The cost of running a family office in Europe is an average of 62 basis points of assets under management but the figure masks a big gap between the price of running large and small operations, according to a survey of 30 offices in 10 European countries by Merrill Lynch and Campden Research.

The report, based on interviews with single family offices between October and December 2007, showed the annual management fee – which does not include set-up costs or investment performance fees – rose to 89bps for the smaller offices with assets of up to €250 million ($380 million) and as low as 48bps for offices over €1 billion. Larger offices are cheaper, on average, to run as they enjoy economies of scale.

Meanwhile, the report also showed that client confidentiality is second only to investment management as a business priority and that while family offices have eagerly embraced alternative investments like hedge funds, they have almost entirely missed out on the recent commodities boom.

The report is the first in what is expected to be an annual survey of this sector by Merrill Lynch and Campden, part of Campden Media, a UK company. The report said client confidentiality is almost as crucial to clients as investing money at a time when authorities such as the UK government are tightening the screws on non-domiciled residents and pressurising financial centres such as Liechtenstein.

“Secrecy is very much a driving factor, a need for confidentiality is a driving force in creating a family office in the first place,” John Pettifor, managing director, Campden Media, told a group of journalists.

On a scale of one to five – where a score of one means clients regard a service as very important and five as not important – survey respondents gave confidentiality a score of 1.41. Only “control and consolidation of family wealth” was regarded as more important, at 1.31. Activities such as concierge services, however, were seen as least important, at 3.31.

As a sign of how wary these businesses are about revealing their activity in some countries, members of family offices in Switzerland, one of the most important centres for this sector, just 7 per cent, or only two, respondents said their offices were based in the country as many Swiss firms were unwilling to take part in the report's survey work.

The report also showed that family offices face a delicate balancing act in their dealings with third-party investment management companies to whom they sometimes farm out their work, since third party companies can be seen as potential rivals for families’ money.

Although these operations, which look to protect and grow wealth for future generations, hold almost half – 48 per cent – of assets in alternative investments, they have been remarkably slow to embrace commodities, despite the red-hot market for commodities like gold, wheat and oil over the past 12 months. Commodities accounted for just one per cent of the average portfolio, the report said.

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