The costs of running a single family office

The main cost blocks of a single family office 

How can you evaluate whether a single family office fits your budget? By doing the groundwork and elaborating on the envisaged structure.

As a first step, you need to define which services the single family office should provide to your family. It's crucial to distinguish between strictly necessary and nice to have.

We recommend focusing on the essential services to get a clear overview and decision basis for the evaluation.

Top five family offices’ in-house capabilities

According to the UBS 2021 Family Office Report, the following categories of family office activities are mainly performed in-house:

• Strategic Asset Allocation
• Philanthropy
• Risk Management
• Real Estate
• Financial Accounting and Reporting

By contrast, research, investment banking functions, and private banking are mostly outsourced. Clarity on required in-house capabilities and outsourced functions is essential to ensure operational excellence and cost-efficiency.

The two main cost blocks of a single family office are i) investment management and performance costs and ii) operational costs for services rendered.

The latter include general advisory services, investment-related activities, family professional services, and administrative activities.

Family office investment management and performance costs

If your wealth is closer to the lower than the upper thresholds mentioned above, you may want to outsource investment management entirely to one or several wealth and asset managers.

According to the UBS Global Family Office Report 2019, the average investment management and performance fees are 50 basis points of the liquid assets under management.

Family office operational costs

Investment-related service costs

If your family wealth comprises alternative investments such as real estate, operational businesses, private equity, and venture capital, it becomes more difficult to predict the related service costs.

These costs depend on the type, amount, complexity, and size of alternative investments and the services to be provided by the single family office.

Is the financial consolidation and reporting the primary need? Will other related activities, such as asset allocation, risk management, manager selection, administration, and foreign exchange management, be outsourced?

Or should the single family office perform the full-service range for the lifecycle management of alternative investments? 

General advisory services: leveraging technology and external experts

Developments in technology and a rising number of professionals catering to the specific needs of single family offices allow for a significant reduction of family office running costs that a few years ago may not have been possible.

Data aggregation and consolidated reporting and verification across asset classes are nowadays standard features of leading family office technology.

With additional interfaces for communication and collaboration, the single family office becomes a platform for complex family wealth management.

It allows for efficient coordination of external advisors and professionals such as lawyers, tax advisors, and accountants.

Regarding the costs for external services, single family offices take an institutional approach and demand for predictable pricing such as monthly fixed fee arrangements and fixed fees for specific project tasks for financial planning, tax planning, estate planning, and legal services.

People and administrative costs

The people working at a single family office are its most critical asset. A conclusion supported by many industry experts irrespective of how much they differ in their threshold opinion.

The single family office executives need to be free of conflicts of interest and at complete disposal of the family and the structure.

They must be loyal and empathic, experienced, and highly skilled to ensure a single family office's effective and efficient operation and its acceptance by family members.

Thus, the right people come at a cost, and you need to compensate at competitive levels and provide adequate incentives for performance and loyalty.

A specialized recruiter can assist in identifying the ideal profile, defining the compensation scheme, and structuring the recruitment process.

With technology, people, and data aggregation and consolidated reporting, you have defined the in-house service offering's main cost block.

You can then add charges for premises, maintenance, and administration to determine the yearly cost base for the single family office's core in-house administrative activities.

Industry family office costs standards

According to the UBS Global Family Office Report 2019, the average overall operating costs of a single family office amount to 67 basis points of the liquid assets under management.

These include family professional services such as concierge services and security, family relationship management, governance planning, and high-value physical assets management. 

Investment management and performance fees add another 50 basis points, and thus the total average gets to 117 basis points of liquid assets under management.

In its 2016 Family Office White Paper, Credit Suisse allocates the overall costs at a range between 30 and 120 basis points, approaching the 1% mark as offices employ more staff. 

In their view, if the single family office is fully-integrated, the minimum annual cost is USD 1 million and, in many cases, much more.

However, they highlight that there is not a strong correlation between the size of assets under management and the operating costs.

We share that view since we believe that the costs depend on individual circumstances and needs rather than assets under management.

