A recent report shed light on how family offices in the US handle executive pay and one of the figures involved in the study expects the sector to become less informal about these arrangements.

There are signs family offices are having to become more professional in how they set executives’ pay and taking more formal approaches in staffing and operations, an author of a recent major survey on pay trends says.

And organizations' structures are likely to be simpler, with family office chiefs more willing to outsource functions, particularly as younger wealth holders create FOs, Andy Fay, who heads the family offices business at Fidelity, told this news service in a recent call following release of a Fidelity survey of the sector a few days ago (see here). 

Fay has held his existing role since April 2017 and Fidelity's family office business provides custody, brokerage, investment and reporting services to family offices, wealthy families and the advisors that support them. The business serves more than 360 family office clients, including 170 single-family offices, 31 multi-family offices and 165 wealthy families across the country.

Family Wealth Report asked Fay about his organization’s 36-page report on family office compensation and executive arrangements. As previously noted, it found that about two-thirds of executives in family offices don’t have employment agreements in place, a departure from best practice, while their compensation tends to move in lockstep with assets under management. (The survey was conducted in conjunction with Family Office Regional Group Executives, or FORGE. This is a national, non-commercial network of 14 regional family office groups.)

The report noticeably focuses on how the lack of formality in setting compensation agreements across the industry, a legacy perhaps of the niche sector that family offices have been, aren’t in sync with best practice. With regulatory and complexity issues challenging business models, the need for more defined executive compensation agreements is likely to intensify, Fay said. 

“We are seeing more formality coming into the family office,” Fay said. 

The relatively loose relationships that family offices have had with executives in the past stems from how these organizations arose, Fay said. “People were hired to be stewards of the office, and they treated it as an honor to serve. Employment agreements just weren’t that common,” he continued. 

But there are changes: FOs are using pay surveys and other data to benchmark pay arrangements, Fay said. 

And there is a “war for talent” among family offices, Fay say, meaning that these entities need to be on top of their game in how they can attract and keep talent. “Family offices are paying more in increases on salaries and bonuses than in the past,” he said. 

As Fidelity’s survey showed, almost all family offices hiked salaries last year; in general, 33 per cent of single family offices increased pay by between 2 per cent and 3.9 per cent last year, consistent with the US average of 3.1 per cent as reported by WorldatWork. However, almost 40 per cent of firms hiked salary by between 4 per cent and 10 per cent or more, underscoring the competition for top talent.

This fight for talent is not confined to the US. For example, in Asia, Morgan Stanley, to give one example, is wrestling with how to cope with defections of private bankers who have been poached by family offices, creating the paradox of a challenging market for the bank even as wealth in the region continues to rise. Vincent Chui, who oversees the business in Asia, has reportedly said that at least 10 RMs left the firm in 2017 for family offices, which means total headcount in Singapore and Hong Kong is static versus the end of 2016 at around 100.

Fidelity is by no means the only firm to have flagged changes to how family offices hire and compensate talent. Family Office Exchange, for example, pointed to "labor gap" issues in the sector a few months ago. 

Hard numbers
Fidelity’s report noted that among all sizes of family offices – ranging from those with $1 billion of AuM or more through to those with less than $100 million – 38.8 per cent of FOs have employee agreements for chief executives; that figure is 34.8 per cent for chief investment officers, 28.7 per cent of chief financial officers have such deals, and 31.5 per cent of chief operating officers have them. When broken down by size, the $1.0 billion-plus AuM FOs have the highest percentage of CEOs with formal employee agreements (50 per cent).

Among other details from the study, Fidelity found that 16 per cent of reported executives are family members serving in executive positions – CEO roles are the most commonly held. Interestingly, the study found that not one family member in the survey was a chief financial officer, suggesting that organizations typically go to expert outsiders for this task.

Consistent with most of the financial and business world, most FOs review pay for executives annually; 86 have annual reviews, 3.6 per cent have biannual reviews and 9.7 per cent have a different approach.