A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future issues straight to your inbox.
Typical family office It costs more than $3 million a year to run a company as competition for talent drives up staffing costs, according to a new study.
According to the JP Morgan Private Bank Global Family Office report released this week, wealthy families spend between $1 million and more than $10 million a year running their family offices, with the average now around $3.2 million. While costs vary widely by asset, experts say costs are rising across the board as family offices grow in size and number and compete more directly with private equity, hedge funds and venture capital.
“There is a real war for talent in family offices,” said William Sinclair, head of JP Morgan Private Bank’s U.S. family office practice. “They compete for talent with private equity, hedge funds and banks.”
Smaller family offices, of course, spend less. Family offices managing less than $500 million spend an average of $1.5 million a year on operating expenses, according to the report, which surveyed 190 family offices with average assets of $1.4 billion. Family offices valued between $500 and $1 billion spend an average of $2.7 million, while family offices valued over $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 costs are associated with staff, which has become more expensive as family offices have grown. tripled in number over the past five years. Family offices are increasingly competing with each other for talent, recruiters say.
More importantly, family offices are reallocating the majority of their investments to alternative avenues, which include private equity, venture capital, real estate and hedge funds. According to a JP Morgan survey, US family offices hold more than 45% of their portfolios in alternative assets, compared to 26% in equities.
As they expand their reach into alternatives, they increasingly find themselves in direct competition with large private equity firms, venture capital firms and deal advisors to attract top talent.
“Over the past decade, we have seen the professionalization and institutionalization of family offices,” said Trish Botoff, founder and managing director of Botoff Consulting, which advises family offices on recruitment and staffing issues. “They build their investment teams by hiring from other investment firms and private equity firms, and that has a huge impact on compensation.”
According to a survey of family offices by Botoff Consulting, 57% of family offices plan to hire more employees in 2024, and nearly half plan to increase salaries of existing staff by 5% or more. Experts say overall family office salaries have risen 10% to 20% since 2019 due to frantic demand for talent in 2021 and 2022.
The average salary for a chief investment officer at a family office with less than $1 billion in assets is about $1 million, Botoff said. The average pay for a CIO overseeing more than $10 billion is just under $2 million, she said. Botoff said more family offices are adding long-term incentive plans such as deferred compensation on top of base salary and bonuses to sweeten the packages.
Competition even leads to higher salaries for lower-level employees. Botoff said one family office she worked with was hiring a junior analyst who was asking for $300,000 a year.
“The family office decided to wait a year,” she said.
Competing with private equity firms becomes especially costly. As more single-family offices enter into outright deals, directly buying stakes in private companies, they are trying to lure talent away from large private equity firms such as KKR, Blackstone and Carlyle.
“That’s the biggest challenge,” said Paul Westall, co-founder of Agreus, an advisory and recruiting firm for family offices. “Family offices simply cannot compete at the top level with large private firms.”
Instead, Westall said, family offices hire middle managers from private firms and give them more power, better access to deals and higher salaries. Family offices now sometimes provide PE recruits with a “carry”—that is, a share of the profits when a private company is sold—similar to PE firms.
Higher salaries, access to billionaires and their connections, and the benefit of “not feeling like you’re just a cog in a big wheel” make family offices more attractive places to work, he said.
“If you look back 15 years ago, family offices were where people went to retire and maintain work-life balance,” he said. “Everything has changed. Now they attract the best talent and pay their people, and this pushes them to compete with large firms and banks.”
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