- Christian Armbruester
The Family Office Question
Setting up a family office can be a big undertaking. Much has to do with the experience and capabilities of the family setting up the organisation to manage the accounting, taxes, legals, and investments in-house. What role the family wants to take is also very important. In other words, how much of the work will be done by the members of the family versus how much is delegated to an employee or a service provider? A vision or philosophy, e.g. a raison d’etre will need to be articulated, so that everyone also understands why the family office was set up, otherwise things could have just been left the way they were.
All seems very complicated, and you really have to wonder why the rate of wealthy families setting up shop is accelerating. There are now more than 10,000 family offices globally according to an Ernst & Young study. Have they all discovered the holy grail of investing and found a better way of managing our money? Of course not, and therein lies the problem: just because you set up a family office does not mean that you are managing your assets more efficiently, and it can be extremely expensive to run things internally, without the scale of a big bank.
Do the numbers: first of all, you need an investment strategy. More than 90% of the value of our investments come from the so-called “strategic asset allocation”. That’s where we have to decide how much risk we are going to take on, what assets we are going to buy and which currencies we are going to choose. If the family doesn’t have the capabilities to do that, then they have to hire a professional. And good ones don’t come cheap, and do you really want to skimp on the most important decision to manage your wealth? This will cost at least £500,000 and to get top talent, you really need to spend close to £1 million. Then you need assistants, portfolio managers, risk management, operations, business management, business support, IT and hey, maybe even an HR specialist to make sure the whole thing doesn’t fall apart after just a few years. That’s at least another £1m.
Then there are the systems for portfolio management, cash and disbursements, execution, pnl (profit and loss) calculation and reporting, accounting, administration and custody. You either need to build the infrastructure internally or buy and outsource. The mere process to choose the right service providers and understand how the whole thing will fit together can take years. And if you don’t know what you are doing, then you run the risk of overpaying for the management and administration of the family assets for generations. Before it is all set and done and also taking the time it takes to build efficient and integrated systems, this will cost more than £250,000 to set up and the on-going costs are at least another £500,000, including the office, business rates, and other expenses.
That means, you would need at least £300million in proprietary assets to justify setting up a bespoke family office. But that’s not all, you also need the accountants, lawyers, tax advisors and most importantly administrative assistants, because after all, what’s the whole point of putting your name on the door without the minions to adore and look after you? All of which is not cheap, so really the threshold for setting up an efficient family office is more than half a billion quid. Which is why most of the 10,000 family offices that exist today cater to those families that have a little less than that, but feel that by working with other families and pooling their assets, they can get the same advantages as the big boys. And who doesn’t want to keep up with the Joneses?