Family offices are moving to an office model that's more virtual in a push to reduce costs and tap into a dwindling talent base.
Over the past few years, there has been a significant increase in the number of family offices as many baby boomers reach retirement age and want to manage their accumulated wealth. Family offices allow them to do that beyond the eyes of regulators and those who may wish to do them harm.
But while the number of offices has been dramatically increasing, the talent pool to work in them hasn't. That's sparked competition among family offices to nab the best talent, and that, in turn, has driven up costs.
“Family offices are looking to beef up their team and to ensure that they are ready when they come in,” said Lucia Perchard, head of family office product at Bermuda-based Apex Group. “And the prices [for those individuals] is starting to spike across the staff.”
John Elmes, head of single-family offices at Los Angeles-based Pathstone, is seeing similar problems at the family offices he works with. While costs are rising, it's difficult to find more qualified people, including many of the higher echelon positions such as chief executive officers, chief financial officers, chief investment officers and lawyers.
Family offices have looked for ways to reduce costs while maintaining access to a high level of service. They will often consider two major models.
The first is a single-family office, which gives families significant control over their wealth and helps them maintain a level of privacy. The problem with this model is that it can limit their investment selections.
The second is a multi-family office model where two or more families can pool their collective assets, get access to a greater number of investments and resources and share costs. The drawback is that it can trigger registration requirements with the SEC when offices include other families and give them investment advice. In addition, the main clients can lose a sense of privacy by involving other families.
One solution to the problem of expenses has been gaining popularity in recent years: to outsource and reduce the number of in-house personnel.
“The trend has been recently to try to scale [those costs] back and outsource,” Elmes said.
By outsourcing with specific providers, family offices can access various services for a reduction of the cost.
“If you find an outside provider that has a suite of services that support a family office infrastructure and administration, you can get the expertise you need essentially immediately,” said Darrell King, director of private wealth for the Americas at Luxembourg-based IQ-EQ.
Many firms such as IQ-EQ, Apex and Pathstone provide a variety of services for family office clients to handle the routine aspects of running an office. Tommy Wright, a private client services and national tax leader for family offices at Chicago-based RSM US, said his firm also provides these services, and he is seeing the same outsourcing trend as his colleagues.
“Family offices may decide that they are tired of having all of those employees, all the headaches of managing those employees, and they will outsource various functions to outside vendors,” he said.
Technology has also hastened these trends, especially in the wake of the recent pandemic. Many people grew accustomed to the idea of remote working at the height of Covid-19, and companies realized they could draw from a larger talent pool that was not limited to one geographic region. For example, they could work with staff via videoconferencing and still maintain the close relationships they did before.
Outsourcing also allows family offices to hand off certain tasks they don't want to deal with, such as compliance, payroll or even investing (if they don't have the resources to select, monitor or track securities). A third-party manager can identify new and unique investments in line with the family office’s needs while the office maintains its independence.
“What we see more these days is thinking around keeping a single-family office idea with a core group of family and trusted personnel but outsourcing the rest of it so the decision-making is kept in-house,” King said. “That becomes a very attractive and efficient use of resources.”
At the same time, family offices might not want to outsource everything. For instance, they might worry about the quality of work being done by third parties, in particular when it comes to compliance. Regulators won't distinguish between errors made by a third-party and the family office itself. King said family offices should do thorough research before engaging with any outside firm.
“In choosing the firm, you must perform your own due diligence to ensure that the firm is operating with the resources that it needs and is operating compliantly,” he said.
In some cases, Wright said that family offices avoid working with third parties because they are loyal to staff members who have been with the office for many years. But in many cases, he said, that loyalty can cloud sound judgment.
“Our clients will rely on loyalty to their own fault rather than having sophisticated up-to-date financial and internal controls and monitoring those controls … and governance,” he said.
In those instances when these employees fail to do their jobs or deliberately defraud an office, additional time and money has to be spent to determine what happened and the damage done.
By working with a third party, an office might be able to avoid all that mess.
