Family Office
Family Office Study Confounds Cost Inflation Anxieties
Following a major report last week examining trends in the North American family offices sector, we talk to the firm about what was most surprising about the study's findings, the lessons they have learnt, and where the industry is heading.
A week ago, this news service carried a report from multi-family office, AITi Tiedemann Global about how family offices are highly focused on winning and keeping talent, with 70 per cent of them struggling to acquire people and almost two-thirds (65 per cent) concerned about holding on to talent. The study, carried out in conjunction with Campden Wealth, also found a wide variation in the relative costs burdens of small and large family offices.
There is now a plethora of reports from banks, institutes, law firms and others about the family offices sector. So this news service asked Erik Christoffersen, head of family office practice, AlTi Tiedemann Global, about its report and what is distinctive about it.
WealthBriefing: There are a number of reports
about family offices around the world these days. What do you
think this report brings in terms of adding actionable,
informative information?
Christoffersen: This report differentiates itself from
many other family office reports since it focuses exclusively on
operational excellence (and intentionally does not address
investment management of the family assets). The report aims to
provide a greater depth of benchmarking data and more insights on
the issues associated with family office operations. Our hope is
that the data will help family offices identify areas for
improvement to achieve better outcomes and higher
satisfaction.
Based on the findings, AlTi Tiedemann Global identified six actionable recommendations for family offices to consider as they look ahead:
1. Value for your costs;
2. Technology is a key driver of excellence;
3. Vigilance is key. Ignore cybersecurity at
your peril;
4. Prioritise sustainability, governance and next-generation
preparedness;
5. Seek honest feedback often; and
6. Outsourcing is a key component of any successful family
office.
WealthBriefing: What findings from the
report surprised you the most and why?
Christoffersen: There are a number of findings
that surprised us, most notably:
1 Family offices' direct costs (in-house and
outsourcing but excluding external fund managers’ fees and
performance distribution) have remained flat or even declined
over the past decade This invalidated our cost hypothesis going
into this report and runs counter to the wage inflation many
firms have experienced during this period. Furthermore, the scope
of services many family offices provide has broadened and, in
some areas, deepened over this past decade.
2 This raises two questions: firstly, has compensation
not grown over the past decade OR is the family office staffing
with fewer resources? And secondly, has there been a
reduction/flattening in spending on such areas as technology,
risk mitigation, governance and education, etc.?
3 With more than half of all mid and large family offices
reporting difficulty recruiting and retaining staff (fig. 4.1 –
approx. 2/3rds of mid-size family offices and more than half
of large ones) and satisfaction with outsourcing running high –
76 per cent for a mid-size FO and 64 per cent for a
large FO, we are surprised that these mid and large family
offices are not turning more to outsourcing as an effective
strategy to access and engage more key talent. Our findings
indicate that mid-sized family offices are outsourcing only 26
per cent of their staff and large family offices outsourcing
even less at 19 per cent.
5 We are surprised to discover that the large majority of family offices established after the turn of the Millenium have a very low level of operational risk mitigation. The percentages of family offices using less than five risk reduction measures established in 2000 to 2009 is 65 per cent and those established in the period 2010 to 2019 is 68 per cent. Those recently established (2020 to 2023) is 63 per cent. We wonder whether there may be a link to the fact that the majority of these family offices are still being run by the first generation that created them.
WealthBriefing: There still appears to be a lag
between action and understanding on matters such as preparing for
next-gen succession. What's the problem? Why aren't family
offices getting these issues sorted out, given the endless amount
of related commentary?
Christoffersen: If you go back to family office reports
more than five years ago, this issue was called out, even
then. While there is no simple answer, two reasons may partially
explain this trend. Firstly, many families are hesitant to
discuss impending wealth transfers with the next generation out
of fear that it could subdue their ambitions. As we all know, it
can be difficult to talk about money and death. Secondly, many
first generation family offices are focused more on the “office”
part of family office and that means prioritising investments and
tax efficiency above all else. As a result, they postpone
properly addressing the "family" part (including next gen prep
and succession) since there is not a deadline and it is hard to
measure success until it happens. Unfortunately, these
discussions often happen too late and result in a scramble that
can hurt the family office.
Families struggling with succession planning often find it helpful to engage an external advisor to mediate these discussions, however it can be difficult to identify a trusted advisor which can result in further delays.
WealthBriefing: The report had interesting things
to say about costs and the differences between large and small
family offices. Do you think this is going to drive more
consolidations of SFOs (single family offices) into multi-family
offices (MFOs), more outsourcing, etc.? Is there also a
difference in costs between family offices that are still linked
to an operating business, and those where a business is sold?
Christoffersen: Let’s start with the second question –
family offices embedded in a family business do have lower costs
as they can share resources for many of the administrative
functions as well as split other costs with the family business.
They can also leverage the systems, operational risk measures,
etc. that the family business bears independent of the FO.
The first part of this question is interesting – if you assume that family dynamics are hard enough for one family with several generations, you can imagine how much harder it can become when a family office services many families. But those MFOs that have strong operational excellence will be set up to do this well. For broader context, we define operational excellence when it comes to family offices as having the capabilities to create a high-performance office, streamline core functions, enhance client experience, mitigate risk and adapt their approach as needs and/or solutions evolve.
Alternatively, SFOs tend to go in the other direction and outsource more of the work to existing MFOs where they discover that they can meet their needs (e.g., talent, systems, operational risk measures, subject matter experts, succession and governance) at a similar or lower cost. But this requires investing in the firm (e.g. MFO) as a partner, similar to how they invest and work with their in-house staff.
WealthBriefing: From where are family offices
recruiting professionals – banks, RIAs, law firms, accountancy
firms, etc.? Do you see much poaching from rival family offices?
Are family offices making much use of executive search firms? Do
they struggle to do this sort of task in-house?
Christoffersen: Poaching is on the rise with talent
becoming hard to find and even harder to keep. Engaging a good
executive search firm can make a real difference and deliver
benefits well in excess of their fees. Top executive search firms
have some of the best insights on hiring and provide access to
large talent pools for various positions. They can also provide
guidance on compensation, skills, fit, etc. and manage the
process more efficiently than most in-house recruiters.
Getting the right talent in top leadership positions is perhaps the number one contributor to operational excellence. It should be noted that many MFOs who partner with SFOs in a hybrid capacity can often provide the access and relationships the FOs seek today at the same or lower cost for equivalent talent.
In summary, the foundation of operational excellence hinges on two things – firstly, hire the right people (remember you will be competing with other FOs and MFOs). And secondly, once you hire them, make sure to retain them. Take care of them in the same way that they take care of your family by motivating them to stay for the long term. Many FOs do this by creating a strong culture and a clear set of governance parameters that positively impact employee’s experience and drive them to deliver good outcomes for the family.
WealthBriefing: From your vantage point, do you
see any acceleration or slowing in the pace of family offices
being created – are costs, hiring issues, etc., creating a limit
on how many can be created?
Christoffersen: The primary reason why small family
offices (under $250 million) are established, is because one
or more family members are invested in running and managing it
and enjoy the work. However, smaller offices need to be
comfortable with costs being potentially higher.
For mid and large family offices, the pace of formation is influenced by how much wealth is being created in any particular decade. And for those existing multi-generational FOs – a key determining factor will be how they transition the family office to the next generation so that the next gen wants to continue to be part of the SFO. Often this is not the case, and one or more family members go their own way.
Finally, a key driver in all of this will be the increasing role of technology in shaping the operational excellence and investment success of the family office. The family offices that fail to invest in a proper tech stack will fall behind operationally.