WM Market Reports

Talent Battle Vexes Family Offices, Many Lack Next Gen Succession Plans

Tom Burroughes Group Editor May 8, 2024

Talent Battle Vexes Family Offices, Many Lack Next Gen Succession Plans

A study of family offices – almost of all of which are North American – sheds light on their hopes and fears, whether on costs, compensation, the fight for talent, cybersecurity or operational risks.

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. And there’s a wide variation in the relative costs burdens of small and large family offices, a new study shows.

The results come from the inaugural Family Office Operational Excellence Report, developed by multi-family office AITi Tiedemann Global in partnership with Campden Wealth.

In broad terms, the findings on talent chime with those of other organizations, such as Botoff Consulting, a US-based business, which issued a study earlier this year in conjunction with Somers Partnership, a UK executive search firm.

Yesterday’s report, meanwhile, took responses from 98 family offices, primarily based in North America, managing an average of $1.4 billion in assets. That average masks a wide range: the asset figures range from less than $150 million assets in some cases to more than $10 billion.

Among other areas, the study said family offices are behind on tech adoption. While all family offices polled have made major investments in their tech stack, only a quarter (26 per cent) claim to have leading-edge solutions for investing and operations. (To read a related article on fintech and family offices, see this report here following this news service's fintech event in New York.)

Nearly half of family offices don’t have a plan in place for the next generation, the study found. While the majority of families want their family office to persist for many generations to come, only just over half of them (57 per cent) have succession plans in place and many of these are incomplete, not documented and only informally discussed and agreed on.

This finding suggests that for all the talk about intergenerational wealth transfer, planning and the need to get prepared, there is a gap between talk and action. 

On costs – even more evident as an issue as inflation rose post-Covid-19 – the report noted that investment management accounts for about half of the total costs for small family offices.

Average operational costs (excluding investment-related fees paid to third-party managers) of family offices participating in the survey is $5.2 million. But this figure disguises a very broad range running from $0.7 million to $24 million. Small family offices have, on average, costs of around $1 million. For large family offices, the ratio of costs to AuM averages 0.2 per cent compared with 0.7 per cent for the midsize group and 0.6 per cent for the small cohort.

The range of costs also varies for compensation, depending on the size of a family office, the study showed.

“Interestingly, compensation levels for C-level executives are significantly lower than those offered by large family offices for the same roles – average compensation for a chief investment officer is $337,000 for small versus $821,000 for large family offices,” it said. “For large family offices, investment management accounts form around a quarter of total costs, allowing them to build out administrative functions, governance and family services.”

Staying on the costs theme, the report noted that large family offices benefit from economies of scale, with total costs averaging 0.2 per cent of assets under management compared with 0.6 per cent for their smaller peers.

(The dynamics of scale and efficiency will not be lost on AlTi Tiedemann Global, which is itself the product of a big multi-family office merger more than a year ago, involving a US and UK business. It has about $70 billion in AuM. To take another case, in 2014 MFO Stonehage merged with Fleming Family & Partners, to create the London-based Stonehage Fleming organization, with an international footprint and £29 billion ($36.4 billion) in AuM.)

Operations, outsourcing and more
In other details, the report said that most employees and family members who work in their family office are satisfied with operations. But satisfaction levels are “noticeably higher” among employees than family members. Family members working in a large family office (AuM greater than $1 billion) are much more likely to be satisfied than those working in a small family office (AuM less than $250 million) where dissatisfaction levels are highest.

On financial reporting, the study suggests that the vast majority – 80 per cent – of family offices are satisfied with their ability to obtain data for making rapid decisions, but approximately 40 per cent of them are concerned about still relying on spreadsheets and pulling data together manually.

The report said it was “encouraging” that more than two-thirds of family offices have acted to cut operational risks by using back-up servers, introducing dual authorization for payments, and controlling remote-access working. Even so, there’s a wide gap between small and large family offices. Most of the larger offices have adopted five or more of the eight risk reduction strategies that were presented to them by the authors of the report. But the majority of small family offices have adopted just four or fewer of those measures.

The report said that cybersecurity is the operational risk that bothers family offices the most.

However, only 43 per cent of them are confident or extremely confident of their ability to prevent cyber attacks causing serious damage, leaving the majority worried and uncertain.

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