How Can a Family Spot Conflicts of Interest in Investment Recommendations?

A family can spot conflicts by asking who benefits if it accepts an investment recommendation and requiring those interests to be disclosed in writing. A conflict does not automatically make a recommendation unsuitable, but it can change how you evaluate the advice. In my experience, a regular disclosure process makes it easier for everyone to raise issues before a decision is made.

Ask About Financial Ties

For each recommendation, ask whether the adviser, its firm, an employee, or a related party has an economic interest in the investment. That includes direct ownership, referral compensation, placement fees, fund fees, or a relationship with the sponsor. Ask whether the firm has an affiliated product or receives a benefit if capital is placed in a particular vehicle. The adviser should explain the interest in specific terms, not simply say that it may have conflicts.

Look at how the adviser is paid across the full relationship. A firm paid by a product provider may have a different incentive from a firm paid directly by the family. Ask for a written description of all sources of compensation and what services each payment covers. The questions in what to ask about adviser pay can help structure that conversation.

Check Personal and Family Connections

Conflicts can arise when a committee member, family member, employee, or adviser already owns an interest in the company or knows its principals. Ask each participant to disclose relevant holdings, business relationships, and close personal connections before discussion begins. Keep an updated register, and require people to refresh their disclosures when circumstances change.

A code of ethics and a clear process help make disclosure routine. In one passage from The Family Office Book, I describe how written disclosures made people more aware of their interests and helped make investment committee discussions more transparent. This process works best when the family records the disclosure, considers its effect, and decides whether the person can participate, must abstain, or can remain involved with defined limits.

Manage the Conflict Before Approval

Require the committee to discuss a disclosed conflict before approving the investment. Ask whether the recommendation has been reviewed independently, whether comparable alternatives were considered, and whether the terms reflect an arm's-length arrangement. If a person with a conflict participates, record the reason and boundaries. For related-party dealings, specify who must approve them and what information that person needs.

The family's governance rules should define disclosure, recusal, approval, and recordkeeping. A written investment committee charter can set expectations before a deal reaches the table. When reviewing a recommendation from an adviser, also ask how the adviser's fees relate to the work and advice. Talk with your attorney about legal requirements for a particular relationship or transaction.

It does help be more transparent overall, so that in the investment committee you know I know that Joe sitting next to me, he already has an investment in this firm that we are looking at.

Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.