Are you looking for ways to cut down family office operating costs? Perhaps you are interested in learning more about what generates them? In both cases, you are in the right place. In this article, we expand on the topic of the expenses related to running a family office and explain how to minimize them. Do you want to learn more? Then we invite you to read on!
How Much Does Running a Family Office Cost?
You might know what a family office is and how much wealth one needs to consider setting it up. However, do you know how much running it costs on average?
According to the 2023 Global Family Office Compensation Benchmark Report [1], the expenses equal between 0.1% and 0.5% of the assets under management (AUM). However, the same source shows that this can vary significantly depending on the market, reaching even 1%.
The cost ranges are quite large. This highlights the importance of proper family office management—after all, 0.1% is far better than 0.5%.
What Impacts Family Office Operating Costs?
Multiple factors affect family office expenses, some of which have a larger impact than others. Therefore, we need to investigate them to understand how to effectively manage and decrease the costs of running such a business.
Assets Under Management
Naturally, the first and most significant element impacting the costs of running a family office is… the amount of wealth managed in such an establishment. The more money there is in a given family, the more assets need to be taken care of, increasing costs. This is why we measure them as a percentage of the assets under management rather than as particular sums of money.
Interestingly enough, you might find reports claiming that as the value of AUMs rises, so does the percentage of AUMs spent on family office expenses.
Investment Services
Investment services constitute a majority of the costs related to running a family office. According to Centro Law, in the US, they account for about 43% of the overall expenses [2]. This is why optimizing and managing family office investment services should be a priority.
If we add investment-related expenses to the equation, then we get (according to the same report) about 64% of the costs, which further strengthens the investment-centric approach in cutting down family office costs.
Administrative Services
Administrative services are a must in any family office, but they also generate visible expenses. However, these are relatively low when compared to investing. Nevertheless, optimizing administrative processes where feasible can help reduce costs, though it should not be the primary focus.
Other Services
General financial advising or family-related services may be most visible daily (at least for the client). Naturally, they also generate costs; however, these are not as high as in the previous examples, so focusing on them right away might lead to misplacing your resources—you will benefit much more from focusing on investment services and improving administration.
How to Reduce Family Office Operating Costs? 3 Strategies
What strategies and actions will help you reduce your family office costs? There is a set of best practices that will help you improve productivity, simplify administration, and, thus, decrease expenses. Let’s look at them now.
Tech Investments
There is a plethora of family office IT solutions available on the market, WealthArc being one of them. Such wealth management platforms impact the expenses on multiple levels and through various means—below you will find some examples, based on our WealthArc platform.
- Automation—Automation drives productivity, hence increasing the value generated by your employees every day. Wealth management platforms come with features that enable you to implement it on multiple levels, for instance:some text
- automated portfolio aggregation,
- automated data extraction from unstructured documents,
- automated reporting,
- algorithmic trading (based on AI),
- automated eKYC and risk management,
- automated client insights.
- Data integration and overview—Tools such as WealthArc also enable your employees to achieve a better overview of their clients and their investments by integrating into one place. This way, all they have to do is move between relevant dashboards, which saves a lot of time (and money).
- Security—Investing in a wealth management platform equals relying on its security features. This is quite convenient—with all the data stored on your provider’s databases, you do not need to invest as much into strengthening your business’ cybersecurity.
Outsourcing
Family offices often strive to perform most of their operations in-house. However, in certain cases, outsourcing might be a cheaper option that does not require you to sacrifice quality. Thus, you should make a comprehensive analysis of your family office and decide which areas should be outsourced.
When this is done, opt for fixed-fee outsourcing services. This way, you can avoid unexpected expenses and you will be able to find the most suitable experts to work with your business.
Outsourcing will also be an excellent choice for those areas, where significant work is required but the value is low. For instance, if a certain project requires a lot of manual work that cannot be automated with wealth management platforms, you do not want it to be carried out by your internal, high-paid specialists; instead, it will be cheaper to outsource the expert/team for this particular project.
Keeping up with the Trends
Watching wealth management trends closely will give you the opportunity to discover new ways to streamline your operations and reduce expenses. Therefore, do not forget to check (and subscribe to) new financial reports, read industry blogs, and attend relevant events.
The Takeaway
Reducing family office operating costs requires you to optimize your front and back office procedures. It might require outsourcing, investments in new technologies or even revolutionizing some of your processes, but in the end, it will yield a high return so you should prioritize it, especially if your costs exceed 0.5% AUMs.
You might also read: Top 5 Focus for Wealth Managers - What Wealth Management Will Be Focused on This Year
References:
- Agreus Group. (2023). 2023 global family office compensation benchmark report. Agreus. https://www.agreusgroup.com/2023-global-family-office-compensation-benchmark-report/
- Centro Law. (n.d.). The costs of a single-family office. Centro Law. https://www.centrolaw.ch/en/insights/detail/the-costs-of-a-single-family-office
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