Source: BBH Analysis. The information in this table is for illustrative purposes only.
However, a family with significant assets, as in the far right column of Exhibit 1, may be able to receive highly personalized services at a lower fee than what it would pay for a multi-family office. This often becomes an important factor for families with billions of dollars, as does the fact that family offices are “nonprofits” – in that the cost to operate them is not meant to create a profit, but solely provide services. On the other hand, multi-family office fees cover a number of services but are also meant to create a profit.
That said, a family office’s assets typically diminish over time, while complexity increases, as future generations are often net withdrawers rather than contributors, and more family members require more accounts and client service professionals.2 Thus, a smaller asset base for a greater service level raises “fees.” To offset this loss in assets and rising costs over time, many single-family offices choose to merge into a multi-family office, resulting in a certain level of lost autonomy compared with a single-family office.
In addition, while the greater asset sizes and higher fee figures appear to produce a large amount of money available to service one’s family office, it’s important to consider that expenses can pile up fast. And more services and greater complexity lead to more cost. What follows are some examples of what could contribute to a family office’s “fee”:
- If it has a physical office, it needs to pay for real estate and occupancy.
- High-quality executives (median CEO annual compensation ranges from $476,000 to $2 million), investment professionals (median CIO annual compensation ranges from $398,000 to $1.5 million), attorneys, and accountants all command six-figure salaries and benefits.3
- Client service, operations, risk, and compliance professionals may be necessary, and all require salaries and benefits.
- There are heavy costs for trade management, accounting, and reporting systems.
- A central custody and administration system is necessary to consolidate all assets.
- There are a number of essential additional costs, including insurance, travel for staff, outside legal expenses, a customer relationship management system to manage critical information about each family member, human resources, and cybersecurity, to name a few.
Outsourcing some of these functions is possible, but to do so, families need to source vendors, manage those vendors and costs, and accept less control.
On the topic of staff, competitive compensation and benefits are just one aspect of finding, attracting, and retaining the best individuals to oversee a family office’s operations and services. Just like for any other employer, to appeal to candidates, firms must have a strong value proposition and provide prospects with a desirable career path. Post-hire, family office managers need to manage employees and focus on retaining talent like other established employers do. This is particularly important when one considers that most C-suite and experienced professionals are likely coming from corporate environments that have structured employee retention programs.
Sustainability also comes into play when evaluating family office employees. While someone interested in founding a family office may have the appropriate staff at the time, it is important to consider who will oversee the family office and various functions once the owner and key employees reach retirement.
For those with limited knowledge or interest in recruiting, fostering, and motivating employees or who lack a successful succession plan, an experienced multi-family office can shoulder that burden.
How Important to You Is Client Service?
As noted, one of the biggest draws of starting a family office is the ability to pick and choose which services a family wants in order to create a personalized experience. Having a well-resourced staff dedicated solely to one’s family can certainly result in valued advice, excellent service, and meaningful relationships if the firm hires employees who truly understand the family’s needs and motivations.
Alternatively, a family can experience client service excellence and deep relationships with a multi-family office. In either case, it comes down to the people servicing the relationships and the time that they have to devote to their clients. One potential benefit of the multi-family office model is the experience client service professionals have gained from working with many families. They can leverage this knowledge to provide useful information about what other families have done in similar situations to help clients arrive at the best possible solution. However, client service professionals at family offices, especially smaller ones, have fewer clients and can therefore devote more time to each. For that reason, when considering a multi-family office, it is important to determine whether client service professionals will be able to dedicate enough time to meet the needs of one’s family.
Do You Have an Interest in Creating a Business – and the Time Required to Do So?
The steps involved in building a successful family office, practically speaking, amount to starting a business. It requires a tremendous amount of work and oversight.
This article has touched on the former point. On the latter, single-family offices need a governance infrastructure, which includes establishing relevant boards of directors and committees, such as a compliance committee and audit committee. Having governance assists the family with succession planning and preparing the next generation to inherit wealth – often a leading concern among founders – and helps maintain transparency across the family and prevent disputes. It also prevents regulatory violations and fund misappropriation.
