Family Investment Policy Statements: Governance for Multi-Generational Wealth

Research on multi-generational wealth consistently identifies the same pattern: wealth created by one generation tends to erode across the next two or three. The oft-quoted statistic — that 70% of family wealth is lost by the second generation, 90% by the third — may be imprecisely sourced, but it describes a real phenomenon. The causes are not merely financial: they are governance failures, misaligned expectations, the absence of shared values, and the lack of formal decision-making structures.

A family investment policy statement (IPS) is the foundational governance document that addresses these structural failures. It articulates what the family is trying to achieve with its wealth, how decisions will be made, what constraints apply, and how performance will be measured. For ultra-high-net-worth families and those establishing family offices, an IPS is not optional — it is the anchor that prevents ad hoc, inconsistent, or emotionally driven decisions from undermining a carefully constructed portfolio.

What an Investment Policy Statement Contains

A well-constructed family IPS is not a one-size-fits-all template. It reflects the specific circumstances, values, objectives, and structure of the family. However, there are consistent components:

1. Purpose and Philosophy Statement

This section articulates why the wealth exists and what the family intends it to achieve. It may address:

• Is the goal to support the lifestyle of the current generation while preserving capital for future generations?
• Is growing the endowment for a foundation or charitable vehicle a primary objective?
• What does "success" look like over 10, 25, or 50 years?
• Are there values or restrictions that reflect the family's beliefs — for example, no investments in certain industries?

The purpose statement creates shared understanding that prevents individual family members from pulling in different directions. It is particularly important when multiple beneficiaries have different time horizons, risk tolerances, and financial needs.

2. Governance Structure

Who makes investment decisions, and how? For smaller family portfolios, this may be a single principal working with an adviser. For larger family offices, it may involve an investment committee with formal voting procedures.

Governance questions to address:

• Who has authority to change the IPS itself?
• What level of approval is required for tactical allocation changes vs strategic allocation changes?
• How are conflicts of interest between family members managed?
• What is the role of external advisers, and how is their performance evaluated?

A governance section prevents paralysis (inability to make decisions) and impulsiveness (decisions made without appropriate deliberation) — two common failure modes in family wealth management.

3. Objectives and Time Horizon

The IPS must specify measurable objectives:

• Return objective: What rate of return (nominal or real) is the portfolio required to generate? For an endowment-style portfolio that seeks to preserve capital indefinitely while distributing income, the required return is typically the distribution yield plus inflation plus costs. A 4% annual distribution rate from an endowment with 2% inflation and 0.5% costs requires a 6.5% nominal return.
• Capital preservation vs growth: Is the primary objective to preserve the real value of capital, grow it, or distribute it over a defined period?
• Time horizon: Short-term (less than five years), medium-term (five to fifteen years), or perpetual (generational). The time horizon fundamentally determines the appropriate risk exposure.

4. Risk Tolerance and Constraints

Risk tolerance must be defined explicitly — not as an abstract concept but as measurable bounds:

• Maximum acceptable drawdown: "The portfolio should not lose more than X% of its value from peak to trough in any 12-month period."
• Volatility target: "Annual portfolio volatility should not exceed X%."
• Liquidity requirement: "A minimum of X% of the portfolio must be accessible within 30 days at any time to meet distributions and expenses."

Constraints that may apply:

• Liquidity constraints: Distribution requirements for family living expenses, trust distributions, charitable commitments.
• Legal constraints: Trust deed restrictions on asset classes, beneficiary rights.
• Tax constraints: Jurisdictions of residence for family members may restrict which structures or instruments are appropriate.
• Ethical constraints: Exclusions based on family values (fossil fuels, weapons, gambling, etc.).

Explicitly documenting constraints prevents portfolio managers or advisers from making proposals that technically improve return but breach constraints that were never written down.

