06-15-2026
Owners of family businesses should weigh business-related strategic considerations when constructing their investment portfolios, not just traditional portfolio management principles. Many wealthy families hire professional managers to run their family businesses. These same families hire professional advisors to run their investment portfolios.
Unfortunately and all too often, intense daily demands, business model issues, and targeted incentives mean professional managers and investors may not commit the time needed to understand the complexities, opportunities, and risks facing their other-vertical counterparts with regard to total family wealth; they each typically focus more narrowly on their individual spheres of responsibility. By not taking the “other half” into consideration, leaders of each of these two verticals fail to capture all the value available to a family business owner, and they may subject that family to unnecessary risks.
Family business executives benefit from the unique features of family ownership:
These features allow family business executives to manage very differently than those working for public-market shareholders or private equity firms. However, the financial incentives placed upon family business executives rarely include metrics relating to the maximization of total family wealth, even if this is the superordinate goal. Hence, these executives focus on narrow, business-specific operating metrics without looking outside the business at the family’s global risk and wealth picture.
Likewise, family office executives typically work within performance frameworks which reward total investment performance (an absolute measure). Sometimes, these frameworks contractually layer on a constraining risk framework within an incentive reward structure, but more often than not, risk is an afterthought with regard to direct financial incentives. This is typically true even if risk is a primary constraint in the investment policy statement. So, a rewards-focused family office executive team manages “their” portfolio to perform on an absolute basis, likely under-valuing the risk and opportunity in the family’s primary operating company.
One of my historical clients was a family with a renowned real estate management and development business. Despite being enormous, the development business still relied upon the personal guarantees of the family to secure low-cost debt financing.
This family invested a significant portion of its “endowment” assets residing outside the business in high beta, cyclical but tax-efficient opportunities. Yet, its real estate development business was itself highly cyclical, high beta and debt-dependent. The value of the real estate development business dwarfed the family’s liquid assets. Strategically, this family needed to support borrowing capacity during a recession to keep its business afloat.
Support for borrowing capacity during a crisis required a combination of maintained value, ready liquidity, and well-understood, high-quality assets. Given this, a shift from their current high-beta portfolio strategy to one more complementary to their principal operating business made sense.
Many families find themselves in similar situations. Such families should consider working with their operating executives to understand the high-risk scenarios of the principal business, then align their investment professionals to deliver portfolio performance outcomes which complement and support that business in stressful times. To make sure this happens, incentives and governance structures should be put in place to bring the total family picture more formally into each vertical’s decision frameworks.
In good times, of course, the operating business throws off cash. That cash gets invested in the family’s complementary, liquid investment portfolio. But in bad times, and if the risk/reward warrants, the investment portfolio can be drawn down to support or accelerate strategic opportunities in the operating business. Every bit as valid an idea, continued investment in the operating business should be weighed against the quality and impact of the opportunities unearthed by the portfolio investment team. The net result of such a practice is a broadly defined rebalancing program across the family’s total wealth, and one with potentially significant additional strategic value.
If managed well, the backing of a stable endowment can be just the confidence-boosting on-call capital that operating executives need to take smart risk when the market is at its most fearful, and most vulnerable to their bargaining. Both the operating and investment teams should be rewarded for setting up such plays well.
It’s not easy to bring all the parties onto the same page here. It’s also hard to ensure top performance within each vertical (family endowment and family business) when the parties have their own mini versions of the Federal Reserve’s dual mandate (our own Joe Tracy would likely wince upon hearing those two words). But the family’s higher-level goal is total, generational family wealth. Optimizing for that may very well require more cooperation and coordination between the two primary underlying executive teams supporting family business owners than current practice provides.
Families should consider putting in place formal governance structures and incentives to encourage a holistic view that helps them win over the long run.
Charles Stucke is a Daniels School Business Fellow in Global Family Office and Wealth Management and a limited term lecturer. He is a CFA and adjunct lecturer at Washington University’s Olin Business School in St. Louis, where he teaches hedge fund strategies, wealth and family office management and real estate finance to master’s students. In addition, Stucke is a founder and the CEO of Ahakista Capital.