Recent developments

In its 2021 Family Office Report, UBS reports upward pressure on family office operating costs. In particular, salaries and IT costs have increased considerably.

Cost reductions seem enabled by hybrid working models that require less office space. Still, investment-related activities and administration are the most expensive cost areas.

According to UBS’s most recent data, the costs for all internal activities (excluding all external fees) range from 35 to 52 basis points of assets under management.

Interestingly, UBS concludes that the costs depend on the size of assets under management, presumably since family offices with more than USD 750 million of controlled assets have reduced costs by one to two basis points compared to their peers with lower asset volumes.  

How to cover the costs of a single family office?

Suppose your immediate answer is from investment management revenues (after taxes!).

In that case, you also need to deduct the charges for investment management and custody, the costs for core in-house administrative activities and those for outsourced general advisory services to do the maths.

This calculation works if all your assets are bankable. In all other scenarios, you need to consider the added value and cost-savings due to consolidation, reporting, verification, risk management, and management of external experts.

We recommend looking at the added value in terms of efficiency, effectiveness, reduced complexity, and cost control due to the family office oversight.

If your assets are mainly alternative investments, you may be willing to directly bear the costs if the overall result justifies them: imagine a family that primarily invests in alternative investments and expects a significant liquidity event in the future.

Although from the assets under management perspective, the single family office may not pass the thumb rule evaluation test, it can add tremendous value in light of the future liquidity event.

The family may accept the losses for several years since they highly value the single family office's service for their illiquid assets.

Depending on the benefits, costs can be allocated to family members according to consumption or participation in the family wealth. 

From digital to virtual family offices

Leveraging technology allows you to go beyond digital and a step further in cost reduction. It's moving from the above outlined digital coordination to the virtual integration of external services.

With a virtual family office, a technology platform integrates outsourced functions into the single family office, and a central in-house team is responsible for the selection, oversight, and integration of external service providers.

With such a structure, in-house running costs can be reduced to a minimum and still achieve favorable results that otherwise may not be possible.

The combination of technology and leveraging external service providers' expertise in an efficient virtual collaborative environment is the secret recipe for overall lower single family office costs.

With such structures, assets under management drift in the background, although consistent budgeting and a transparent fee structure remain critical.

Single family office set-up costs

There are two main cost factors during the set-up phase: i) concept elaboration and implementation and ii) recruiting.

The concept elaboration and implementation include, among other things, a front analysis of costs and benefits, family governance, the family office structure, and governance, a regulatory and compliance framework, an investment strategy, and succession planning.

Also, these costs depend on the individual circumstances, and as with the recurring expenses, you should demand predictable charges from your advisors for this phase of the process.

Hiring and onboarding the right people is a critical success factor for your single family office, and you may seek guidance and assistance from a specialized recruiter.

When should you set up a single family office?

In our opinion, there is no ideal world specific point or stage of wealth where a single family office should be created. As with most of these topics, it all depends.

Individual assessment

We don't believe in the evaluation with percentages of assets under management but in individual circumstances and needs as the basis.

The single family office evaluation process requires an in-depth assessment of the family's situation, and the individual needs to define the required family office service offering.

With such groundwork completed, costs can be predicted and double-checked against industry standards for assets under management.

However, there can be many reasons for a single family office structure that does not pass the threshold test.

The most crucial factor is that you and your family get the desired value out of the system, and you may be willing to bear additional costs for that.

Thus, the costs of a single family office depend on your needs rather than your wealth. And as we mentioned above, it's vital to focus on the strictly necessary when defining the family office's purpose.

A lean structure will also be reflected in the running costs. With the consolidation of the central services, you can add further services, such as family professional services, at a later stage.

A family office ecosystem

Due to technology and external advisors and professionals adapting to a new collaboration and predictable pricing model, the single family office space is evolving rapidly towards platform ecosystems.

Such ecosystems offer attractive features in terms of efficiency, data-based decision making, real-time oversight and control, and substantial cost reduction for single family offices.

Thus, the question of how much wealth you need for creating your single family office may lose its relevance.

Updated 28-01-2022

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