SUMMARY
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 operating a family office vary according to a number of factors unique to each family, such as the size, scale, scope and location of the office. However, 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 willing to incur not only start-up costs, but also operating costs over the long term. Failing that, family tension can arise later on, with adverse effects on the operations of the family office.
Family office expenses generally fall into three categories:
- Internal operating costs - including compensation, benefits, office operations, technology, cybersecurity, family education and meetings
- External professional service fees - including investment management, custody, reporting and investment consulting
- Investment advisory fees - including accounting, tax and estate planning, trusts, legal and insurance
The table below provides an overview of the low and high cost ranges for family office internal operations, investment advisory and external professional services.
|
Low end (bps) |
High end (bps) |
|---|---|---|
Internal Operating Costs includes compensation, benefits, office operations, technology, cybersecurity, family education and meetings |
40 |
80 |
Investment Advisory Fees includes investment management, custody, reporting and investment consulting |
45 |
85 |
External professional service fees includes accounting, tax and estate planning, trusts, legal and insurance |
15 |
35 |
Total costs |
100 |
200 |
BPS: basis points. One basis point equals 0.01%.
These ranges are for guidance only and based on our review of client operating budgets and survey data available.
Size
The number of office professionals is a direct function of the tasks assigned to the family office. 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.
In time, families almost always form multiple separate legal entities for tax and other ownership purposes. However, the greater the number of legal entities, the higher the attendant costs of accounting, legal and compliance.
Geography
A family office's location has a direct impact on tax exposure, regulatory requirements, privacy, proximity to family, availability and retention of high-quality staff, professional services infrastructure and cost.
With the increasing globalization of affluent families, competition among jurisdictions is intense as countries modernize their trust, tax, civil law, regulatory and fiduciary standards to keep up with the pace of evolving practices.
Principals are well advised to seek legal counsel and make the final determination based upon the long-term needs of the family, while resisting trendy or popular solutions that are not time-tested.
Scale
Economies of scale are often present in family offices. For example, consolidated performance reporting solutions can serve many family members and trusts. Equally, diseconomies of scale may also be present, which can increase operating costs. For example, 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.
Outsourcing
Many family offices have long outsourced specialized professional functions such as tax strategy, trust and estate planning, custody, and investment management.
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 cost rises alongside volume, such as bill payment and account reconciliation
- 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
Cost guidelines for family offices
What should my family office cost to run? is a question that every family ought to consider.
While this is a difficult question to answer, one useful benchmark of cost is to divide the direct / incremental costs of running the family office by the active assets under management.
The internal operating costs, outlined above, would best represent the direct / incremental costs. Expenses normally incurred by the family should not be included - this includes all personal expenses, donations, collections, tax expenses, and other expenses normally associated with assets such as residences, vehicles, etc.
Active assets include investment portfolios, trust assets, and liquid assets. Families should exclude large concentrated equity positions, family-owned operating business, fine art collections, and similar “inactive” assets to avoid skewing the ratio.
Family office expenses often amount to approximately 1% to 2% of the family's total active assets, rather than of its net worth, so the approximate cost for a small family office with active assets of $200 million would be $2 million to $4 million annually.1
Direct / incremental costs of running the family office
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Active assets under management
The interplay between investment advisory fees and external professional services fees will depend largely on the services performed in house versus outsourced as well as the complexity and nature of the investments and operations of the family office.
Important considerations for creating and operating a family office
When creating and operating 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 their requirements.
To find out more important considerations when establishing a family office, read the full white paper.
Family office questions
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