Fee Management in Successful Family Office Operations

When it comes to understanding and controlling family office investment fees, which can be complex and opaque, family offices and high-net-worth individuals frequently encounter substantial hurdles. As a result, investors may be unsure of the exact expenses of their investments and may struggle to identify solutions to minimize them. Family offices, on the other hand, may navigate and manage investment costs with the correct software and knowledge.

Family Office Fee Structures, Schedules and Models

What are the costs of a single-family or multi-family office? How much do I need to set up a family office? Such questions are often asked but not that easily answered.

In fact, not all families are worried about the costs of a single-family office; some establish one to control and save costs. Investment fees are a major expense for family offices and high-net-worth individuals, yet these costs are often opaque and confusing. This lack of transparency stems from the complex and fragmented nature of the investment industry, where no single financial intermediary has the incentive to clarify the fee structure. In this article, we will discuss the impact of investment fees, the complexity of fee structures, and how family offices can reduce their investment costs.

Assessing the Impact of Investment Fees on Family Office Returns

When considering the formation of a family office, it is critical to comprehend the true impact of investment costs on results. Over time, charges like management fees, performance fees, transaction costs, and other expenses can add up to a large amount. Based on case studies from our clients, the total true investment cost can be as high as 2-3% every year. These expenses can have a significant impact on long-term investment returns.

Assume you had $10 million to invest over ten years with a net average annual return of 10%. If you can save just 1% in annual costs, your investment may grow at a rate of 11% rather than 10%. That seemingly minor difference can result in significant benefits – approximately $2.4 million more in returns (i.e., $29.4 million at 11% compounding vs. $27 million at 10% compounding), or approximately 25% of your initial investment. It’s a substantial sum to consider, and with the correct investment plan and fee structure, a solution is within reach.

Accounting for Complex Family Office Fee Structures

However, due to the complexities of fee structures, determining the exact cost of investments can be difficult. Some costs, including custody and advisory fees, are visible and can be viewed in your quarterly bank account statements. Others, such as Forex bid-ask spreads and mutual fund manager fees, are hidden and deducted from the product price or NAV. Hidden costs can sometimes exceed 100% of obvious costs, effectively doubling them. Because of this intricacy, it can be difficult for investors to compare the costs of various investment products and grasp the true cost of their investments.

Finally, those considering establishing a family office should carefully consider the impact of investing fees on returns and devise a strategy for decreasing these costs. Family offices can maximize their long-term returns by knowing the true cost of investments and selecting the appropriate fee structure.

Family Office Fee Models are Unique for Each Family

When contemplating the establishment of a single-family office, it is essential to comprehend the associated costs. Target annual total operating expenses for a single-family office should range between 0.75 and 1.50 percent of the family’s net worth. This percentage should include fees for external providers, such as attorneys, accountants, investment administrators, and custodian banks. The wealthier a family is, the more this percentage could shift towards the lower end, and vice versa.

However, it is essential to recognize that every family is unique, with varying circumstances and requirements. Depending on the complexity or simplicity of your wealth, what you and your family intend to accomplish, which services will be delegated, and the number of generations involved, costs could be significantly higher (or lower).

For instance, when a family office actively invests in private equity, investment-related costs can easily be 0.5% to 1% higher, if not more. Additionally, the expected return is greater, and it is precisely this balance that should be emphasized.

It is also important to note that family offices, like families and their family businesses, evolve. This evolution will also impact the expenditures. Therefore, you must continue to monitor the costs for the duration of the office’s existence.

Three Ways to Optimize Family Office Fees

Typically, there are three main sources of investment cost optimization that can be attained through the following techniques:

1. Recovering erroneously charged expenses by intermediaries, such as unanticipated additional brokerage fees for an ‘all-in’ discretionary mandate.
2. Aligning your costs with industry benchmarks and best practices by comparing your fees to those paid for the same services by investors with similar AUM.
3. Learning and implementing industry best practices to avoid hidden costs, such as negotiating the default 1.5% FX fees that all private banks apply to smaller amounts or remembering to place idle USD currency on a 5% deposit.

By implementing these strategies, investors can minimize investment expenses and maximize returns.

Over time, charges like management fees, performance fees, transaction costs, and other expenses can add up to a large amount.

Charging Family Office Fees to the Family

It is important, when analyzing the costs of a single-family office, to consider not only the total annual amount owing, but also how these costs are charged to and divided among the individual family members. This topic is just as essential as determining the operating expenses of the family office.

This can be challenging, especially if there is no family consensus on the services to be provided. If family members are not well-informed about the costs of the family office and how they will be charged, this can lead to long-term problems and conflict.

Families must therefore carefully consider how they will charge individual members and communicate this information in a plain and transparent manner. By doing so, families can avoid misunderstandings and conflicts and guarantee the efficient operation of their family office.