Align on goals
An investment policy statement (IPS) will likely provide details about risk tolerance and asset allocation. But before a family can agree on those types of issues, they need to agree on their goals.
“If you’re not aligned on your guiding principles and aspirations and you start trying to make decisions about the structural elements within a family investment policy, it can be a very divisive conversation,” says Mike Fassler, principal consultant with the Family Business Consulting Group.
Use goals to inform tactical decisions
Identifying overall goals will help the family answer more specific questions as part of the IPS — for example, regarding the relationship between the operating business and the family’s investments.
“Are you investing in opportunities or technology to support the business, or are you looking to diversify away from that?” asks Hugo King-Oakley, head of private markets and community at GPFO, a European-centered family office network. Diversification can help the family manage the risk of a decline in the operating company’s market sector, he notes.
Likewise, decisions about how much liquidity the family needs can affect how much they want to invest in illiquid investments such as venture capital and private equity.
Bring in help
Conversations may be more fruitful if led by an outside facilitator or informed by an outside expert who is brought in to answer questions.
“If you just ask, ‘What return do you expect?’ most will say, ‘I don’t know,’” Fassler says. A finance professional can explain risk and return and manage expectations. And if family members have diverging philosophies or goals, a trained facilitator can help them find common ground.
Educate the family
Education is key not only during the process of creating the IPS, but also afterward.
“Education of family members about what’s involved, what’s possible and what’s not possible is critically important,” Fassler says. “If family members understand what the deal is, they’re going to be more patient.” If there is no transparency, he adds, “then people get really frustrated and often demanding.”
Offer choices
“When people don’t have a choice, they get anxious,” Fassler says. If possible, find ways for family members to have some control over their level of investment. Provide them with options to exit “in full or in part, but in a way that does not ruin it for the rest of the group,” he advises.
Update the IPS when needed
Market conditions can change, and families change as well. It’s important to update the IPS as needed.
“It’s got to be a living document — there’s too much change in the world and in the family to not keep it constantly fresh,” says Chris Herschend, a managing director of Elmwood Management, the family office of the Herschend family.
How often may depend on how much the family and markets are changing, as well as how flexible the IPS is.
“One of the real tricky things is how much flexibility to embed into this,” King-Oakley says. “This is where the debate gets a little bit nuanced around how much your investment policy should adjust to market conditions and how opportunistic it can be. Some of that comes back to the vision: whether philosophically it’s more wealth preservation focused or more wealth creation focused.”