White Papers

How Complexity Affects Wealthy Families' Costs – Cambridge Associates White Paper

Editorial Staff 19 May 2023

How Complexity Affects Wealthy Families' Costs – Cambridge Associates White Paper

The US-based study examines the sort of cost considerations – with a few hard numbers – that families with large wealth face when it comes to managing it. These often influence decisions to use outside specialists rather than manage money in-house.

The ways in which wealthy families work out the costs involved in running their wealth are probed in a new White Paper from Cambridge Associates, the US-headquartered investment firm.

The study looks at typical ranges for annualised investment and non-investment costs and their allocation between a family office and third-party service providers. It shows, for example, that the total cost is usually more than 100 basis points, or 1.0 per cent, of investable assets. CA shows that the range is between 115 bps and 175 bps. 

“For wealth owners with substantial assets, there can be a wide range of cost levels that fluctuate in relation to individual family circumstances, and a good number will be outside the ranges [shown in the paper].

The report is written by Charlie Grace, managing director, family enterprise solutions, private client practice, at CA. 

“Both a family office or a third-party provider can be used to perform designated investment and non-investment functions. The notion of `build or buy’ comes into play when families consider whether to construct their own wealth management capabilities and individualised services inside a family office, or to outsource some or all of these tasks to a third-party provider,” Grace writes. “Some of these costs may also be shared. For example, there may be some accounting services performed by the family office and other accounting services performed by a third party. In this scenario, the two cost buckets should be allocated accordingly.”

Investment services typically represent a high percentage of overall wealth management costs – typically half or more of total expenses. The two main factors causing variations in cost include, complexity of alternative investments in a family’s portfolio and economics of scale.

The report notes that some forces such as the total number of family households or financial entities, affect costs in a straightforward way. The more households and entities, the higher the cost. However, other factors can add to overall cost in less obvious ways, it said. A higher number of accounting and tax entities, for example, often require more sophisticated tax and estate planning design, advanced monitoring, and more robust reporting, which will lead to higher costs. 

Figure 5 of the study gives a hypothetical example of how larger and more complex wealth management requirements can substantially drive up a family’s total cost.

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