in years, not days or months. Governance is never static, and progress is never final as the family and its enterprise will forever evolve. While optimizing governance won’t solve every challenge, it is a significant factor in the family’s overall resilience over time.
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