The Investment Habits of Family Offices

Family offices invest to stay rich, not to get rich. A family office is a private firm that manages one wealthy family's money, and sometimes several families'. Its owners have already made their fortune, usually from a single business, and that shapes every habit below.

They think in generations

A mutual fund is judged every quarter. A family office is judged over decades. Its real benchmark is whether the grandchildren inherit wealth that has kept pace with inflation, taxes and spending.

This long horizon is the family office's main edge. It can hold through downturns that force others to sell, and it can wait years for an investment to mature.

They own more private assets

Surveys of family offices regularly find that alternatives make up a large share of portfolios, often approaching half. That covers private equity, venture capital, real estate, private credit and hedge funds.

Patient capital is paid for accepting illiquidity. A family that will not need the money for twenty years can lock it up and collect that premium.

They prefer direct deals

Many families made their money running companies, so they are comfortable owning them. Family offices increasingly buy stakes in private businesses directly instead of through funds. They often co-invest alongside other families or private equity firms.

Direct deals save fees and give control. They also demand real expertise, and families tend to do best in the industries they already know.

They diversify away from the source

The original fortune usually sits in one company or one sector. A core job of the office is to spread that risk without triggering an avoidable tax bill or losing control of the business.

This is done gradually, through staged sales, dividends reinvested elsewhere and borrowing against the main holding.

They hold more cash than you would expect

Family offices typically keep meaningful liquid reserves. Cash funds the family's spending, meets capital calls from private funds and allows purchases during a crisis.

The 2008 crisis taught many families that illiquid assets cannot pay bills. Liquidity planning now sits beside asset allocation.

They watch costs and taxes closely

A family office looks at returns after fees and after tax, because that is what the family keeps. It negotiates fees, uses tax-efficient structures and avoids needless turnover. Over decades, a one-point saving each year is enormous.

They govern the family, not just the money

The saying "shirtsleeves to shirtsleeves in three generations" exists in many cultures. Fortunes are more often lost through family conflict and unprepared heirs than through bad investments.

Well-run offices therefore write an investment policy, hold family meetings, educate the next generation and plan succession. Many also run the family's philanthropy, which gives younger members a shared purpose.

What an ordinary investor can borrow

• Set a horizon measured in decades and judge results on it.
• Reduce dependence on a single employer, property or stock.
• Keep enough liquidity never to be a forced seller.
• Measure returns after costs and tax.
• Write down your investment policy, and talk to your family about it.

Part 13 of 15 in the series Lessons From the Masters. Next: How Sovereign Wealth Funds Think.

Independent educational commentary, not investment advice. References to people and firms do not imply affiliation or endorsement. The picture is an illustration, not a photograph. Past results say nothing about future ones. Trading leveraged products carries a high risk of loss.