In this article, we explore the crucial role of an investment infrastructure that allows family offices to respond quickly and efficiently to ever-changing market environments. We also explore the importance of ongoing monitoring, oversight and selection to ensure fund managers are producing the best outcomes at the most efficient cost levels.
1. Governance and oversight support
Stringent governance and oversight structures can be an essential part of any SFO’s toolkit in effectively navigating today’s investment management landscape. Establishing an effective and robust risk and operating framework for investments not only frees up valuable resources, but it also provides a level of oversight and due diligence. This is especially helpful in challenging market environments or in cases where a level of nimbleness and first-mover advantage is beneficial. A well-defined governance structure provides a clear roadmap for managing what is often a complex and varied set of underlying vehicles, including private market and alternative investments.
By engaging with external investment advisors, SFOs can tap into a wealth of knowledge and experience, enabling them to make more informed decisions, respond quickly to market environments and implement investment decisions in a quick and streamlined fashion.
Although seeking independent strategic advice is valuable, many SFOs find it beneficial to delegate certain responsibilities to their external investment advisors. These advisors can act as an extension of the in-house team while still allowing the SFO to retain control over critical decisions, such as long-term strategic asset allocation. This approach enables SFOs to leverage the expertise and resources of external advisors while maintaining ultimate decision-making authority.
Finally, implementing a holistic, structured approach to investments can allow in-house teams to focus on core areas of concentration, such as aspects of venture capital that require significant time and resources. An ongoing governance solution can cover manager selection, oversight and monitoring of the public asset side of the investments, ensuring they’re well managed and producing better outcomes.
2. Manager selection and ongoing monitoring
Manager selection is a crucial part of the portfolio construction process. However, in-house teams may not have the resources to research the extensive universe of investment managers (for both public and private markets). By partnering with a manager research team with the size and scale to cover a global list of specialist managers, family offices will be able to tap into an extensive resource of professionals in selecting, monitoring and implementing highly rated investment managers across various asset classes.
Selecting the right investment managers involves more than just picking the top-performing manager. It requires developing a deep understanding of a manager’s idea generation, portfolio construction, implementation processes and business management. Furthermore, regularly monitoring and evaluating investment managers is crucial to ensure due diligence and accountability. SFOs can delegate this responsibility to a specialised team, thereby reducing the governance burden for in-house teams.
3. Cost efficiencies
One of the significant benefits of utilising a delegated solution for investment manager selection is the potential for explicit and implicit fee savings. Explicit fee savings are the direct reductions in investment management fees an SFO can negotiate through its delegated solution provider. Implicit savings, on the other hand, result from the collective scale and buying power of the delegated solution provider or the efficiencies and costs saved by outsourcing this cost base. By pooling the assets of multiple clients, the provider can negotiate lower fees from investment managers, which are then passed on to the family office. This arrangement allows SFOs to benefit from cost efficiencies that would be difficult to achieve individually.
With Mercer’s significant global assets under advice (approximately US$16.3 trillion) and strong, worldwide fund manager relationships, we’re able to secure very attractive sub-investment-management fees exclusively for the benefit of SFOs. This allows us to pass on significant cost and fee savings.
In the ever-evolving financial landscape, governance and oversight are pivotal in the success of SFO investments. By embracing a strong governance framework and seeking independent expertise, SFOs can navigate the complexities of investment management with confidence and safeguard wealth across generations. The process of selecting and monitoring investment managers is a critical component of effective governance, enabling an SFO to access tailored advice. Moreover, the cost efficiencies of having the right framework and governance structures can be sizeable. By prioritising governance and oversight, along with manager selection and monitoring, SFOs can unlock their full potential and secure a prosperous future for generations to come.