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Perspectives

What makes a successful family office CIO?

By Edward Marshall, Director, Global Family Office Group

November 14, 2018Posted InFamily Office

Investment management is often seen by ultra-wealthy families as the main function of their family offices – or at least one of the most important determinants of their family offices’ success.

This puts a lot of pressure on family office chief investment officers (CIOs) to navigate market volatility and manage liquidity, knowing that they are under the watchful eyes of their principals – who, even if not interested in the day-to-day investment strategy, are very interested in the returns they generate.

Each CIO role varies widely based on the size, complexity, investment philosophy, and objectives of the family. Professionals new to a family office CIO role should remember that whilst family offices may be institutional in nature, they can and often do have very different expectations and priorities to asset managers, pension plans, private equity funds, and hedge funds.

So, what sets a strong family office CIO apart from an average one? We take a look at some best practices gleaned from our experience of working with over 1,200 family offices around the world.

Deep rolodex of investment industry connections

Great family office CIOs will have a strong intelligence network of investment professionals who can inform them of new and exciting opportunities or deals. In the direct investment market, typically the top private equity or venture capital firms get priority access to deals.  Therefore, family offices have to remain concerned about potential selection bias.  This means that the deals that many family offices see are the ones that have already potentially been review and passed on by many other institutional investors.  This can lead to a fewer and less lucrative direct investing opportunities.

If a CIO does not have good and trusting relationships with individuals in the private equity, venture capital, asset management, or family office space, they run the risk of not having the required ‘ears on the ground’ to discover the best potential investments for the family.  Moreover, the insular nature and priorities placed on discretion in the family office space make the selection bias a larger issue with which to contend.

Excellent understanding of the principal’s aims

Most family office CIOs create and rigorously follow an investment policy statement which defines objectives, establishes benchmarks, and set out investment parameters. But a great family office CIO will also be attuned to a principal’s needs.  She or he will understand a principal’s interests, passions, and goals in life, and suggest ideas to ‘express’ these in the investment strategy. 

Good CIOs will also strike a produce balance between the values and interests of the family, and the needs and motivations of the executive.  For example, this could include introducing principals with a focus on impact investing to strategies that not only ‘scratch the values itch’, but also fit the overall investment strategy of the family office. 

Don’t be afraid to outsource

Increasingly many family offices manage large and complex multi-asset portfolios spanning global markets. As a result, many family office CIOs may feel inclined for reasons of privacy, security, or even role justification, to manage all investment activities in-house. However, a successful family office CIO is not afraid to outsource non-core expertise, or inefficient activities for the overall benefit of the family wealth. 

Successful family office CIOs can effectively deploy external advisory boards for investment management – made up of family members, banks, and consultants – to not only make the CIO accountable, but also to provide unique insights and advice to help shape strategy.

Being progressive and forward-looking

CIOs can benefit from developing benchmarks that go beyond the investments they have implemented as part of their strategy.  This can take many forms but can be seen through measurement of performance of investments they didn’t choose to implement as well.  This can help identify potential gaps and future opportunities for CIOs.

CIOs should also be wary of the potential trap of setting up inadvertent horse races between investment professionals if they have multiple investment providers.  This can lead to adverse results if money managers dial up risk in order to achieve better results to increase favor with the CIO.

Parting thoughts

Overall, successful CIOs will stay well-connected with many industry connections, play to their strengths, seek outside counsel, help principals engage the next generation, and be able to navigate tough conversations with principals to ensure the investment strategy is in alignment with the family’s overall values and aims.  To find out more about the unique challenges faced by family office CIOs and how they can overcome them, read our white paper: Organizational Design, Strategic Leadership, and Governance Insights for Family Offices.