It was during a leisurely round on a recent summer morning that the conversation took a turn towards the financial. Just before the back nine, my business colleague, a successful entrepreneur with a growing global business, posed a question that had been weighing on his mind: “Is it worth starting a family office?”
This question is becoming increasingly common as more families accumulate wealth significant enough to warrant dedicated management of their assets. The concept of a family office is not new, but its adoption is becoming more widespread, not just among the ultra-wealthy but also among the merely affluent who seek greater control over their financial affairs.
Single-Family Office (SFO)
A single-family office (SFO) is a private organization that manages the wealth and personal affairs of one affluent family. It’s the epitome of personalized service, offering investment management, estate planning, philanthropic advice and even day-to-day administration for family members.
Setup Costs: The setup costs for an SFO can be quite steep. Initial expenses include legal fees for structuring, technology investments for managing assets, and staffing costs. On average, the yearly operating costs range between 0.75% and 1.50% of the family’s total wealth. This means for a family with $100 million in assets, the annual cost could be between $750,000 and $1.5 million.
Multi-Family Office (MFO)
MFOs serve multiple families and offer a way to share the costs associated with wealth management. They provide similar services to SFOs but on a less personalized level.
Setup Costs: The costs for setting up an MFO can vary widely based on the number of families involved and the services provided. However, economies of scale can play a significant role in reducing individual costs. For instance, consolidated performance reporting solutions can serve many family members and trusts, potentially lowering the per-family expense. According to UBS’s Global Family Office Report 2024, MFO fees are generally lower than a SFO, typically in the range of 0.2 – 1.25% of assets under management (AUM).
Virtual or Outsourced Family Office
A virtual or outsourced family office uses technology and third-party service providers to manage a principal’s wealth. This model is leaner and can be more cost-effective than traditional family offices. Costs depend entirely on the level of support required by the principal, up to approximately 1% of AUM.
Setup Costs: While specific figures can vary, the costs for setting up a virtual family office are generally lower than those for an SFO or MFO. The use of outsourced services and technology solutions can drive down the initial investment and operational expenses.
In-Depth Cost Analysis
The overall expense of running a family office can be thought of in four overarching categories:
- Office Operations (salaries, benefits, overhead and technology)
- Direct Family Expenses (residences, art or collectibles, travel, administration, spending and taxes)
- External Professional Fees (accounting, tax, legal, consulting, insurance and security)
- Investment Fees (management, custody, research/data and aggregated reporting)
Within a family office itself, expenses are typically related to investment activity, operational costs, advisory/administrative services, and technology/cybersecurity.
Investment Management and Performance Costs
For a SFO, these costs include hiring investment professionals and may involve performance-based fees. MFOs and virtual offices might negotiate these costs down due to their collective bargaining power.
Operational Costs
Operational costs encompass the day-to-day running of the office, including salaries for staff, office space rental and technology infrastructure. For an SFO, these costs are borne solely by one family, whereas MFOs and virtual offices distribute these expenses across multiple clients.
Advisory and Administrative Services
These services can include legal advice, tax planning, and administrative tasks such as bill paying and travel arrangements. SFOs often have dedicated in-house staff for these roles, while MFOs and virtual offices may outsource them to reduce costs.
Technology and Cybersecurity
Investing in robust technology and cybersecurity is essential for protecting assets and information. SFOs may require significant upfront investment in these areas, while MFOs and virtual offices can spread these costs across several families.
The decision to establish a family office is not one to be taken lightly. The costs associated with setting up and maintaining such an office are substantial and require careful planning and consideration. Whether you choose an SFO, MFO, or a virtual family office, the key is to align the structure with your family’s needs and financial goals. If you would like to learn more about how the East Coast’s top family offices hire their staff, reach out to speak with one of our experienced family office recruitment professionals.
