A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Register to receive future issues, directly to your inbox.
A typical family office costs more than $3 million a year to run, according to a new study, as competition for talent drives up staff costs.
Wealthy families are spending between $1 million and more than $10 million a year to operate their family offices, now averaging around $3.2 million, according to JP Morgan Private's Global Family Office Report. Bank published this week. While costs vary widely by assets, experts say expenses are growing across the board as family offices increase in size and number and compete more directly with private equity, hedge funds and private equity. risk.
“There is a real war for talent within family offices,” said William Sinclair, head of JP Morgan Private Bank's family office practice in the United States. “They are competing for talent against private equity, hedge funds and banks.”
Smaller family offices, of course, spend less. According to the report, which surveyed 190 family offices with average assets of $1.4 billion, family offices managing less than $500 million spend an average of $1.5 million a year on operating costs. Family offices between $500 million and $1 billion spend an average of $2.7 million, and those above $1 billion average $6.1 million. Fifteen percent of family offices spend more than $7 million, while 8% spend more than $10 million.
The biggest cost is staffing, which has become more expensive as the number of family offices has tripled over the past five years. Family offices are increasingly competing with each other for senior talent, according to recruiters.
More importantly, family offices are shifting more of their investments into alternatives, including private equity, venture capital, real estate and hedge funds. According to the JP Morgan survey, US family offices have more than 45% of their portfolios in alternatives, compared to 26% in stocks.
As they expand their reach into alternatives, they increasingly compete directly with large private equity firms, venture capital firms and business advisors to attract top talent.
“We have seen over the last decade the professionalization and institutionalization of the family office space,” said Trish Botoff, founder and CEO of Botoff Consulting, which advises family offices on hiring and staffing. “They are strengthening their investment teams, hiring from other investment firms and private equity firms, which has a huge impact on compensation.”
According to a family office survey by Botoff Consulting, 57% of family offices plan to hire more staff in 2024 and nearly half plan to extend raises of 5% or more to their existing staff. Experts say overall salary at family offices has increased by 10% to 20% since 2019 due to frenetic demand for talent in 2021 and 2022.
The average compensation for a chief investment officer of a family office with less than $1 billion in assets is around $1 million, according to Botoff. The average compensation for a CIO overseeing more than $10 billion is just under $2 million, he said. Botoff said more family offices are adding long-term incentive plans, such as deferred compensation, on top of their base salary and bonus, to sweeten the packages.
Competition is driving up salaries even for lower-level staff. Botoff said a family office he worked with was hiring a junior analyst asking for $300,000 a year.
“The family office decided to wait a year,” he said.
Competition with private equity firms is becoming especially costly. As more single-family offices make direct deals, buying stakes in private companies directly, they are trying to attract talent from big private equity firms like KKR, Blackstone and Carlyle.
“It's the biggest dilemma,” said Paul Westall, co-founder of Agreus, the family office recruiting and advisory firm. “Family offices simply cannot compete at a higher level with large private equity firms.”
Instead, Westall said, family offices are recruiting mid-level managers at private equity firms and giving them more authority, better access to deals and higher salaries. Now family offices sometimes give PE recruits a “carry” (i.e., a share of the profits when a private company is sold) similar to PE firms.
He said better salaries, access to billionaires and their networks and the benefit of “not feeling like just a cog in a big wheel” are making family offices more attractive places to work.
“If you look back 15 years ago, family offices were where people went to retire and achieve work-life balance,” he said. “That's all changed. Now they're bringing in top talent and paying their people, and that's pushed them to compete with big companies and banks.”
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