Family Office

Family Offices Study Confounds Cost Inflation Narrative

Tom Burroughes Group Editor May 14, 2024

Family Offices Study Confounds Cost Inflation Narrative

Following a major report last week examining trends in the North American family offices sector, we talk to the firm about what was most surprising about the study's findings, the lessons they learnt, and where the industry is headed.

A week ago, this news service carried a report from multi-family office, AITi Tiedemann Global about how family offices are highly focused on winning and keeping talent, with 70 per cent of them struggling to acquire people and almost two-thirds (65 per cent) concerned about holding on to talent. The study, carried out in conjunction with Campden Wealth, also found a wide variation in the relative cost burdens of small and large family offices.

There’s now a plethora of reports from banks, institutes, law firms and others about the family offices sector. So this news service asked Erik Christoffersen, head of family office practice, AlTi Tiedemann Global, about its report and what is distinctive about it. 

FWR: There are a number of reports about family offices around the world these days. What do you think this report brings in terms of adding actionable, informative information?
This report differentiates itself from many other family office reports since it focuses exclusively on operational excellence (and intentionally does not address investment management of the family assets). The report aims to provide a greater depth of benchmarking data and more insights on the issues associated with family office operations. Our hope is that the data will help family offices identify areas for improvement to achieve better outcomes and higher satisfaction. 

Based on the findings, AlTi Tiedemann Global identified six actionable recommendations for family offices to consider as they look ahead: 

1. Value for your costs; 
2. Technology is a key driver of excellence; 
3. Vigilance is key. Ignore cybersecurity at your peril; 
4. Prioritize sustainability, governance and next-generation preparedness; 
5. Seek honest feedback often; and 
6. Outsourcing is a key component of any successful family office. 

FWR: What findings from the report surprised you the most and why? 
Christoffersen: There are a number of findings that surprised us, most notably: 

1  Family offices' direct costs (in-house and outsourcing but excluding external fund managers’ fees and performance distribution) have remained flat or even declined over the past decade This invalidated our cost hypothesis going into this report and runs counter to the wage inflation many firms have experienced during this period. Furthermore, the scope of services many family offices provide has broadened and, in some areas, deepened over this past decade. 

2  This raises two questions: firstly, has compensation not grown over the past decade OR is the family office staffing with fewer resources? And secondly, has there been a reduction/flattening in spending on such areas as technology, risk mitigation, governance and education, etc.? 

3  With more than half of all mid and large family offices reporting difficulty recruiting and retaining staff (fig. 4.1 – approximately two-thirds of mid-size family offices and more than half of large ones) and satisfaction with outsourcing running high – 76 per cent for a mid-size FO and 64 per cent for a large FO, we are surprised that these mid and large family offices are not turning more to outsourcing as an effective strategy to access and engage more key talent. Our findings indicate that mid-size family offices are outsourcing only 26 per cent of their staff and large family offices are outsourcing even less at 19 per cent.

5  We are surprised to discover that a large majority of family offices established after the turn of the Millenium have a very low level of operational risk mitigation. The percentages of family offices using less than five risk reductions measures established in 2000 to 2009 is 65 per cent and those established in the period 2010 to 2019 is 68 per cent. Those recently established (2020 to 2023) is 63 per cent. We wonder whether there may be a link to the fact that the majority of these family offices are still being run by the first generation that created them. 

FWR: There still appears to be a lag between action and understanding on issues such as getting prepared for next-gen succession. What's the problem? Why aren't family offices getting these issues sorted out, given the endless amount of commentary on it?
If you go back to family office reports more than five years ago, this issue was called out, even then. While there is no simple answer, two reasons may partially explain this trend. Firstly, many families are hesitant to discuss impending wealth transfers with the next generation out of fear that it could subdue their ambitions. As we all know, it can be difficult to talk about money and death. Secondly, many first generation family offices are focused more on the “office” part of family office – that means prioritizing investments and tax efficiency above all else. As a result, they postpone properly addressing the "family" part (including next gen prep and succession) since there is not a deadline and it is hard to measure success until it happens. Unfortunately, these discussions often happen too late and result in a scramble that can hurt the family office. 

Families struggling with succession planning often find it helpful to engage an external advisor to mediate these discussions, however it can be challenging to identify a trusted advisor which can result in further delays.  

FWR: The report had interesting things to say about costs and the differences between large and small family offices. Do you think this is going to drive more consolidations of SFOs (single family offices) into multi-family offices (MFOs), more outsourcing, etc.? Is there also a difference in costs between family offices that are still linked to an operating business, and those where a business is sold?
Let’s start with the second question – family offices embedded in a family business do have lower costs as they can share resources for many of the administrative functions as well as split other costs with the family business. They can also leverage the systems, operational risk measures, etc. that the family business bears independent of the FO. 

The first part of this question is interesting – if you assume that family dynamics are hard enough for one family with several generations, you can imagine how much harder it can become when a family office services many families. But those MFOs that have strong operational excellence will be set up to do this well. For broader context, we define operational excellence when it comes to family offices as having the capabilities for creating a high-performance office, streamlining core functions, enhancing client experience, mitigating risk and adapting their approach as needs and/or solutions evolve.

Alternatively, SFOs tend to go the other direction and outsource more of the work to existing MFOs where they discover that they can meet their needs (e.g., talent, systems, operational risk measures, subject matter experts, succession and governance) at a similar or lower cost. But this requires investing in the firm (e.g., MFO) as a partner, similar to how they invest and work with their in-house staff.

FWR: From where are family offices recruiting professionals – banks, RIAs, law firms, accountancy firms, etc.? Do you see much poaching from rival family offices? Are family offices making much use of executive search firms? Do they struggle to do this task in-house?
Poaching is on the rise with talent becoming hard to find and even harder to keep. Engaging a good executive search firm can make a real difference and deliver benefits well in excess of their fees. Top executive search firms have some of the best insights on hiring and provide access to large talent pools for various positions. They can also provide guidance on compensation, skills, fit, etc. and manage the process more efficiently than most in-house recruiters. 

Getting the right talent in top leadership positions is perhaps the number one contributor to operational excellence. It should be noted that many MFOs who partner with SFOs in a hybrid capacity can often provide the access and relationships the FOs seek today at the same or lower cost for equivalent talent. 

In summary, the foundation of operational excellence hinges on two things – firstly, hire the right people (remember you will be competing with other FOs and MFOs). And secondly, once you hire them, make sure to retain them. Take care of them the same way that they take care of your family by motivating them to stay for the long term. Many FOs do this by creating a strong culture and a clear set of governance parameters that positively impact employee’s experience and drive them to deliver good outcomes for the family. 

FWR: From your vantage point, do you see any acceleration or slowing in the pace of family offices being created – are costs, hiring issues, etc., creating a limit on how many can be created? 
The primary reason why small family offices (under $250 million) are established, is because one or more family members are invested in running and managing it and enjoy the work. However, smaller offices need to be comfortable with costs being potentially higher.  

For mid and large family offices, the pace of formation is influenced by how much wealth is being created in any particular decade. And for those existing multi-generational FOs – a key determining factor will be how they transition the family office to the next generation so that the next gen wants to continue to be part of the SFO. Often this is not the case, and one or more family members go their own way.    

Finally, a key driver in all of this will be the increasing role of technology in shaping the operational excellence and investment success of the family office. The family offices that fail to invest in a proper tech stack will fall behind operationally.

Register for FamilyWealthReport today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes