Having faced multiple challenges in the shape of global inflation spikes, rising interest rates, geopolitical risks and potential recession in the wake of a global pandemic, family offices in North America have survived and thrived by adopting significant cost control methods.
According to the North America Family Office Report 2023 by Campden Wealth and Royal Bank Of Canada, family offices’ [FOs’] operational costs over the past year averaged $5.7 million, representing a 22% reduction on the previous year.
“Inflation increased everyone’s costs from paper clips to employees to entertainment,” says Brad Sprong, Partner at KPMG Private Enterprise Tax Industry Leader. “Family offices, like all prudently run businesses, have re-evaluated what is important to them to be able to execute on their stakeholders’ goals and missions and are adjusting accordingly.
“Also, there was a lot of pent-up demand post-pandemic for doing ‘something’. Whether that was trips, new business ventures, change in structure etc. Families were ready to be on the move again, so some of these activities have occurred and people are moving back to current course and speed.”
The report, which is based on a statistical analysis of 144 survey responses from North American single family offices and private multi-family offices, found that FOs were partially able to keep tight control on their costs by reducing discretionary expenditure and staff remuneration. The average basic remuneration for chief executive officers, which was found to be down by around one third (approximately $304,000) on the previous year, may have been facilitated by the high percentage of senior management who are also family members.
“While initially reducing employment costs may offer short-term financial relief, it is essential to consider the impact on the performance and success of the family office in the long run,” agrees Gio Maso, Family Office Advisory Services at Ernst & Young. “Lower compensation tends to limit the family office's ability to attract and retain top talent, which is a valuable and scarce resource within the industry, given the unique skills involved.
“Instead of focusing on cutting employment costs, family offices could explore other strategies to optimise operational efficiency and cost-effectiveness. This might involve leveraging technology, outsourcing non-strategic functions or implementing process improvements to streamline operations while still delivering value to its stakeholders.”
“Employees who perform, regardless of their role in an organisation should be and need to be well compensated to ensure FOs attract, retain and advance the best people to make the family and business successful, as defined by the family and stakeholders,” says Brad Sprong. “Reducing costs to make more money has never proven to be a successful long-term strategy. Cutting waste on unnecessary programmes or excess capacity is always a prudent step but not to the extent of lost talent.”
The report found that the renumeration-related belt-tightening could be related to investment-related costs (encompassing asset allocation, due diligence, and real estate management) which constituted the largest cost category at 34%. Meanwhile, advisory costs (which includes estate and financial planning as well as legal services) accounted for 29%, and family services (which incorporates travel and security) and administration represented slightly less than 20% respectively.
Advisory costs and investment-related costs are highly variable by nature, based on non-constant family, principal and organisational demand for discretionary projects and the bespoke nature of such semi-variable services.
“These percentages are consistent with our experience,” says Brad Sprong. “With the uncertainty of gift and estate laws going forward and some of the significant changes listed in [US President Joe] Biden’s 2024 Green Book, families are increasing their focus on wealth transition planning. It wouldn’t surprise me though to see these percentages become closer to one another though as we are seeing many more family offices offering concierge services to their stakeholders as families grow, privacy concerns increase and the economy of scale that can be had when some services are aggregated and you have more group buying power.”
“Advisory costs and investment-related costs are highly variable by nature, based on non-constant family, principal and organisational demand for discretionary projects and the bespoke nature of such semi-variable services (costs),” says Trish Botoff Founder of Botoff Consulting, an independent American firm specialising in compensation consulting services to family offices and family enterprises. “Investment-related costs also would fall into the category of semi-variable services (costs), as they are particular to the family’s allocation and investment mandates, which are typically unique to each organisation.
“Because US family offices generally want to pay competitively and provide comprehensive benefits, we have found that the cost of providing the necessary services to the family, whether directly through employees or indirectly through service providers is the highest cost, and that will vary greatly by category based on the services of which the family is in need.”
“This strategy helps reduce staffing costs while also bringing in specialised expertise, eliminating the need for full-time in-house employees,” says Gio Maso. “By leveraging their expertise and investments in technology, family offices can potentially achieve economies of scale and cost savings. They should consider engaging in constructive fee negotiations with external service providers. By seeking tiered pricing options based on volumes or complexity, family offices can effectively manage costs as they grow.”
The family offices surveyed (who have an aggregate AUM of $126 billion and a collective wealth of $189 billion) revealed that achieving efficiency improvements in operating costs becomes increasingly challenging once family offices exceed USD $750 million in AUM. Beyond this threshold, the pace of reduction in the cost-to-AUM ratio begins to taper off.
For family offices with more than USD $1 billion in AUM, the report found that either achieving additional cost efficiencies becomes more difficult at this size, or, more likely, the expansion of functions and scope within family offices as they grow beyond this point contributes to an increase in their cost base, which is believed to have driven the need for cost-saving measures across North American FOs.
“The impact of family office costs is largely driven by the services the family wants to provide,” says Trish Botoff. “Whether you insource or outsource these services, multi-year labour inflation above ‘normal’ is reflected in cost increases for both goods and services, as well as talent. For example, the trend of fewer accounting graduates has resulted in ramped-up competition for talent and thus increasing costs for accounting services, both for direct employees and indirectly through higher accounting firm rates.”
“We're seeing a lot more leveraging of technology to improve efficiency, timeliness and accuracy,” says Linda Mack, President of family office C-suite executive search firm Mack International. “Having staff manually inputting things and creating spreadsheets and so forth is not very time, cost or accuracy efficient. As a result, there is a lot more emphasis on leveraging technology to improve the efficiency, effectiveness and accuracy of work being done - and that does translate to less staffing need or redeployment of staffing to higher value roles.”