Our extensive interactions with affluent families and their advisors repeatedly reveal that they benefit from a regular, formal review and planning process.
The idea of undertaking such a process might seem overwhelming, so we thought we would share what we have found to be an efficient and constructive approach.
To ensure a good foundation, we recommend the following best practices:
• Solicit the participation of all relevant stakeholders in this process—such as family members, financial advisors, legal counsel, tax professionals, and investment staff. It is especially important that family members fully participate in this process and fully understand each aspect of it.
• Separate the analysis into three discrete but interrelated topics: investment, governance, and family circumstances.
• Codify, memorialise, and share the results, action items, and conclusions.
Rather than take a prescriptive approach (e.g. always seeking maximum diversification), we believe the Socratic method yields the best results. Thus, we challenge you to answer the following fundamental questions.
**Assessment**
- **What is our investment objective?**
Common investment objectives can include funding lifestyle needs during retirement, supporting family members, funding philanthropic activities, and ensuring multigenerational transference of wealth.
- What is our investment policy?
This should include, at a minimum, the investment time horizon, the family’s ability and willingness to withstand portfolio volatility, asset class preferences and limitations, other investment preferences such as liquidity and ESG, rebalancing rules, the level of discretion over tactical positioning, and other implementation requirements (use of third-party money managers; investments in mutual funds, exchange-traded funds, or individual securities).
- **What are our investment beliefs?**
Draft an investment belief statement that articulates the fundamental perceptions of investors and their intermediaries regarding the nature of financial markets and the role these individuals play within them. For example: “We believe that public equity markets are generally efficient and are best accessed through low-cost passive products”; “We would like the portfolio to be a mix of active and passive products”; or “We are long-term investors and are comfortable with a sizeable portion of the portfolio being in illiquid instruments.”
- **How do we make investment decisions?**
Could we categorise our process as rigorous? Systematic? Scientific? Discretionary? Ad hoc? Can we evaluate the efficacy of our decisions over time? Have we identified appropriate benchmarks at the asset-class and instrument levels?
We have also found that much can be learned by revisiting investment decisions, both acted upon and not. For example: we hired manager X but not manager Y—was this the right decision? Did these decisions add or subtract value? What can these actions tell us about our decision-making process, and how could it be improved (e.g. with more or different data, or better assessment tools)?
- **Can we demonstrate that our current portfolio supports our current needs and complies with our investment policy and investment beliefs?**
Are our strategic asset allocations within the stated ranges? Have we monitored and reviewed our managers to ensure that their activities continue to comply with the terms of the investment-management agreements? It is also important to identify which processes, methodologies, and metrics will be used for monitoring.
**Planning**
- **What are our anticipated financial and familial needs for the next ten years (and beyond)?**
Think broadly, and include ongoing lifestyle needs as well as one-time spending (a second home, a boat, etc.). Consider liquidity, safety, growth, resiliency, transparency, succession, and inheritance.
- **What exogenous macro-level risks and investment opportunities do we foresee over the next ten years?**
Geopolitical risks (e.g. trade wars, fading US hegemony)? Environmental risks? New technology developments and market-disruption opportunities such as artificial intelligence, cryptocurrencies, blockchain, decarbonisation technology, and water rights.
- **What changes could we make to the portfolio to increase the likelihood of managing these risks, capitalising on these opportunities, and achieving our investment objectives?**
Even if affluent families are long-term investors, they may be understating the true risk of capital losses in a world where forward expected returns can decline without commensurate declines in spending rates. This suggests the need to re-examine risk tolerance and volatility targets.
- **Does our current investment policy support these potential changes?**
Are the constraints and limitations too restrictive to capitalise on opportunities? Is the asset-allocation minimum and maximum range aligned with future expected returns?
- **Do we have the proper tools to identify and assess risk?**
Are we using common risk measures such as volatility and value-at-risk (typically calculated at the end of the investment horizon), or are we evaluating risk in a continuous way—by asking what could happen to our portfolio at any point in time?
While it may be easier to focus on quarterly investment performance than to answer the fundamental questions above, last quarter’s performance is not something you can affect. What you _can_ affect are your future investment decisions.
An honest assessment of your current investment situation, combined with a rigorous and contextual estimation of future financial needs and expectations, will prove more valuable for all stakeholders. Indeed, we believe that undertaking this level of reflection and discussion is one of the most effective ways families and investors can improve long-term financial performance.
