Family office insights this week:

• The latest data and insights on family office operating costs

• How inflation is hurting the rich

• Generational concerns at family offices

• A classic book on banking and modern finance

• Jobs: join a philanthropic-focused New York family office

The Real Cost of Running a Family Office

How much does a family office actually cost?

Setting up a family office can come with a hefty price tag. While most families know this, they can still underestimate just how crucial it is to fund the family office properly. New family offices can easily fall into the trap of trying to cut costs too much, which usually leads to problems down the line.

The expenses involved in creating and running a family office depend on factors unique to each family, but there are some basic costs everyone has to deal with, like staffing, office space, and tech.

A recent JP Morgan Global Family Office Report 2024 has some interesting data on the costs of running a family office and the typical staffing numbers.

Today we’ll look at those stats and consider the key costs of running a family office.

A Rule of Thumb

Citibank has identified a common rule of thumb: that family office costs are around 1%-2% of AUM. It’s a useful benchmark, but the actual costs of running a family office can vary significantly based on a range of factors such as the complexity of the family’s financial affairs and the services provided in-house.

Survey Results

JP Morgan surveyed their network of family office principals and executives, interviewing 190 family offices. They found the approximate total annual cost to run a family office:

• Average family office operating costs: $3.2 million annually (median $1.3 million)

• Modest family offices ($50M-$500M AUM): Average $1.5 million (median $0.4 million)

• Mid-sized family offices ($501M-$999M AUM): Average $2.7 million (median $1.5 million)

• Larger family offices ($1B+ AUM): Average $6.1 million (median $4.2 million)

And in the US:

Family Office Costs

Typical operating costs include:

• facilities

• technology

• risk management

• investment management expenses

• accounting and reporting

• legal services

• taxes

• staffing

Facilities 🏢

Office space, utilities, maintenance, conference rooms.

These costs are essential for setting up an office that meets the operational needs of the family office and can range from 5% to 10% of the total budget.

Location is obviously a key factor here. Opt for a major financial center like New York, London or Singapore and expect to pay the premium.

The office setup will depend on the family’s preferences. If family members want to design the perfect office environment (park views, large offices, Silicone Valley style amenities), expect some chunky costs!

Technology 💻

Hardware, software, cybersecurity measures, and data management systems.

Like most companies, tech costs can be material for family offices.

Advanced tech solutions enable the family office to handle complex financial portfolios, ensure secure transactions, and provide real-time reporting.

As family offices are frequently the target of cyber attacks, their tech should be robust and resilient.

Typically, technology expenses make up about 15% to 20% of the total budget.

Watch out for future newsletters - there will be a deep dive on family office tech.

Risk Management ⚖️

Insurance policies, implementing cybersecurity measures, and hiring risk management professionals.

Risk management costs encompass the strategies and tools used to identify, assess, and mitigate financial and operational risks

Effective risk management is critical for protecting the family’s wealth from unforeseen events and ensuring regulatory compliance. While these expenses can be significant, they are necessary to safeguard the family’s assets and reputation.

Investment Management Expenses 💼

Fees paid to investment managers, trading and execution costs, custody fees, and research expenses.

Investment management expenses involve the costs associated with managing the family's investment portfolio. These fees can vary depending on the complexity of the investments and the level of active management required.

Accounting and Reporting 📊

In-house accountants, costs of accounting software, and fees for external auditors if necessary.

The expenses related to maintaining accurate financial records and producing regular reports for the family office. Accurate accounting and timely reporting are essential for financial transparency and effective decision-making. Accounting and reporting also act as a key internal control.

Legal Services ⚖️

Ongoing legal advice, contract review, regulatory compliance, and dispute resolution.

Legal services are vital for protecting the family’s interests and ensuring compliance with legal standards. That said, legal services are the most outsourced service by family offices.

Fees can vary widely based on the complexity and frequency of the required services.

Taxes 💰

Tax planning, compliance, and filing.

Family offices often engage tax advisors to optimize tax strategies, manage cross-border tax issues, and ensure compliance with local and international tax laws.

