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How to choose a portfolio manager or investment advisor for a family office

The basic reason for investment is to earn an inflation- adjusted return that compensates for the risk of the relevant asset class.

December 26, 2017 / 02:39 PM IST

Aniruddha Meher

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”                                                                                         --Warren Buffett

The basic tenet of any family office is to preserve capital and manage it so it provides reasonable returns over the long term thereby preserving the interests of the family. Investopedia defines a family office as “private wealth management advisory firms that serve ultra-high-net-worth investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family”.

Traditionally, family offices catered to generation after generation of the families of Ultra-High-Net-worth Individuals (UNHIs), looking after their wealth stoically often serving as financial guides for each new generation of the family. The financial world has changed since then with families having to settle for transient advisors who may have diluted ideals of fiduciary responsibility at best. Finding a portfolio manager or investment advisor in such a scenario can be difficult. Here is how you should choose an advisor for your family office.

Referrals and testimonials:

Let’s face it; we are more likely to trust someone we know has our best interests at heart. If a friend has been talking about the amazing experience they have had with their investment advisor, it could be worthwhile to set up a meeting to see if they might be a good fit. A good investment advisor or portfolio management service (PMS) provider should be able to provide references. Testimonials from unbiased third parties can also go a long way.

Fee structure:

This is extremely important to understand. There are a few different ways that investment and portfolio management advisors are compensated for their services which can affect the services received.

a) Percent of account value: Such remunerations may be fee based or fees only. A fees only advisor would be paid a flat retainer based on the account value while a fee based advisor would be compensated by fees for their advice along with commissions on any sale of financial products that are used to implement their advice.

Flat fee advisors (i.e. not based up on account percentages) tend to provide the most conflict free advice overall.

b) Commission based: These advisors are compensated via commissions which may be paid to an advisor in a variety of ways. It is important to remember that this may influence the advice you receive.

c) Retainer fees: Retainer fees are paid for ongoing financial advice and such advisory services are normally suitable for small businesses. Retainer fees are agreed upon by the two parties depending on the complexity of the investments to be handled along with any other services that may be required.

No matter which method of compensation the advisor uses, one should always check to see if it is reasonable when weighed against the services offered. It is vital to understand the structure of the compensation and incentives in any financial transaction and financial relationship.

Experience and Manpower:

It is only fair to look into a potential advisory service provider’s background, just as one would for a potential employee. A few good questions to ask are:

• How have they fared through recent bubbles and crashes in the market?
• What are the resources they have in terms of manpower and resources to carry out their research?
• What are their credentials and that of their staff (if any)?

It is also a good idea to try and find out how long staff members have been working with them. A high staff turnover can mean that the manager handling an account changes frequently which does not bode well in the long run.


It is a good idea to know how well an advisor’s interests align with the goals set by the family office. Find out what their strategy is for the long term.

• How do they deal with fluctuations in the market?
• What are their processes for handling accounts and making investment recommendations?
• Do their procedures give them an advantage during times of uncertainty?
• What is their risk management strategy and how do they protect portfolios against inflationary and deflationary periods?

Knowing how they communicate with clients can also help in the decision making process. It is vital to know their reporting structure and how any anomalies are handled.

To summarise, here is some sage advice, we strongly suggest going back to the basics of investing. The basic reason for investment remains: to earn an inflation- adjusted return that compensates for the risk of the relevant asset class. Refrain from getting involved in the rat race of a short term performance derby. It is actually detrimental to earning reasonable long term returns.

Mutual understanding of goals and the alignment of strategies are vital for the successful relationship between a family and their financial advisor and one must not be afraid to ask all the necessary questions before settling on an advisor. It is after all, a relationship we hope will continue down the generations.

(The writer is fund manager of Sankhya India Portfolio at Multi-Act India)

Tags: #investing
first published: Dec 21, 2017 11:36 am