11 July 2020

Family CIO

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Investors have long been instructed to diversify their holdings.  By including multiple asset classes in a portfolio, investors can, of course, often enhance returns and reduce risk. 

Today, many investors are taking diversification to a step further. They seek variation in the advice they receive.  Rather than have a single investment advisor, some net worth families are breaking their wealth into multiple segments and hiring separate advisors.  Other families maintain multiple advisory relationships because they have been in place for many years.

Using multiple advisors will certainly bring a diversity of perspective.  However, this process introduces a number of complexities.

First – investors miss the benefit of fee discounts.  As investment professionals provide advice about larger pools of assets, their advisory fees typically drop to a lower percentage of the total portfolio.  By splitting up portfolios, investors lose these fee breakpoints and pay a higher total cost.

Second – investors need to be careful of over-diversification.  If a family hires multiple advisors and asks them to build broad-based portfolios without coordinating with one another, the total return of all the portfolios may have little chance of exceeding traditional index strategies.  By having four or five active managers in one asset class, overall performance will typically mirror index performance, and may actually be worse once management fees are accounted for.

Third – investors lose the practical benefit of comprehensive investment reporting.  By hiring three advisors, for example, one will face a time consuming challenge of reviewing three separate quarterly performance reports.  This review may involve many manual calculations to judge the combined performance.

Despite these challenges, maintaining multiple advisors is often necessary for many high new worth families.  Long-time bank and brokerage relationships-especially those involving trusts and family partnerships-must often be continued in addition to hiring an independent family investment advisor.

By having a coordinating advisor, long-term relationships need not be disrupted.  Instead, the aggregate reporting of the coordinating advisor allows for better synchronization and the introduction of complementary investments – all while keeping family investments in multiple locations.  These creative advancements in client service allow advisory firms to simplify the lives of clients in ways that more efficiently meets their needs.

The Family CIO

For high net worth families using multiple investment advisors, many describe a family chief investment officer as a key advisory role.  By monitoring the overall portfolio, you can address the complexities of maintaining different family accounts in multiple locations.

Even when many investment professionals are involved with a family’s overall finances, the CIO keeps a diligent watch over the aggregate portfolio monitoring each investment account as well as the total.  The advisor who serves in this role may or may not make tactical investment allocations for certain parts of the overall portfolio, but by maintaining a view of how the disparate parts are affecting each other; the CIO can help families make critical decisions for overall asset allocation.

Studies consistently show that strategic asset allocation plays the largest role in generating portfolio reports. Engaging a family CIO as a professional watchdog and co-fiduciary is a new trend, but one that is quickly gaining acceptance.

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