Individuals who have the drive and motivation to create and run a family office must also determine whether the business will be sustainable. In order for the family office to remain intact once the original founder is no longer able to run it, family offices need a successful succession plan in place to transition to the next generation.
For those who enjoy the excitement of creating an organization and have the time or those who want to occupy retirement with meaningful and personally rewarding work, starting and potentially managing a family office may be a great option. Individuals who don’t want the hassle may find that the right multi-family office is a better alternative because it provides more of a turnkey solution. Even for those who require a service not offered by a multi-family office, hiring two providers can often achieve one’s goals while keeping costs, service providers, and time commitment more manageable.
Do You Have a Strong Point of View on Investing and an Interest in Being Involved in Investment Decisions?
Finally, families should consider their level of interest and involvement in investing, which is in many ways the reason many individuals even begin to consider creating a family office. The main focus for most family offices is wealth management. In order to create a wealth management organization to oversee a family’s assets, as well as those of the next generation, it is important to begin by defining the family’s goals and investment philosophy.
For example, at BBH, we have a clearly defined list of our investment beliefs, which focus on:
- Performing bottom-up fundamental research on all investments
- Purchasing securities at a discount to our estimate of their value and holding them over time until they realize their full value
- Only partnering with third-party investment managers who think and invest the way that we do
If you are contemplating creating a family office but do not have a philosophy on how you would like your assets managed, it may make more sense to interview a number of multi-family offices and hire one. Experienced multi-family offices can help families determine their investment objectives and philosophy, desired level of risk, and time horizons in order to oversee asset allocation, outside manager selection, and monitoring and investment strategy and performance.
On the other hand, hiring an outside CIO to manage family office investments might be a good solution for families with a clear vision of investment philosophy and goals but who do not want to lead their family’s investment office.
One related issue to be aware of is that the size of the family office can affect the CIO’s ability to implement its defined investment philosophy. Access to the best investment managers may be limited by asset size; for example, until a family office passes the billion-dollar mark, it is difficult to construct a fully diversified private equity offering with top managers, as they often require investments of $10 million or more. Furthermore, a family office needs to hire a team to conduct due diligence on managers, and many only have the budget to hire one or two people, whereas a multi-family office has an entire dedicated team.
Conclusion
Like most decisions, there are pros and cons to establishing a family office. Some of the attractive features of family offices include highly personalized services, control, exclusivity, and lower fees. However, the benefits of highly personalized services are most evident for highly idiosyncratic services. In addition, the benefit of control diminishes as a family grows and more members exert influence on the decision-making process. The benefit of lower fees is only a benefit if a family office has the assets to support the family members and the service suite it requires.
The downsides to starting a family office include the tremendous amount of work it entails compared with hiring a multi-family office. In order to preserve and grow capital, those leading the family office should have these three requirements, at a minimum:
- Point of view on investing
- Ability to hire personnel to implement investment philosophy
- Insourced or outsourced wealth planning services
An execution failure can lead to the permanent destruction of a family’s wealth.
Finally, like most “businesses,” family offices take some time to hit their stride, but time is the enemy of a family office that does not have a new asset stream. For example, if the first generation (G1) creates a family business and sells it, and G2 and G3 live off of the wealth created but do not meaningfully create their own, then the assets of the family office will begin to deplete over time, raising “fees” for the same set of services.
However, like the pros, the cons have a flipside as well. For instance, many people enjoy the work of creating and managing a family office and are well-positioned from an investment and hiring perspective to do so. In addition, many family offices have a new asset stream – for example, those that receive regular dividends from the current owner of a family business. Others open their doors to outside families (multi-family offices), and some even become for-profit entities from which the founding family benefits.
The considerations for starting a family office are plentiful. We merely scratch the surface of what it takes to create one and the circ*mstances under which it is a good decision for families. To learn more about this topic or have a conversation with a BBH professional, please reach out to Nichol MacManus.
