Family Office Fee Structure
A family office is a private advisory firm that serves ultra-high-net-worth individuals and families. It provides a range of services, including investment management, estate planning, tax planning and optimization, philanthropy coordination, and more.
The fees can vary based on factors such as the services offered, the complexity of the client’s financial situation, and the size of the family’s assets. Here are some common structures:
- Percentage of Assets Under Management (AUM): This is one of the most common structures.
- Fixed Fee: Some family offices charge a fixed annual fee based on the services provided, regardless of the size of the client’s assets.
- Performance-Based Fees: In addition to a base fee, some offices might charge a performance-based fee. This fee is a percentage of the client’s investment gains.
- Hourly or Project-Based Fees: For specific services, an office might charge an hourly rate or a project-based fee.
- Retainer Fee: Similar to a fixed fee, a retainer fee involves the client paying a regular amount to retain the services of the family office.
- Combination of Fees: Some offices might offer a combination of the above structures to accommodate the diverse needs of their clients.
The structure can vary based on the specific needs and preferences of the ultra-high-net-worth family it serves. Family office services are designed to provide comprehensive and personalized services, and their structure typically reflects this goal. Here’s a general outline of the structure:
- Leadership and Governance: At the top, you’ll typically find the family members or the family’s designated representatives who provide overall leadership and governance.
- Executive/Manager: This individual is responsible for overseeing the day-to-day operations.
- Investment Team: The investment team is responsible for managing the family’s investment portfolio.
- Wealth Management Team: This team focuses on the overall financial well-being of the family.
- Legal and Compliance Team: This team handles legal documentation, contracts, regulatory compliance, and more.
- Administrative and Operations Team: This team manages the administrative and operational aspects.
- Philanthropy and Family Education Team: Some offices have a dedicated team to manage philanthropic efforts and family education initiatives.
- Technology and Information Security Team: This team is responsible for managing the technology infrastructure, ensuring data security, and implementing relevant software and tools.
- Client Service Team: This team handles communication with the family and coordinates the services provided by various teams within the office.
- External Advisors and Partners: Family offices often collaborate with external advisors such as attorneys, accountants, investment managers, and other specialists to provide expertise in specific areas.
Fine-Tuning the Family Office
Fine-tuning involves optimizing its operations, services, and structure to better align with the needs and goals of the ultra-high-net-worth family it serves. Here are some steps to consider when fine-tuning:
- Assess Current Operations
- Clarify Family Goals and Objectives
- Review Service Offerings
- Optimize Investment Strategy
- Streamline Operations
- Regularly Review and Adapt
Increasing Number of Family Offices
The increasing number of family offices reflects the growing demand among ultra-high-net-worth individuals and wealthy families for comprehensive and personalized services.
As mentioned previously, the fees can vary based on factors such as the services offered, the complexity of the client’s financial situation, and the size of the family’s wealth. For a discussion on fees, please refer to the previous section of this article.
The Costs of Setting Up a Family Office
Setting up a family office can involve various costs, which can vary widely based on factors such as the scope of services, the complexity of the family’s financial situation, the size of the family’s wealth, the location of the office, and the specific goals of the family. Here are some of the common costs:
- Personnel Costs
- Office Space and Infrastructure
• Office Rent
• Office Equipment
- Technology and Software
• Investment and Portfolio Management Software
• Security Measures
- Legal and Regulatory Costs
• Legal Fees
• Registration Fees
- Compliance and Reporting
• Compliance Services
• Reporting Costs
- Consulting and Advisory Fees
• Specialist Advisors
- Philanthropic Initiatives
• Charitable Giving
• Professional Liability Insurance
- Travel and Entertainment
• Client Meetings
- Marketing and Communication
• Branding and Marketing
- Training and Education
• Continuing Education
Single Family Office Set-Up Costs
Setting up a single-family office (SFO) involves creating a dedicated organization to manage the financial affairs of a single ultra-high-net-worth family. The costs of setting up an SFO can vary significantly based on factors such as the complexity of the family’s financial situation, the range of services the SFO will provide, and the jurisdiction in which it will operate.
Do Family Offices Charge Fees?
