Cost is always a major consideration when setting up a family office. These expenses are multifaceted ranging from employee salaries, IT, administrative costs, consultancy fees etc. A recent UBS report highlighted a significant rise in average operational expenses of family offices in 2022 with 59% of respondents reporting significant rises in the costs for staff and 48% reporting the same for IT. Knowing these funding factors and their impact on the overall performance of the family office will allow families to make better decisions on where to cut costs without unfavourable consequences.
Let us take a bird’s eye view of the general expenses that would be required to operate a family office in 2022.
The categories of family office expenses
The expenses to operate a family office can generally be classified into 4 broad categories:
- Internal operating costs including salaries, overheads, IT, etc.
- Family expenses including residential and personal costs.
- External service costs, including consultancy and experts, security, and outsourcing fees.
- Family office advisory costs, including research and data collection, reporting, and managerial expenses.
These expenses can vary quite significantly with what a family expects out of their family office and it largely depends on the family office structure and size, the percentage of outsourced services, and the complexity of its investment portfolio. To put things into perspective, we’ll take the example of the cost profile developed from Citi Private Bank Family Office Leadership Program Surveys in 2019 and 2020. It states that the average cost to run a small-scale family office of 6 employees can vary between $1.5 – 1.8 million annually while the number can range from $14 – $22 million for a large-scale family office with over 30 employees.
Optimising Family Office Expenses
Optimisation of family office expenses can be done in a number of ways with the end goal to keep the operating costs at or around 1% of the family’s net active assets. However, it is often advisable to develop cost-cutting strategies that counteract any increase in internal costs which tend to have the highest impact on a family office’s net annual expenses.
One of the most obvious ways to reduce the burden on staffing costs is by outsourcing non-core and commoditised activities. This was noted in this Forbes article which stated that family offices should only stick to essential services when insourcing and outsource everything else. Now, many family offices have long been outsourcing specialised, non-core professional services like execution and custody, taxation, and investment management, essentially providing an avenue for cost control all the while improving efficiency by gaining access to the systems of a specialised third party.
However, commoditised services are much more difficult to outsource due to their sensitive nature. For example, consolidated reporting is an important area that can take up to 65% of a family office’s resources. However, it can be difficult to outsource completely since it is highly bespoke for an individual family.
Another key factor that can significantly impact family office operational expenses is the nature of its investments. Complex investments like private equity often require staff with additional expertise which can drive up the running costs but are also expected to generate better returns. It falls on the families to strike a balance between investment expenditure and return in order to achieve maximum profitability in the long run.
Technology as a Vehicle to Save Cost
Imad Warde, the Co-CEO at Hedgeguard, said that well-chosen technology can boost front-end services and cut associated costs by up to 50 basis points at the expense of an initial upfront investment. For example, a cloud-based SaaS (software as a service) platform allows for greater efficiency and accuracy of operations since both the office and the service provider would have access to the same data that is securely held in the cloud.