How to Start a Family Office, step 5 of 12

Choose a Portfolio Model That Fits Your Family

In short. This step involves choosing how your family office will allocate attention and capital across public markets, funds, real estate, and private businesses. Start with broad models such as endowment-style diversification, real estate, private equity, direct investments, or a hybrid. Then compare each model with your family's mission, experience, and resources. Consider where your family has an advantage as well.

By Richard C. Wilson, from chapter 5 of How to Start a Family Office

Your portfolio model should fit the source of your family's wealth, its capabilities, and its goals. When you start a family office, you have several choices: public markets with fund manager diversification, real estate, private operating businesses, or a mix of these. This step is about deciding which approach your family can understand and carry out over time, with support from the people involved.

No single model fits every family. In my experience, families with similar asset sizes or wealth origins may share some patterns. Generational phase and risk preferences can also shape their choices, yet each family adapts its approach. Begin with the family's mission and objectives. Then consider how much investment work the office can take on.

Compare the Broad Portfolio Models

An endowment-style portfolio aims for broad diversification and asset preservation. Some later-generation families use this approach, spreading investments across different asset classes and managers. It can make sense when the family wants diversification and has the resources to oversee a broad portfolio.

A real estate portfolio may suit families whose wealth came from property and who have experience or local connections in that market. Some families keep a large share of their long-term assets in real estate. Apartment buildings and hotels are common areas of focus. Family portfolios may also include office space. A history in real estate can give a family useful knowledge of local assets and market cycles. Familiarity alone, however, does not make every opportunity a fit.

A private equity approach treats the family's capital as a pool for building and owning businesses. Families that created wealth through operating companies may prefer industries they know. They can invest directly in private businesses, using strategies such as building a platform or combining companies in a sector. This model depends on the family's ability to assess businesses and stay involved in ownership decisions.

Some families combine real estate with private businesses in a direct investment portfolio. This gives them control of assets and spreads exposure across different types of direct investment. A hybrid model can also pair a diversified endowment-style allocation with property and operating businesses. The proportions depend on the family's goals and available resources, as well as its mission and values.

Use Your Family's Advantages to Set a Focus

A list of portfolio choices is only a starting point. To decide where to focus, I use a practical test. What advantage comes from your family's background, location, or experience? Where could your time and capital have the greatest effect? Which areas matter enough to hold your attention? An opportunity may be stronger when it fits these considerations.

You can also ask whether demand is likely to grow in an area with limited competition. That may help when comparing possible directions. It does not replace your own understanding of the assets or businesses.

Consider what you know in each area and whom you trust. The family or its team may have industry experience, a close understanding of a company or asset, or a trusted relationship with its leadership. These connections can strengthen your conviction. If the family is unfamiliar with an area and has little connection to the people involved, assessing the opportunity may be difficult. Your family compass can help keep portfolio discussions tied to shared values and objectives.

Match the Model to Execution Capacity

A portfolio model requires more than a target allocation. It needs people who can source and assess investments, then monitor them and report on results. A family office focused on direct investments will need a way to evaluate and oversee businesses or properties. A diversified approach will need a process for selecting funds or managers and monitoring their work. Before committing to a model, consider the skills and time already available to the family office. Also review the outside help it can access.

Write down what the family expects the office to do and what it will retain outside the office. Specify who has authority to make decisions. An investment policy statement can document the objectives and constraints, along with the process for reviewing the portfolio. The investment committee can provide a regular setting to discuss proposals and risks, then consider changes in direction.

Keep the first version clear enough for family members and staff to use. Set out the broad model and the areas where the family has experience. Include the conditions that would make an investment a poor fit. You can refine the approach as the office learns what it can execute well. The asset allocation and performance measures can then follow from the goals you have set.

Make a Decision the Family Can Carry Out

Discuss the models in light of the family's wealth creation story, resources, and interests. Consider its strengths as well. Ask where the family has an advantage and where it would rely on knowledge or relationships it lacks. Record why the family selected its focus, along with the areas it has chosen to leave aside for now.

That record gives the family a basis for consistent decisions as opportunities arise. It also helps show whether an investment fits the intended portfolio or appeals on its own. A useful model helps your family office direct attention and capital with conviction. It also leaves room to adapt as your goals and capabilities develop.