Finance

Soaring Operating Costs in Family Offices as Talent War Intensifies

Affluent families around the globe are grappling with soaring operational costs for their family offices, with an average annual expenditure of $3 million, according to a comprehensive report by J.P. Morgan Private Bank. This surge in expenses can be attributed to a fierce competition for experienced personnel, which has intensified as family offices have seen their numbers swell by threefold within a mere half-decade.

This escalation in competition has not been limited to just family offices but has extended to battles for skilled professionals with banks, private equity firms, and hedge funds all vying for the same talent pool.

Multimillion-Dollar Operations

The expense of running a family office varies widely, but the average has settled around the $3.2 million mark. This substantial amount goes toward managing wealth, with figures ranging from $1 million to a staggering $10 million each year. According to the insights from the J.P. Morgan Private Bank Global Family Office Report, which surveyed 190 family offices with an average of $1.4 billion in assets, this trend shows no sign of slowing down as family offices not only grow in size but also in number.

The escalating operating costs have been linked directly to the competition for experienced investment professionals who can manage complex portfolios and direct investment strategies. William Sinclair, leader of J.P. Morgan Private Bank's Family Office Practice in the United States, says, "There's a real war for talent within family offices." The competition is pushing salary levels upward as these offices contend not only among themselves but also with investment firms and banks for top-tier candidates.

The High Cost of Talent

It is particularly evident that the largest chunk of these operating costs goes toward staffing. Executive search and recruitment have become increasingly challenging as the number of family offices has skyrocketed, tripling over a five-year period. This rapid growth has led to fierce head-to-head competition for senior investment professionals and other skilled staff, driving up salaries and recruitment costs.

Smaller family offices, managing less than $500 million, encounter relatively lower operational costs, around $1.5 million annually. Those overseeing $500 million to $1 billion allocate roughly $2.7 million for operating costs, while the expenses for offices managing over $1 billion average at $6.1 million. Notably, 15% of family offices have yearly operational expenditures exceeding $7 million, and 8% surpass the $10 million threshold.

Investing in Alternatives

The strategic shifts within family offices don’t stop at personnel. There’s a palpable trend toward alternative investments such as private equity, venture capital, real estate, and hedge funds. U.S. family offices now allocate over 45% of their portfolios to such alternatives, a stark contrast to the 26% committed to traditional stocks. This pivot toward a broader spectrum of investments pits family offices directly against established private equity and venture capital firms, as well as deal advisors, in the fierce talent grab.

Trish Botoff, a consultant specializing in family office staffing, underscores the consequence of this shift, stating, "We've seen over the last decade, the professionalization and institutionalization of the family office space." She observes that as family offices bolster their investment teams and onboard staff from other firms, the direct impact on compensation is undeniable.

Compensation Climbs

With the demand for qualified personnel surging, a significant increase in staff compensation is inevitable. According to a survey from Botoff Consulting, 57% of family offices plan to expand their staff chart in 2024, and nearly half anticipate offering salary raises of at least 5% to their existing employees. The fast-paced demand for talent has propelled a rise in family office pay by 10% to 20% since 2019.

Further illustrating the elevated costs, the average compensation for a chief investment officer (CIO) at a family office with assets below $1 billion hovers around $1 million. For those managing over $10 billion, the compensation approaches $2 million. To stay competitive, Botoff notes, family offices are increasingly offering comprehensive long-term incentive plans on top of base salaries and bonuses.

Even entry-level positions are seeing inflated salary expectations. Botoff recounts a case wherein a junior analyst demanded an annual pay of $300,000 – a demand that leads some family offices to reconsider their hiring timelines and strategies cautiously.

Private Equity Rivalry Intensifies

The competition heats up further when family offices seek talent from private equity's echelons. Many single-family offices, now engaging in direct deals and taking stakes in private companies without third-party involvement, are hungrily eyeing the seasoned talent within leading private equity firms like KKR, Blackstone, and Carlyle.

Paul Westall, co-founder of the family office advisory and recruiting firm Agreus, sheds light on the challenge: "Family offices just can't compete at a senior level with the big PE firms." To circumvent this, Westall explains, family offices are attracting midlevel managers from PE firms, luring them with the promise of greater authority, deal access, and higher compensation, including profit shares akin to 'carries' from private equity transactions.

The move towards lucrative compensation, exposure to billionaire networks, and the appeal of a more significant role in smaller, but growing, entities has made family offices enticing to ambitious professionals. Westall reflects on the evolution of the family office landscape, contrasting today's competitive environment with the past where family offices were seen as retirement destinations with a work-life balance.

He emphasizes, "Now they're bringing in top talent and paying their people, and that's pushed them into competition with the big firms and the banks." This shift signifies the dawn of a new era in wealth management, where the traditional bastions of finance now encounter rigorous competition from the burgeoning sector of family offices.

To stay updated on these trends and more insights into the high-net-worth financial movements, the public is invited to subscribe to CNBC’s Inside Wealth newsletter by Robert Frank, delivered directly to readers’ inboxes.

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In conclusion, while the burgeoning costs associated with operating a family office may be daunting, the competition for exceptional talent is shaping a new future for wealth management. The redefined family office space, once considered an avenue for a finalized career, now stands as a bastion of innovation and competition, enticing professionals with the potential for growth, influence, and lucrative returns. As family offices continue to expand their footprint and challenge traditional financial institutions, the landscape of high-net-worth investment management remains one of the most dynamic and fascinating sectors to watch.