The cost of operating a family office is on the rise, with the typical family office now spending over $3 million annually, according to a new study by J.P. Morgan Private Bank. Wealthy families are shelling out anywhere from $1 million to more than $10 million a year to run their family offices, with the average cost now standing at around $3.2 million. This increase in expenses is being driven by the growth in the size and number of family offices, as well as the fierce competition for talent in the industry. Family offices are now competing directly with private equity, hedge funds, and venture capital firms for top talent, leading to higher staffing costs.
Smaller family offices, managing less than $500 million in assets, spend an average of $1.5 million annually on operating costs, while those with assets between $500 million and $1 billion spend an average of $2.7 million. Family offices with over $1 billion in assets have the highest average operating costs, at $6.1 million. The biggest expense for family offices is staffing, as they compete for senior talent with other family offices and financial firms. Recruiters are reporting an increase in compensation for staff at family offices, with salaries rising by 10% to 20% since 2019.
With family offices increasingly investing in alternatives such as private equity, venture capital, real estate, and hedge funds, they are now in direct competition with big firms in these sectors for talent. Family offices have more than 45% of their portfolios in alternatives, compared to 26% in stocks, according to the J.P. Morgan survey. This shift has led to the professionalization and institutionalization of the family office space, with a focus on hiring staff from other investment firms and private equity firms. Family offices are also adding long-term incentive plans, such as deferred compensation, to attract and retain top talent.
According to a survey conducted by Botoff Consulting, 57% of family offices plan to hire more staff in 2024, with nearly half planning to offer raises of 5% or more to existing staff. The competition for talent is especially fierce at the senior level, with family offices struggling to match the salaries offered by big private equity firms. To attract top talent, family offices are offering mid-level managers from PE firms higher pay, greater authority, and better access to deals. Family offices are even offering profit shares, known as a “carry,” to recruits, similar to what is offered by PE firms, to sweeten the deal.
As family offices evolve from being perceived as places for retirement to becoming competitive players in the financial industry, the need to attract and retain top talent has become paramount. The shift towards investing in alternatives has led to increased competition with private equity firms and venture capital firms for talent. Family offices are now offering competitive salaries, long-term incentive plans, and profit-sharing opportunities to lure talent away from big firms. The competitive landscape in the family office sector is driving up operating costs, particularly in terms of staffing expenses, as family offices strive to build out their investment teams and stay competitive in the market.