Yes, they typically charge fees for the services they provide to ultra-high-net-worth families. These fees are intended to cover the costs of managing and overseeing the family’s financial affairs and providing a range of specialized services. The fees can vary based on the services, the complexity of the family’s financial situation, and the specific needs and preferences of the family.
How Much Should a Family Office Cost?
The cost of can vary widely based on several factors, including the scope of services provided, the complexity of the family’s financial situation, the size of the family’s wealth, the location of the office, and the specific goals and preferences of the family. There is no one-size-fits-all answer to how much it should cost, as each family’s needs and circumstances are unique.
How Much Money Do You Need to Justify a Family Office?
The amount of wealth required to justify setting up and maintaining a family office can vary widely based on factors such as the family’s financial goals, the complexity of their financial situation, the range of services they require, and their preferences for wealth management. There is no fixed threshold that universally defines when a family should consider establishing an office. However, generally speaking, a family office is most relevant and cost-effective for ultra-high-net-worth individuals and families with substantial assets, which include stocks, cash, real estate, and more. While there’s no strict minimum, a common guideline is that a family should have at least $100 million to $200 million in assets to potentially justify the costs of setting up and running an SFO. However, this threshold can vary based on factors such as the cost of living in the family’s location, the specific services required, and the family’s goals.
Counting the Fees of Running a Family Office Structure: Family Office Costs Generally Fall into Categories
As discussed previously, the costs can be grouped into several categories based on the nature of the expenses and services provided. Please refer to the previous section on costs for a detailed discussion on counting the fees.
1. Family Office Fee Models: Every Family Unique
Indeed, the fee models can be highly tailored to the unique needs, preferences, and circumstances of each ultra-high-net-worth family. Family offices recognize that no two families are exactly alike, and as a result, the fees should reflect the specific services required and the level of customization desired by the family.
Multi-Family Offices Use Three Fee Models
Multi-family offices (MFOs) often use a variety of fee models to accommodate the diverse needs of the wealthy families they serve. MFOs provide services to multiple ultra-high-net-worth families, allowing for cost-sharing while still offering personalized attention. Here are the three common fee models that MFOs frequently use:
- Percentage of Assets Under Management (AUM) Fee: Just like SFOs and private equity firms, MFOs often charge a percentage of the total assets they manage on behalf of the client families. This fee is calculated based on the combined assets of all client families with the MFO. The percentage can vary depending on factors such as the services provided, the size of the assets managed, and the specific MFO’s fee model.
- Tiered Fee Model Some MFOs use a tiered structure where the percentage charged decreases as the total assets increase. For example, the MFO might charge a higher percentage for the first $10 million in assets, a slightly lower percentage for the next $10 million, and so on.
- Fixed Fee Plus AUM Fee: In addition, MFOs might charge a fixed annual fee to cover basic services and administrative costs.
2. Internal Operating Costs and Other Family Office Operational Costs
Internal operating costs and other operational costs are important factors to consider when establishing and running an office. These costs encompass a wide range of expenses required to ensure the smooth operation of the office and the delivery of its services.
3. Direct Family Expenses
Direct family expenses refer to the costs and financial outlays that pertain directly to the family members and their lifestyle. These expenses cover various aspects of the family’s personal and day-to-day needs.
4. Industry Family Office Costs Standards
The costs can vary widely based on factors such as the scope of services provided, the size and complexity of the family’s financial situation, the location of the office, and the specific goals of the family. As a result, there are no strict industry standards for costs.
5. External Professional Service Fees
External professional service fees are the costs associated with hiring specialized professionals or firms to provide specific services that are outside the core expertise of the office. These external advisors offer expertise in areas such as legal, tax planning, estate planning, risk management, and more. The office leverages these experts to ensure that its clients receive comprehensive and high-quality support across various financial and non-financial matters. In this scenario, it becomes very important to have a clear understanding of the pricing structure of these firms.
6. Investment Advisory-Related Service Fees
Investment advisory-related service fees refer to the costs associated with providing investment and advisory services to clients. These fees are charged by investment advisors or firms that help clients make informed decisions about their investment portfolios, asset allocation, and overall investment strategies. Investment advisory-related service fees can vary based on factors such as the level of service provided, the AUM, the complexity of the investment strategy, and the fee model chosen.