Effective tax planning can result in significant savings and is an essential aspect of preserving family wealth.

These costs can vary depending on the complexity of the family’s financial affairs and the jurisdictions involved, but they are a necessary investment to avoid legal complications and fines.

Staffing: Salaries and Benefits 👥

Staffing expenses are often the largest single cost for a family office, encompassing salaries, bonuses, long-term incentive compensation, benefits, and insurance for all employees. Key positions typically include a CIO, CFO, legal counsel, investment analysts, accountants, and administrative staff.

Competitive compensation packages are crucial for attracting and retaining top talent, especially in specialized roles. The family office sector is becoming ever more transparent and C-level compensation is on the rise.

These expenses can account for 50% to 60% of the total operating costs of the family office.

Staffing levels

Staffing is influenced by the size of AUM, the nature of investment activities, nature of the assets (e.g. direct real estate assets usually require more people) and the goals of the family office.

The JP Morgan study highlights:

Small Staffing Levels: Most family offices have relatively small staffing levels.

Average Staff: On average, family offices employ 11 staff members.

Median Staff: Half of the respondents report having five or fewer staff members, indicating the mean may be skewed by a few large offices.

Staff Size by Office Size:

- Smaller Offices: 71% have 1-5 employees.

- Mid-Sized Offices: 53% have 1-5 employees.

- Larger Offices: 76% have 6 or more employees, with 18% having more than 20 employees.

And in the US:

Psychology and Costs

People have complex psychological relationships with money. In family offices, which are much closer to their owners than traditional corporations, the family’s financial quirks can become the family office’s financial quirks.

It is common to see first-generation family offices with the wealth creator tightly controlling the purse strings.

A traditional business owner might balk at the cost of employing investment professionals.

Later generations, who have not experienced financial hardship, are often less controlling on costs.

It is therefore crucial for family office leaders to understand the family’s attitude towards costs. If these attitudes negatively impact the effectiveness of the family office, it is the executives' responsibility to educate and inform the family accordingly.

A Balancing Act

When a family decides to open a family office, they should do so with their eyes open. They should be strategic about what they want the family office to do and understand the corresponding costs.

They should consider what services the family office will provide and what will be outsourced.

As the family office sector develops, the possibility of cutting corners on expenses is diminishing. Many families are rightly cost-conscious, but hiring second-rate people or scrimping on operating costs will lead to problems down the line.

Remember, if you pay peanuts, you usually get monkeys.

𝕏 highlights

Private bank Julius Baer assesses inflation for the wealthy.

Family offices and the next generation.

And because I can’t resist an occasional meme.

 💼 where to work

Three notable family office job opportunities currently open. The Tax Director role states the family office’s “main mission is to build a legacy of giving back.”

Chief of Staff - Private Family Office (Florida / Single Family Office)

Tax Director - Private Family Office (New York / Single Family Office

Chief Financial Officer - Private Family Office (Dubai / Single Family Office)

📚 what to read

Staying on topic with JP Morgan, The House of Morgan by Ron Chernow is a classic in financial history. It traces four generations of the Morgan family's influence on American finance

📻 what to listen to

The view from Western Australia. The Family Office Sherpa by Shaun Parkin is an insightful short podcast series exploring various aspects of family offices. Monday’s Buzz mentioned the latest episode on staffing and pay, which fits nicely into the topic of family office costs.

📺 what to watch

Dirty Pop: The Boy Band Scam on Netflix explored the dark world of Lou Pearlman, the mastermind behind 'NSync and the Backstreet Boys. While Pearlman clearly had vision, he built an empire on fraud and deceit.

And finally…

In an upcoming newsletter, there will be a look at family offices and health. It will explore topics around wellness, lifestyle, burnout and longevity.

I’d love to hear your thoughts on this topic: does your family office have an active strategy on the health of the family members and family office employees?

Hit reply and let me know.

For now, here’s to a healthy and wealthy weekend!

Family Office Buzz will be back on Monday (here’s the last edition if you missed it) with more of the best content on family offices and beyond.

Until next week, see you on 𝕏 or LinkedIn

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