Could Your Family Benefit from an Independent,Chief Investment Officer? Part VII

Education of Next Generation and Succession Planning

Is the next generation of family members involved in the current decision-making process, or if not, at what point will they be involved or taking over? How will responsibilities be divided? Does the next generation understand the family’s objectives, and are they educated on the family’s investments? These are all very important questions for families to address in advance of succession changes. An independent CIO can help develop a formal education program for next-generation family members that is customized to the family’s needs with consideration given to the following:

1. At what point in time should the next generation be educated?

2. How sophisticated is the next generation from an investment perspective?

3. Given this level of sophistication, what would be the right approach to an education program?

4. Should group or individualized education sessions be held?

5. Who should perform the investment education?

6. Environmental, Social, Governance (ESG) Investing

Increasingly, and especially as assets are transferred from generation to generation, families are considering factors other than return and risk in their overall investment objectives. For example, environmental, social or governance considerations may be important to the family when constructing the portfolio. An independent CIO can help to weigh pros and cons of the various ways of implementing these considerations in the portfolio, from negative screening to active allocations to certain areas, such as impact investing.

Case Study

Social Investing Situation: A family foundation sought to be in harmony with their philosophy and mission by not investing in certain companies.

Independent CIO Solution: After research, it was recommended that the family foundation could implement socially-screened managers in the following asset classes: U.S. equity, international developed equity, emerging markets equity and hedge fund of funds. The socially screened managers now comprise 91 percent of their portfolio.

Independent CIO Considerations - Final Thoughts

Not all firms offering Chief Investment Officer (CIO) services are alike. Like an evaluation of any firm, consider the following:

The experience and reputation of the firm. There are many firms new to independent CIO services. Solutions and services can vary dramatically. Conflicts of interest, such as selling investments, lending, and other proprietary products should eliminate a firm from consideration.

The experience of the independent family CIO team. Seasoned professionals with strong personal reputations are crucial.

Investment expertise. This is also crucial. Understand the depth and expertise behind the analysis of investment products and the due diligence process.

Technology and reporting capabilities. There is a huge variance in the quality of portfolio accounting and reporting tools. Understand the download process from custodians and the reporting flexibility. The independent CIO should be able provide nearly any report with a custom design that a family wants and needs.

Fees. Again, they can vary wildly. You may not always get what you pay for.

Qualitative issues. Understand the firm’s client and employee turnover, ownership structure, long-term firm plan, success and failures, and, importantly, the culture of the firm. As famed business consultant. Peter Drucker used to say, “Culture eats strategy for breakfast.”

References. Talk to their clients that have similar circumstances. Look for high-touch and client-driven firms.

There is the adage, “If you’ve seen one family office, you’ve seen one family office!” Therefore, the work must be completely custom for each client, and expertise and experience should be deep. A quality, independent CIO can pay for itself in services and