Outsourcing is the practice of contracting specific business functions, tasks, or processes to external third-party providers rather than handling them in-house. Outsourcing allows organizations to leverage external expertise, resources, and efficiencies to manage certain aspects of their operations. This can result in cost savings, increased focus on core activities, and access to specialized skills.
8. General Advisory Services: Leveraging Technology and External Experts
Leveraging technology and external experts for general advisory services can significantly enhance the capabilities and effectiveness of family offices. General advisory services encompass a wide range of financial planning, investment, and strategic guidance provided to clients.
9. People and Administrative Costs
People and administrative costs encompass the expenses associated with the personnel and administrative functions of a family office. These costs are essential for the smooth operation of the office and the delivery of services to clients.
10. Charging Costs to the Family
Charging costs to the family in a family office context refers to the practice of passing on various expenses associated with running the office and providing services to the clients (usually the family members) through a fee model. The office charges the family for the services rendered and the operational costs incurred.
11. Family Office Investment Management and Performance Costs
Investment management and performance costs refer to the expenses associated with managing the family’s investment portfolios and assessing the performance of those investments. These costs are an integral part of operations and are incurred to ensure effective investment strategies and outcomes.
12. Recent Developments
There have been recent developments in this space, the most common of which are the following:
• Technology Integration
• Evolving Fee Models
• Sustainability and ESG
• Remote Work and Flexibility
How Fees Get Out of Control
Fees can potentially get out of control in various situations, leading to unexpected costs and financial challenges. Here are some common reasons why fees might escalate beyond what was initially planned:
• Lack of Transparency
• Complex Fee Model
• Unmonitored Service Expansion
• Inadequate Fee Agreements
• Lack of Regular Review
• Failure to Manage External Costs
• Unaligned Incentives
• Inefficient Operations
• Underestimating Operational Costs
• Market Volatility
• Lack of Competition
• Changes in Regulation
How to Cover the Costs of a Family Office?
Covering the costs involves generating revenue or managing assets in a way that supports the operational expenses of the office while providing value to the family members.
Is There a Minimum Wealth Requirement for a Family Office?
There is no strict minimum wealth requirement universally applicable to all offices, as the establishment and operation of an office depend on various factors including the family’s financial situation, goals, and the services they require. However, family offices typically cater to high-net-worth and ultra-high-net-worth families due to the significant costs associated with setting up and operating an office.
1. How Wealthy Do I Need to Be to Establish a Family Office?
That being said, a rough guideline is that family wealth should generally be in the range of $50 million to $100 million or more to justify the establishment of an SFO.
2. Not a Set Minimum of Wealth
There is no fixed or set minimum wealth requirement universally applicable to all family offices. The decision to establish an office depends on various factors, and while a certain level of wealth is often associated with family office viability, it’s not a rigid requirement.
3. In the “Stay Wealthy” Business
This typically involves offering comprehensive wealth management, financial planning, investment advisory, and other services that aim to preserve and grow the wealth of high-net-worth and ultra-high-net-worth individuals over the long term.
4. A Family Office to Save Costs
Creating a family office with the goal of saving costs involves setting up a structure that optimizes operational efficiency while still providing the necessary services and support for the family’s financial management.
The Main Cost Blocks of a Single-Family Office
The cost structure can vary based on the size of the family’s wealth, the range of services provided, the complexity of the family’s financial situation, and the family’s preferences. However, there are several main cost blocks that are typically associated with running single-family offices, and those are discussed in the previous section on costs.
When Should You Set Up a Family Office?
Deciding when to set up a family office depends on various factors, including the family’s level of wealth, financial complexity, goals, and preferences.
1. Individual Assessment
Certainly, making the decision to set up a family office involves a careful and individual assessment based on your family’s unique circumstances, needs, and goals.
2. A Family Office Ecosystem
A family office ecosystem refers to a comprehensive and interconnected network of services, resources, and professionals that collectively support the financial management and well-being of a high-net-worth or ultra-high-net-worth family. This ecosystem is designed to provide tailored solutions to meet the family’s unique needs, goals, and preferences.
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