A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Sign up to receive future issues straight to your inbox.
A typical family office costs more than $3 million a year to run as competition for talent drives up staffing costs, according to a new study.
Wealthy families spend between $1 million and more than $10 million per year running their family offices, according to JP Morgan Private Bank’s Global Family Office Report released this week. The average is currently around $3.2 million. While costs vary widely depending on assets, experts say expenses are rising across the board as family offices grow larger, more numerous and compete more directly with private equity, hedge funds and venture capital.
“There is a real competition for talent in family offices,” said William Sinclair, U.S. head of the family office practice at JP Morgan Private Bank. “They’re competing for talent with private equity and hedge funds and banks.”
Smaller family offices naturally 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 per year on operating costs. Family offices between $500 million and $1 billion spend an average of $2.7 million, and those over $1 billion spend an average of $6.1 million. Fifteen percent of family offices spend more than $7 million, while 8% spend more than $10 million.
The biggest cost factor is personnel costs, which have become more expensive as the number of family offices has tripled in the last five years. Recruiters say family offices are increasingly competing with each other for senior talent.
More importantly, family offices are shifting more of their investments into alternative investments, including private equity, venture capital, real estate and hedge funds. According to the JP Morgan survey, U.S. family offices have more than 45% of their portfolios invested in alternative investments, compared to 26% in stocks.
As they expand their reach into alternatives, they increasingly find themselves in direct competition with large private equity firms, venture capital firms and deal advisors to attract top talent.
“We have seen the professionalization and institutionalization of the family office space over the last decade,” said Trish Botoff, founder and managing director of Botoff Consulting, which advises family offices on recruiting and staffing. “They are expanding their investment teams and hiring from other investment firms and private equity firms, which has a huge impact on compensation.”
According to a family office survey conducted by Botoff Consulting, 57% of family offices plan to hire more staff in 2024 and nearly half plan to increase their existing staff by 5% or more. Experts say total compensation in family offices has increased by 10% to 20% since 2019 due to huge demand for talent in 2021 and 2022.
The average chief investment officer compensation for a family office with less than $1 billion in assets is about $1 million, according to Botoff. The average compensation for a CIO overseeing more than $10 billion is just under $2 million, she 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 even leads to higher salaries for lower-level employees. Botoff said a family office she worked with hired a junior analyst who was charging $300,000 a year.
“The family office decided to wait a year,” she said.
Competition with private equity firms will be particularly costly. As more single family offices make direct deals and acquire stakes in private companies directly, they are trying to attract talent from major private equity firms like KKR, Blackstone and Carlyle.
“That’s the biggest dilemma,” said Paul Westall, co-founder of Agreus, the family office consulting and staffing firm. “Family offices simply cannot compete with the large PE firms at the executive level.”
Instead, Westall said, family offices recruit mid-level managers from PE firms, giving them more authority, better access to deals and higher salaries. Family offices now sometimes give PE recruits a “carry” – a share of the profits when a private company is sold – similar to PE firms.
He said better pay, access to billionaires and their networks and the benefit of “not just feeling like a cog in the big wheel” make family offices more attractive places to work.
“If you look back 15 years ago, family offices were where people went to retire and seek a good work-life balance,” he said. “That has all changed. Now they are hiring top talent and paying their people, and that has pushed them into competition with the big companies and banks.”
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2024-05-03 15:46:41
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