5. Strategic Asset Allocation

The IPS contains the long-term target asset allocation — the central anchor of the portfolio:

Example for a growth-oriented generational portfolio:

Asset Class	Target Allocation	Range
Global equities	45%	35–55%
Private equity	15%	10–20%
Fixed income	15%	10–25%
Real assets (property, infrastructure)	15%	10–20%
Alternatives (hedge funds, managed futures)	7%	5–10%
Cash and short-dated bonds	3%	2–8%

The "range" for each asset class defines the bounds within which tactical deviations are permitted without requiring an IPS amendment. Deviations outside the range trigger a formal review.

Example for a capital preservation portfolio:

Asset Class	Target Allocation	Range
Short-dated government bonds	40%	30–50%
Investment-grade corporate bonds	20%	15–30%
Global equities	20%	15–30%
Real assets and gold	10%	5–15%
Alternatives	10%	5–15%

6. Manager and Fund Selection Criteria

How should fund managers and investment vehicles be selected? The IPS may specify:

• Minimum AUM and track record requirements for active fund managers
• Maximum allocation to any single manager (concentration limit)
• Preference for UCITS-regulated vehicles vs offshore funds
• Conflict of interest policies (e.g., no retrocession payments accepted)
• Review criteria: when is a manager placed "on watch" and when is termination triggered?

7. Rebalancing Policy

When and how will the portfolio be rebalanced back to its strategic target? Options:

• Calendar rebalancing: Annually, semi-annually, or quarterly.
• Threshold rebalancing: When any asset class drifts more than X% from target.
• Hybrid: Review quarterly; rebalance only when thresholds are breached.

The IPS should specify whether rebalancing is permitted across all wrappers (tax-inefficient but simple) or whether new contributions are directed first to underweight asset classes to minimise taxable disposals.

8. Performance Measurement and Review

How will the portfolio's success be assessed?

• Benchmark: Against which index or combination of indices will performance be measured?
• Review frequency: Quarterly reporting, annual strategic review, five-year IPS review.
• Who reviews: Investment committee, independent adviser, family council.

Defining performance measurement in advance prevents post-hoc rationalisation of underperformance ("the benchmark isn't relevant") or misplaced credit for market-driven gains.

The IPS Process: More Valuable Than the Document

The most important function of an IPS is the process of creating it. Bringing a family together to agree on purpose, values, risk tolerance, and governance structures is challenging — and the difficulty of the conversation reflects the importance of the questions being answered.

Families that attempt to create an IPS often discover:

• Misaligned risk tolerance among family members (one generation wants growth, another wants preservation)
• Unspoken assumptions about how wealth will be used or distributed
• Values conflicts (one family member wants ESG restrictions; another disagrees)
• Governance gaps (nobody has clear authority; all major decisions are deferred)

Working through these conflicts before they arise in a crisis — before markets fall, before a key family member dies, before the next generation enters the picture — is far less costly than resolving them reactively.

Practical Steps for Establishing an IPS

1. Engage a facilitator — typically an independent wealth adviser or family office consultant with no product to sell. A neutral facilitator enables honest conversation.
2. Conduct individual interviews — with each principal family member to understand their individual objectives, concerns, and values before the group discussion.
3. Draft the IPS — working from a structured framework adapted to the family's specific circumstances.
4. Formal review and sign-off — by all relevant principals; in a trust context, by trustees and potentially beneficiaries.
5. Annual review — the IPS is a living document; review at least annually and update as circumstances change (new family members, changes in residence, significant market events).

Compliance Note

An Investment Policy Statement is a governance tool and does not constitute investment advice or a guarantee of investment outcomes. The value of investments can fall as well as rise. Asset allocations and strategies described in an IPS should be implemented in a manner compliant with the legal and regulatory requirements of all jurisdictions relevant to the family's circumstances. Tax treatment of investments depends on individual circumstances and can change. This guide is educational. Families should seek qualified legal, tax, and investment advice when establishing an IPS.

How Global Investments Can Help

Global Investments advises internationally mobile HNW families on investment governance and policy — from facilitating the IPS creation process through to implementing and managing the resulting asset allocation across multiple jurisdictions. We bring experience of cross-border tax structures, family office design, and multi-generational wealth management to each engagement. Contact our team to discuss how a formal investment policy framework could benefit your family's financial governance.