A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to wealthy investors and consumers. Sign up to receive future issues straight to your inbox.
Typical family office A fresh study says it costs companies more than $3 million a year to operate as competition for talent drives up staffing costs.
Wealthy families spend anywhere from $1 million to more than $10 million a year running their family offices, with the average currently around $3.2 million, according to the JP Morgan Private Bank Global Family Office Report released this week. While costs vary widely by asset, experts say expenses are rising across the board as family offices explode in size and number and compete more directly with private equity, hedge funds and venture capital.
“There is a real war for talent going on in family offices,” said William Sinclair, head of the Family Office practice at JP Morgan Private Bank in the US. “They are competing for talent with private equity funds, hedge funds and banks.”
Smaller family offices obviously spend less. According to the report, which examined 190 family offices with average assets of $1.4 billion, family offices with less than $500 million under management spend an average of $1.5 million annually on operating costs. Family offices worth $500 million to $1 billion spend an average of $2.7 million, and those above $1 billion spend an average of $6.1 million. Fifteen percent of family offices spend more than $7 million, and 8% spend more than $10 million.
The biggest cost is staff, which has become more exorbitant, as have family offices triple the number over the last five years. According to recruiters, family offices are increasingly competing with each other for senior talent.
More importantly, family offices are shifting more of their investments toward alternatives that include private equity, venture capital, real estate and hedge funds. According to a J.P. Morgan study, U.S. family offices hold more than 45% of their portfolio in alternatives, compared with 26% in stocks.
As they expand their reach into alternatives, they are increasingly competing directly with immense private equity firms, venture capital funds and transaction advisors to acquire top talent.
“Over the last decade, we have seen the professionalization and institutionalization of the family office space,” said Trish Botoff, founder and managing director of Botoff Consulting, which advises family offices on recruiting and staffing. “They are expanding their investment teams, hiring employees from other investment firms and private equity firms, which has a huge impact on salaries.”
A Family Office survey conducted by Botoff Consulting shows that 57% of Family Offices plan to hire more employees in 2024, and almost half plan raises for current employees of at least 5%. Experts say overall family office salaries have increased 10% to 20% since 2019 due to the frenzied demand for talent in 2021 and 2022.
According to Botoff, the average salary for a chief investment officer in a family office with less than $1 billion in assets is about $1 million. She said the average cost for a CIO overseeing more than $10 billion is just under $2 million. Botoff said more family offices are adding long-term incentive plans, such as deferred compensation, in addition to base salary and bonuses to sweeten the packages.
Competition even increases the wages of lower-level employees. Botoff said one of the family offices she worked with employed a junior analyst who asked for $300,000 a year.
“The family office decided to wait a year,” she said.
Competition with private equity firms is becoming particularly costly. As more single-family offices enter into direct deals, buying shares of private companies outright, they are trying to attract talent from immense private equity firms like KKR, Blackstone and Carlyle.
“This is the biggest dilemma,” said Paul Westall, co-founder of Agreus, a consulting and recruitment company for family businesses. “Family offices simply cannot compete at the senior level with immense PE firms.”
Instead, Westall said, family offices recruit middle managers from PE firms and give them more authority, better access to opportunities and higher compensation. Family offices now provide PE recruiters with a “carryover” – or profit-sharing if the company is sold privately – similar to PE firms.
He said better wages, access to billionaires and their networks and the ability to “not feel like a cog in a huge wheel” make family offices more attractive places to work.
“If you look back 15 years ago, family offices were a place where people retired and had a work-life balance,” he said. “Everything has changed. Now they are hiring the best talent and paying their people, which has pushed them to compete with immense companies and banks.”
Sign up to receive future editions of CNBC Inside the wealth newsletter with Robert Frank.
