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Where The Investment Policy Statement & Family Constitution Intersect

In a previous article, we discussed the role and importance of the Investment Policy Statement. To recap, this document is a unifying statement of financial objectives that focuses on “hard” money issues. It differs from a Family Constitution, which is a document that seeks solidarity of values and vision, and focuses on “soft” money issues.

[Note: we discuss both of these documents in detail in our recently published book “The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Families Worth $25 Million to $500 Million”.]

However, while the Investment Policy Statement and Family Constitution are separate documents that have specific roles to play, in the big picture they are related, and intersect when it comes to establishing wealth goals and performance targets.

Establishing Performance Targets

While every ultra-high net worth family is unique, all of them should engage in deep, meaningful conversations about what they want their wealth to achieve. This may seem self-evident, but many families do not approach this aspect from the direction of goal-attainment. Instead, they approach it from the direction of performance. That is, they base their investment decisions on how much return they desire.

One major flaw with this approach is that no one can predict, let alone achieve, a certain future performance, assuming of course that a family seeks higher than Money Market or short/medium term bond returns. If we were to be completely honest with ourselves, we would admit this, and this alone should stop us from following this approach.

Furthermore, this approach does not allow for educated and intelligent decisions about risk and return, because the proverbial cart is placed before the horse. In other words: the investment goals and targets should drive the returns, and not the other way around.

At our firm, once our clients establish their respective life-goals, risk and reward becomes a by-product.

Setting the Right Level of Risk

With the above in mind, families need to establish the level of risk that aligns with their objectives and tolerances. However, many advisors fail to address this aspect. Typically, they use a questionnaire to identify their clients’ risk.

This approach is useless at best and misleading at worst, because it can cause families to over-estimate or under-estimate how much risk they are willing to accept, or what the impact of today’s decisions may have on future generations. For these reasons, we encourage our clients to clearly define risk in their Investment Policy Statement.

Some Final Words About Net Return

Lastly, we reiterate a key point that we have raised in previous articles: it is a mistake for investors to focus on the return of individual investments. What they should be concerned about — and what should be highlighted in the Investment Policy Statement — is the net return of investments after taxes, expenses, fees, and inflation.

After all, it is impossible to accurately determine the return without taking into consideration tax ramifications and other expenses that inevitably drain a portfolio.

About Pillar Wealth Management, LLC

Haitham “Hutch” Ashoo and Christopher Snyder are privileged to have worked with ultra-high net worth families, some of whom attained wealth reaching $400 million, helping them achieve a positive change in their lives and finances.

They co-founded Pillar Wealth Management, LLC, an independent, fee based, private wealth management firm. As their clients’ go-to advisors, they are brought in to help with investment management, strategic planning, asset allocation, risk control, and tracking of their clients’ progress towards life-goals.

Their services are provided to a limited number of clients. They only accept a new client when they have determined that there is mutual admiration and respect and only if they can add substantial value to the client’s financial life. Learn more at Wealth Management. You can reach us at [email protected]