Governance and Investment Policy of a Family Office

Governance is a critical factor in the long-term success of a Family Office. Without a clear management system, even a technically strong FO crumbles under the pressure of intra-family conflicts and uncoordinated decisions.

Governance Structure

Family Council

The highest governing body of the family office. Includes representatives of the family (usually from different branches and generations).

Functions:

• Defining the general vision and values
• Approving strategic directions
• Resolving conflicts within the family
• Communicating with the FO team

Meeting frequency: quarterly or semi-annually.

Investment Committee (IC)

The body responsible for investment decisions.

Composition: CIO (chair), external independent members (2–3), family representatives with financial expertise.

Functions:

• Approving the IPS (Investment Policy Statement)
• Approving strategic asset allocation
• Considering large investments (usually above a set threshold)
• Quarterly portfolio review

Advisory Board

Optional but valuable body: external experts (lawyers, tax advisors, industry specialists) who provide advice but do not make decisions.

Investment Policy Statement (IPS)

The IPS is a key document formalizing the investment policy of the FO.

Mandatory sections of the IPS:

1. Objectives and Time Horizon

   • Preservation vs. growth
   • Time horizon (perpetual for wealth preservation)
   • Expected return (e.g., CPI+4% per year)

2. Risk Profile

   • Maximum permissible drawdowns (e.g., -20% in a peak crisis)
   • Liquidity constraints (min. X% in liquid assets)
   • Currency risk

3. Strategic Asset Allocation (SAA)

   • Target allocation by classes: public equities / fixed income / private equity / real assets / cash
   • Permissible deviations (rebalancing triggers)

4. Restrictions

   • Excluded sectors (weapons, tobacco, gambling—if applicable)
   • Concentration limits (max. X% per issuer)
   • Use of leverage and derivatives
   • ESG requirements

5. Liquidity Management

   • Operating reserve (12–24 months of FO + family expenses)
   • Stress scenarios (liquidity needs in emergency)

6. Benchmark

   • Target benchmark for performance evaluation

Family Constitution

A broader document than the IPS. It regulates not only investments, but also:

• Rules for joining the FO (who among new family members can become a beneficiary)
• Distribution of dividends/payouts
• Dispute resolution mechanisms
• Succession (inheritance of management positions)
• Educational programs for the next generation

Typical Governance Mistakes

1. Unclear division of authority — CIO makes decisions that should pass through the IC
2. Lack of independent IC members — risk of echo chamber and groupthink
3. Mismatch between IPS and actual investment decisions — IPS exists only on paper
4. Ignoring the next generation — young heirs are not involved in governance → conflicts during generational change
5. Lack of documentation — decisions are made verbally, no audit trail