While cost is a highly important issue when assessing family offices, it should always be viewed in context of the value provided.
Cost is one of the major considerations in setting up a family office. But while most families are aware of this, they do not always appreciate the importance of funding a family office properly. All too easily, families can fall into the trap of artificially trying to keep costs low, almost always with undesirable consequences.
The costs of creating and then running a family office vary according to a number of factors unique to each family. Some fundamental costs – such as personnel, office expenses, and technology – are common to all family offices.
From the outset, the family should be fully aware of and in agreement over all the creation and ongoing costs. Failing that, family tension can arise later on, with adverse effects for the smooth running of their family office.
Family office expenses generally fall into four categories:
- Internal operating costs - salaries and employment benefits, overhead, technology, and telecoms.
- Direct family expenses - residences, art or other collections, travel, administration, consumption, and taxes.
- External professional service fees - accounting, tax, legal, consultants, insurance, and security.
- Investment advisory fees - management, custody, research/data, and aggregated reporting.
The table below provides a simplified model that should act as a benchmark for the typical costs incurred by family offices around the world1. It does not reflect the cost of third-party professional services – such as legal, accounting, tax, and investment management fees – because these are typically already being incurred by the family.
|Family office||Full-time professional staff||Full-time support staff||Low-end annual cost||High-end annual costs|
|Small||2||4||$1.5 million||$1.8 million|
|Medium||4||11||$3 million||$3.8 million|
|Large||8||16||$8 million||$10 million|
|Very large||16||32||$14 million||$22 million|
Note: Professional staff compensation varies by profession, location and experience. Data drawn from 2019 and 2020 Citi Private Bank Family Office Leadership Program Surveys, as well as direct review of a large sample of family office operating budgets
One key factor families should consider when assessing costs is the nature of their investments. Portfolio size, complexity, and the mix of active versus passive investments all affect the costs of running a family office.
More complex investments – such as direct venture capital holdings in start-up companies – require specialized staff expertise and therefore cost more.
The total number of advisors and asset managers used by the family office around the world also contributes to costs. Sometimes, the most significant costs are not transparent.
Hedge funds and private equity vehicles, for example – and particularly fund-of-funds – frequently involve multiple layers of issuer and manager fees, such as expenses, carried interest, and sales charges.
While families may be tempted to engage a wide range of services via their family office, an inventory of the costs associated with each service element should always be undertaken. This exercise may result in families deciding to forego or outsource certain services.
Other contributors to costs include the number of family members, the number of different tax jurisdictions involved, and the number and location of their residences. The more numerous and complex in each case, the greater the cost.
Clients often ask if spending at least US$1m to $2m to create a family office is really necessary. The answer depends on a variety of factors.
Increasingly, outsourcing and technology solutions are driving down the cost of setting up and running a family office. Mixing and matching in-house and external resources can also result in more modest expenditure.
Scale can be both an advantage and a disadvantage. For example, consolidated performance reporting solutions can serve many family members and trusts. Equally, however, having a large number of legal entities – each of which may require multiple bank accounts – can result in several hundred bank accounts that need to be reconciled periodically.
In order to improve efficiency and reduce costs, however, families are increasingly seeking to outsource functions like investment strategy, risk monitoring, bill payment, and general ledger and financial reporting. Family offices should be encouraged not simply to default to hiring staff but instead should consider all possible technology and service bureau solutions. Specifically, families should look to outsource functions involving:
- Dis-economies of scale – where costs rise with size or activity
- Specialized skills – e.g., aircraft maintenance, estate law
- Sound/low-cost alternatives – e.g., external vs. in-house fixed income manager
- New technology solutions – e.g., consolidated reporting, risk management
What should my family office cost to run? is a question that every family ought to consider.
One useful benchmark of cost is to divide the direct expenses of the family office by the active assets under management. The direct expenses consist of internal operating costs and investment advisory fees – see above. Family office expenses often amount to approximately 1% to 2% of the family’s total active assets, including investment portfolios, trust assets, and liquid assets. So, the approximate cost for a small family office with active assets of $155 million would be $1.5 million to $3.1 million annually.1
Internal operating costs + Investment advisory fees
Active assets under management
Active assets are merely a part of the family’s net worth. Inactive assets are disregarded in this calculation. These include large concentrated equity positions, family-owned operating businesses, fine art collections, residences, and various other assets. Were these reflected in the calculation, it would misleadingly exaggerate the costs required to run a family office.
Throughout the creation and running of a family office, the most important consideration is value. The family should determine whether the benefits of a family office would or do justify the time and expense involved. Some small, well-run offices produce an abundance of benefits relative to their cost. There are also large, costly organizations that fail to meet the expectations of the family fully.
The family needs collectively to define in advance what is valuable and beneficial to them and then ensure their family office fulfills all of their requirements.
To find out more important considerations when establishing a family office, read the full white paper.