Matt Norman discusses how single family offices can minimise costs.
This article covers the cost controls available to the single family office, and while we cannot promise to cover everything, some ideas on costs savings may be of interest.
Getting a definitive breakdown of the sector’s annual costs is not practical, but personal experience and industry surveys suggest an average yearly cost of running a family office to be anywhere from 50 basis points to in excess of 1.5% of the family’s liquid wealth, although it will likely be less for those offices focused purely on administrative, concierge and property management services.
Simon Foster, the CFO at TY Danjuma Family Office said, “Cost control has always been a major focus at TY Danjuma Family Office. It was cost control considerations that first lead us down the path of insourcing both IT and accounting and finance. Now that these are nearly 100% in-house the costs are approximately half of what we were paying in outsourced configurations. Also we have the added bonus of full control all the way through the functions. It was a major time commitment to find the right people, but we feel the numbers speak for themselves.”
Others argue that outsourcing offers a better path in terms of cost cutting, one which allows carefully selected partners to provide specialist skills which can help family offices navigate the evermore challenging accounting, regulatory and tax environment that multinational families face today. As well as possibly making financial savings, outsourcing should allow the well-run family office to focus its resources on other pressing tasks.
Storm Capital Management Ltd provides family office accounting services to both their founding partners and to external families, having found that economies of scale mattered to them when it came to getting the specialist accounting skills needed by both themselves and their principally Norwegian family office client base. Einar Pedersen, the CFO of Storm Capital Management Ltd, advises: “The cost of IT systems, servers, up-to-date training, holiday cover and special situations with trust and holding company restructuring projects, were all factors which led to those families preferring [to outsource to] our team of Norwegian state authorised accountants.”
However, it is not just straightforward financial cost savings, but having families avoid making the wrong structuring steps, while having a dedicated team aware of constantly evolving international legislation and regulation, which Einar believes is the real benefit for single family offices.
The “insource versus outsource” argument will always be prevalent in the family office community. But for those that don’t want to insource everything, yet feel that outsourcing leads to too much of a loss of control, there remains another option: the sharing of resources. Many nimble family offices are sharing more and more services these days; everything from the actual office, from IT management, servers and other office infrastructure, to jointly employing shared staff such as office managers and PAs.
Carrie Tucker, CFO at Exploration Capital Ltd spoke of her experience: “Sharing a building with another family office can lead to multiple benefits, from reducing the rental and running costs of an office to sharing investment ideas and co-investments.” With custodians, wealth managers and other service providers all offering discounts based on the size of assets, it is no wonder that family offices opt where possible to negotiate collectively to enable both access to products as well as discounts on fee levels. A growing number of companies now offer platforms where family offices can join forces in order to get preferential fee levels.
If going alone, always hold a beauty parade of potential service providers and where possible exchange information with your family office peer group on what they are paying for any given service. Although not the only parameter for selecting a provider, it will give you a better idea of whether or not you are getting fair value for money. Even once selected, it pays to continue to review the costs of all service providers on a regular basis as this will keep them on their toes and make sure that their prices stay competitive.
At the Family Office Council’s Recruitment and Retention roundtable, held in May this year, one family office CEO advised that in their case KPIs for staff were good both in terms of managing staff and in delivering measurable goals across the family office such as cost savings. The CEO found that if the staff’s KPIs were aligned to the goals of the SFO then serious cost cutting could be simply and effectively achieved. Implementing of KPIs within the family’s various household staff had led to for example the captain of the family’s super yacht becoming much more effective at cost saving.
Traditionally families of wealth and therefore their offices congregate in the areas with the most expensive real estate. In London terms this tends to mean the most expensive West End neighbourhoods of Mayfair and Knightsbridge. Cushman & Wakefield’s 2014 Office Space Across the World report cited that “London’s West End is the world’s most expensive office market for the second year in a row, retaining its title ahead of runner-up Hong Kong”. Fortunately a plethora of suitable real estate can be found across London at more economic prices, with some areas in West London such as Marylebone and Covent Garden now becoming home to more and more family offices.
It is especially easy for an SFO to take the decision to not locate in Mayfair proper if the family itself is not resident in the UK and therefore the family does not personally visit the office on a regular basis. Some family offices avoid a larger office cost footprint by only coming together on a formal basis for monthly or quarterly meetings, with the family’s executives working from home. For those families the era of the virtual CEO/CIO is upon us.
As the saying goes, “everyone likes a bargain” and family offices are no different. Nevertheless, the CFO of a London family office told me: “I tend to find that you get what you pay for so prefer to spend the time in the planning stage and explain to the supplier or service provider what is required. If they are the sort of people you are happy to work with, then the price will probably be reasonable. As our Chairman is wont to say, ‘I don’t mind people stealing my money but I do object to them stealing my time!’”