Practical analysis for investment professionals
22 March 2013

Challenges for Family Offices: Customized Service versus Economies of Scale

The CFA Institute Wealth Management Conference is an annual event covering tools and strategies important to private wealth management, including financial planning, practice management, and client relationship management. The CFA Institute Wealth Management 2019 Conference will be held in Fort Lauderdale, Florida, on 2–3 April.

They’re hiding in plain sight: Family offices in the United States steward more than $1.5 trillion in assets, and yet there is no definitive data on even the number of family offices established. As Fidelity’s Andrew T. Fay noted in his presentation at the CFA Institute Wealth Management conference, this lack of visibility shouldn’t be confused with a lack of importance.

Family offices handle a variety of services for their clients, ranging from investment management and administration to more bespoke services intended to address specific administrative and wealth management needs. Beyond setting a single point of administration for a family’s wealth, a family office can help instill the values that are important to the original creators of wealth in a family and help preserve them as a foundation for the family’s financial affairs across generations.

Despite the appeal of an organizational structure that is tailored to a family’s values and preferences, Fay cited several factors that challenge successful family offices. Significant wealth is required to justify the expenses associated with expert staff and vendors, with Fay estimating that the structure begins to be justified at approximately $300 million in assets for a single family office, with fees generally accounting for 35 bps on average for a sizable portfolio. And, as with any enterprise, finding the right staff with appropriate expertise is the challenge, with the additional dimension of the right personal chemistry to assure a productive relationship between the staff and family members.

Multiple family offices are also gaining in popularity, allowing for cost sharing of staff and other resources across the combined assets of multiple families. But as Fay pointed out, achieving economies of scale through standardized services runs in the face of the usual customized service demands of families, which can either limit cost efficiencies or reduce family satisfaction with the services provided. Fay notes a growing preference for flat-fee arrangements that are a more explicit payment for services rendered, but do not incentivize successful stewardship with higher fees.

Alternatives to a formal family office structure include embedding a family office structure within a private company, diverting trusted employees, at least in part, from their corporate responsibilities to attend to the family’s finances and affairs. Such arrangements are all but invisible to the outside world, perhaps an attraction for those who wish to avoid the attentions of wealth management salespeople. And some families are forming loose “club” alliances with their peers to take advantage of specialized industry knowledge in making private equity deals and other investments.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Bob Dannhauser, CFA

Bob Dannhauser, CFA, was the head of global private wealth management at CFA Institute.

1 thought on “Challenges for Family Offices: Customized Service versus Economies of Scale”

  1. Ellie Davis says:

    Thank you for pointing out that some family offices share staff and other resources across many families. Owning a family business seems like something you should be proud of and try to grow. Hopefully, people look into finding the best businesses to help them out.

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