Have you ever wondered what are the costs associated with running a Family Office?
Family Offices play a crucial role in managing the wealth of ultra-high-net-worth families and have grown in popularity in recent years. Many families looking to set up a Family Office are concerned about the operational costs, rightfully so.
As an expert in Family Office recruitment, my goal is to equip our clients with the essential information needed to establish their Family Office. With that in mind, this article explores the average costs linked to operating a Family Office and investigates the correlation between the costs and various influencing factors.
What is the average cost of running a Family Office?
The findings from our ‘Global Family Office Compensation Benchmarking Report 2023’ indicate the most average cost of running a Family Office is 0.1-0.5% of the Asset Under Management (AUM). However, while this is a valuable benchmark to establish or optimise Family Office operations, some jurisdictions incur higher costs than others. For example, in a more mature market like the UK, the average cost is 0.6%-1% of the AUM.
What is the relationship between cost and AUM/size of the Family Office?
The ‘Benchmarking survey report: Costs of running a Family Office, 2021’ by the Forge Community found a correlation between the size of a Family Office and its cost efficiency; that is, larger Family Offices tend to experience cost savings due to economies of scale. As shown in the report, Family Offices with an average of approximately $200 million in AUM, are operating at an average cost of 0.55% of AUM, whereas those with an estimated average of $12.5 billion in AUM, are operating at an average cost of 0.17% of their AUM. It is also noted that certain functions, such as asset management, will become more cost-effective as the entity grows.
Interestingly, the budget levels are virtually identical across Family Offices falling within the $625 million to $875 million AUM tranches.
How do the services Family Offices offer affect their running cost?
The Forge Community report noted that while AUM is a significant factor in the overall cost of running a Family Office, there are other factors that can also affect it, such as the focus of the entity. The report found that investment-focused Family Offices that act as fund managers incur the highest costs, averaging 0.54% of AUM. On the other end of the spectrum, trustee and philanthropic offices are considered the most cost-effective, with expenses amounting to only 0.28% of AUM.
The range of services provided can also significantly impact costs compared with outsourcing. The cost of operation may escalate when a Family Office opt for in-house legal professionals as opposed to external outsourcing. The same applies to investment, support and operational as well as accounting and finance functions. Furthermore, if the Family Office extend its services to encompass lifestyle support and other specific requirements of the family, there will be an additional increment in operational costs. Understanding these variations is crucial for the alignment of the purpose of the Family Office to the families’ financial goals.
What are the employee costs for running a Family Office?
Employee costs constitute a substantial portion of Family Office expenses. According to the UBS Global Family Office Report 2023, they account for 69% of all costs across all size groups. This emphasises the significance of human capital in the operation of Family Offices, especially when functions such as investment management, estate planning, and philanthropy, require investing in skilled professionals to ensure success.
As a recruitment expert who works exclusively with Family Offices, Agreus believes employee compensation is one of the core issues affecting Family Offices today. While the unique nature of a Family Office is part of its allure, it is also what makes compensation benchmarking for Family Office employees extremely difficult. This is why we worked with KPMG to create the Global Family Office Compensation Benchmarking Report 2023. Competitive and comparable compensation package is paramount in employee retention. In order to retain high-calibre professionals, Family Offices must be prepared to compensate them to or above the market standard.
