Long-term management of family investments requires clearly defined rules and regular checks
Finding the right moment for purchasing or selling a security is every investor’s dream. Sometimes this can be achieved. However, no one, even major investors, can have such luck every single time. The only solution is to be constantly present on the market and have investments distributed in a manner complying with your investment plans and ability to run the risk. According to some surveys, with long-term investments, the share of the investment allocation factor (i.e. the “in what I have invested” factor) in the final success is more than 80%, while the importance of the correct entry into or exit from the investment (i.e. “when I invested”) is just over 10%.
Family investments are an inseparable part of family wealth. Long-term experience shows that although this part of family wealth is considered important, it is rarely given adequate attention. This is due to the very essence of investing in capital markets, which is often a vague idea for the families. Therefore, they do not how to correctly formulate their requirements for their banker and often limit themselves to requesting a proposal for assets with a particular volume. Subsequently, the banker prepares the offer in view of his bank’s possibilities and presents it to the client. The key criterion is often the offered expected return and the bank’s fee policy.
However, usually, the family’s objective is to diversify its assets. They contact several banks with a similar inquiry and decide for three or four of them to which they entrust their money. This creates several portfolios that have nothing in common but the name of the owner. This cannot be considered a fundamental diversification. Banks’ offers created in the same period and under similar conditions will be more or less the same. If there is a specific security or sector available as a suitable tool in the given time, we can be sure that it will be included in each of the proposed portfolios. When the security declines in value after some time, it will affect all the portfolios. So this is how diversification is usually viewed by the families. Unfortunately, only a few people realise that diversification cannot be achieved using a higher number of managers but by means of a suitable composition and combination of individual portfolios.
Consequently, before contacting specific banks, one should define the strategic family allocation of assets and then simply assign a specific task to the banks for a specific part of the property one is planning to entrust to them. Subsequently, we should assess the offers according to the assignment. This will allow reaching an actually diversified portfolio with a wide coverage in the long run. Afterwards, the same key should be used to assess individual results of the banks and the management firms. If the limit is significantly exceeded, some of the assets should be transferred from the portfolio.
Besides traditional types of assets, such as shares and bonds, modern assets have come recently to the fore, such as venture capital or private equity. However, investments in them require even a more detailed analysis of individual management firms or individual projects. Also in this case, underestimation or the lack of knowledge may have very serious implications for the final result.
The traditional role of a family office is to assist families in allocating their assets and liaising with banks. Proper communication between the family and the banks or the management offices is of considerable help in ensuring that the family assigns tasks appropriately and that the bank understands the assignment correctly. Traditionally, this includes that part of the wealth which should be managed particularly conservatively and with particular prudence. Therefore, adequate attention should be paid to the management of such assets.