Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 127

How family offices differ from institutions

With tongue partly planted in cheek, George Soros maintains that each day investors should ask how their portfolio would differ if they began investing today. In that spirit and starting with a blank whiteboard, a group of seasoned Chief Investment Officers (CIO) and Advisers to High Net Worths (HNW) and Family Offices (FO) were invited by Brookvine to question the constraints of convention and legacy that underlie their investment practices. It’s a process we call ‘Whiteboarding’.

Constraints of convention and legacy

The exercise was triggered by a suspicion that much of those practices rest on the theories, experiences and characteristics of large institutional US investors. That raises two questions:

  • Is some of what we use inappropriate for relatively small Australian HNW/FOs? If so, what different theories, practices, experiences and characteristics might be more appropriate?
  • What comparative investment advantages (opportunities, skills, governance, decision-making, risk tolerance) do Australian HNW/FOs have?

Vigorous group discussions led to rich insights and tentative conclusions. Not surprisingly we only managed to scratch the surface of the two main questions; in that sense, we started and finished from scratch. At the very least the differences between the institutional and HNW/FO ‘models’ of investing were highlighted and clarified, differences we intend to explore further at greater depth in future Whiteboardings.

Some of these differences and similarities follow.

Investing models compared

HNW/FO clients are significantly more engaged than their institutional counterparts, a difference with powerful bearings on decision-making and strategy. Because non-financial purposes such as lifestyle and values are important to HNW/FO clients, deep engagement is crucial. Prioritising non-financial objectives is a key decision rarely found in the institutional world. Further complicating that decision, objectives can diverge markedly across individuals, especially across different generations.

Managing competing objectives of near-term dependable income, long-term capital appreciation and capital/inflation protection is also common in the institutional world, though income requirements tend to have higher priority for HNW/FOs. Curiously, and unlike the institutional world, while HNW/FOs spend considerable time with clients setting investment objectives, few have promulgated a set of firm, robust investment beliefs.

This difference likely has two sources. First, Advisers/CIOs to HNW/FOs have a different role; they are more like educators and influencers than just capital allocators. To succeed they need to be good advocates and listeners especially to clients’ expectations, financial goals and lifestyle values. Second, they and their clients tend to have real-life investing experience gained through business building and a greater predilection for personal account investing. These result in a more hands-on and direct approach to investing that favours activity over principles.

Features of HNW/FO portfolios

HNW/FO decision-makers are more opportunistic and more prepared to invest in niche opportunities, such as alternative assets, tempered by access difficulties and the challenge of explaining risks and exposures. A common complaint regarding alternatives is a lack of quality independent manager research. HNW/FO decision-makers also pay less attention to industry preferences and norms. As a result their funds are far less diversified.

Younger generations however tend to be more concerned with diversification (including global investing) as a tool for preserving wealth, than founders who emphasise concentration as a tool for creating wealth. Founders’ resistance to moving away from the sector in which they made their wealth and tax consequences create sizeable barriers to diversifying.

Naturally, tax plays a larger role in the HNW/FO world where decisions are frequently driven by tax considerations.

Two factors seem to lie behind HNW/FO’s limited use of Modern Portfolio Theory including optimisers and other risk management tools. First, HNW/FOs are less concerned with risk described as volatility or tracking error and far more with risk described as (permanent) loss of capital and not meeting objectives. Second, the risks inherent in large holdings of property, founder businesses and legacy equity struggle to fit within the usual parameters of institutional investing. On the other hand, sequencing risk, a hot topic for institutions, is equally important for HNW/FOs because founders do worry about their wealth collapsing late in their life and in that of their family. Yet managing tail and other embedded risks is lower on their agenda in part because they lack the skills and experience some large institutions have in adopting and managing explicit hedges.

Cash holding and active management

Cash is an active component (typically the most active) of portfolios’ tactical asset allocations and at times is held at quite high levels. HNW/FOs revert to cash when faced with potential risks and instability. By way of comparison, institutions tend to see cash as a residual (and occasionally as having option value.)

HNW/FOs have a strong preference for local managers as they are perceived as offering greater transparency and understanding through heightened bonding and trust, a likely benefit of domestic bias. A larger domestic bias to Australia (compared to institutional accounts) is seen as ‘not unreasonable’ and historically valid.

Active managers are strongly supported through a vibrant belief in the ability of Advisors/CIOs to identify and access top tier managers, though a small number remain strong advocates for passive, encouraged by the growing availability of relatively cheap specialised ETFs. Although very cost conscious, HNW/FOs are more focused on net-of-fees returns than their institutional cousins. They are more open to higher cost opportunities where justified by (necessary) complexity and/or capacity constraints.

Governance tends to be based on simple principles executed through high client engagement, which makes decision-making more timely than in the institutional world. As part of that simplicity, investment teams tend to have flat structures with minimal specialisation by asset class or investment opportunity and a high degree of delegation to individuals.

Diversification

Participants were pragmatic about diversification. Having lived and worked through many investment cycles and crises they understand how a naïve reliance on diversification can fail at points of inflection. They also tend to focus on what they think ‘works best’ over time, consistent with their experience, skills and knowledge. What does ‘work best’ varies across HNW/FO organisations to a greater degree than it does across institutional investors.

Sufficiently many rich insights were generated for Brookvine to have already led Whiteboarding 2 that explored this topic, diversification, in greater depth.

For more insights into the ways HNW/FOs look at investing, the link is here Whiteboarding 1 Report.

 

Jack Gray is a Director and Advisor, and Steve Hall is the Chief Executive Officer of investment manager and adviser, Brookvine. See www.brookvine.com.au.

 

RELATED ARTICLES

Five steps to become a better investor

Understanding the benefits of rebalancing

Wealth doesn’t equal wisdom for 'sophisticated' investors

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.