Family Office Fee Structures, Fee Schedule, Fee Models (2022)
Family Office Fee Structures, Fee Schedule, Fee Models (2022)Enzo Caputo2022-04-08T06:36:40+02:00
Family Office Fee Structures, Fee Schedule, Fee Models (2022)
What are the costs of a single-family office? How much do I need to set up a family office? Such questions are often asked but not that easily answered.
In fact, not all families are worried about the costs of a single-family office; some actually establish one to control and save costs.
Read further or contact us for more information about the costs of setting up and operating a single-family office.
How wealthy do I need to be to establish a single-family office?
This question is often asked as families want to know what the involved costs are, but it is difficult to answer straight away. You can compare it with the question ‘how much money do I need to buy a car’? Most people would respond to such a question with counter questions: what type of car, which brand, for what purpose do you need the car?
❝Your family office is what you want it to be❞
That is exactly the situation: there are so many different types and styles of single-family offices and they all come with a completely different price tag. How large and complex is your wealth? Do you want to set up a basic single-family office or a very large and complete one?
How big is your family, how many generations are involved? Which and how many services will be provided? Do you wish to outsource most activities or do you intend to have everything offered in-house? Are the family assets held in numerous locations? How many entities does the family control?
Not a set minimum of wealth
In the past, only billionaires considered setting up a single-family office, nowadays families that are worth around 100 million Dollars consider taking this step.
We are not convinced that there is such a thing as a set minimum wealth to establish a single-family office, but we believe it advisable that a family’s wealth is at least around a hundred million Dollars or more free investable assets before it considers setting up a family office.
The two primary reasons for this threshold are:
the complexity of setting it up, and
the actual costs involved.
There are great benefits to a family office, but when the operating costs are completely out of balance with the return you make on your wealth, your wealth will slowly disappear instead of being preserved and you will in fact realise the opposite of what you aim for.
It is clear that the wealthier a family gets, the less of a barrier the costs of a single-family office are. But even with extremely wealthy families, the costs still need to make sense. However, besides the costs, some families may feel that they are not served well enough by their existing wealth managers and see no alternative but to start their own family office.
Although it is possible to start one with a smaller amount of wealth, in most cases single-family offices are established by families with an overall wealth of several hundred million Dollars or more. Or the family holds wealth that is highly complex, for example, consisting of a combination of operational businesses, real estate, private equity and bankable investments. Or they want to invest actively and entrepreneurially.
Family Office Fee Structures: Costs of running a single-family office
When you consider the costs of a (small) team consisting of one or more investment specialists, an accountant, (tax) lawyer and one or more assistants solely working for you and your family, it is clear that a considerable sum of money is needed to operate a single-family office. Such a team, which you will have to recruit yourself (a challenge in itself own), is in most cases the minimum you will need in order to operate a single-family office that acts as more than just an administrator.
For most family offices, the cost and compensation of staff is the largest cost component (percentage-wise), it can easily reach 50-60% of the total office costs. At the same time, staff is also the most important asset of the family office. Therefore, it would be unwise to try to save money on that front.
If the costs of the different areas of activity are considered separately, then investment related costs are by far the largest cost component for most single-family offices. These normally include the costs of in-house staff, investment-related IT, external investment management and custody fees.
The target yearly total operating costs of a single-family office should normally range between 0.75% and 1.50% of the family’s total wealth. This percentage should include the costs of external providers, such as lawyers, accountants, investment managers and custodian banks. The larger a family’s wealth is, the more this percentage could move towards the lower end, and the other way around.
Family Office Fee Models: Every family is unique
As also mentioned on other pages of our website, every family is unique and the situation and needs of every family are different. Depending on the complexity or simplicity of your wealth, what exactly you and your family aim to achieve, which services will be outsourced and how many generations are involved, considerable higher (or lower) costs could be the outcome.
When a family office is, for example, actively engaged in private equity investments, the investment-related costs can easily be 0.5% – 1% higher, maybe even more. The expected return is also higher, and it is exactly that balance that should be in focus.
Remember, family offices evolve, just as families and their family businesses. Such evolvement will also affect the costs. You therefore need to keep monitoring the costs during the whole lifetime of the office.
A more detailed answer regarding the costs of a single-family office is only possible once the actual objectives of the family have been established and an initial family office business plan has been drafted.
A family office to save costs
Not all families are concerned about the costs of a single-family office. Every wealthy family is confronted with considerable costs for the management of their assets, needs and wishes, and often lacks the overview and insight of how much they are actually paying to all their advisors.
❝The right single-family office set-up can save you a lot of money❞
Therefore, some families specifically establish a single-family office to control and reduce the costs of managing their assets. A family office will enable them to obtain a much better overview of their costs and negotiate lower fees (in an institutional manner).
In practice we see in a considerable number of cases that the costs of the single-family office end up lower than the total of scattered costs paid before. Moreover, the level of service received and the implemented risk management improves.
The costs of setting up a family office
Operating a single-family office costs money, but setting one up also triggers a considerable initial investment, as it is rather complex. Costs of establishment could easily be 50% of the average forecasted yearly operating costs. The initial costs of setting up a family office should therefore be securely budgeted for. This prevents the project coming to a standstill halfway and family members already being disgruntled at the start.
Charging costs to the family
When analysing the costs of a single-family office, you should not only consider the total yearly amount due, but also how these costs are charged to and divided amongst the individual family members.
This topic is equally as important as establishing the costs of running the family office. Especially if there is no family consensus on the services to be provided, this can be a challenging aspect. If the family members are not well-informed about the family office costs and how these will be charged to them, it will translate into problems and conflict in the long run.