I was in a meeting with a large single family office and we were discussing total running costs. The idea being, can you attribute a specific basis point of FUM to expenses in a similar way you would budget for management expense ratios for managers.
I’m going to use this UBS Family Office report from 2019 as a base as it’s the only time I’ve seen an attempt at total running costs of the office.
According to the report, Family Offices spent:
14bps on General Advisory services
25bps on investment related activities
10bps on professional services
17bps on administration activities
They provide a regional total average here below, you can see it stripped out more specifically in the full report.
The 2020 report from UBS also included some detail on staffing and IT costs: more than a third (39%) of family offices report significant or moderate upwards pressure on salaries, and a similar percentage (35%) for IT.
This is all pre-COVID but I’m not sue how much of this has changed, hopefully there is an updated costs survey at some point, I know that Agreus/KPMG is producing a Family Office remuneration survey which should shed some light on how the below chart has changed:
How Should You Calculate Costs
In my experience, it’s always a great idea to write down all the functions that can be attributed to the office. If it’s an embedded office, you need to include the costs of using operating business staff and resources. For standalone single-family offices, you have to account for every drag on return.
A few to start with:
Staffing costs – be clear on time allocations, this can come in handy when looking at outsourced versions of low value task given to highly reciedtionalled staff members.
Investment fees – this is difficult to do on a continuous basis, but a yearly review should be completed. Make sure to use the Total Cost Ratios of your investment, particularly those structures that may be opaque in how they charge fees. External consultant, deal arrangers, real estate, costs should be included here.
Administration costs – include staff time and days taken to complete tasks. Make sure layered fees are included such as custodians.
Subscription fees – a weird one I know, but looking at my own company the number of subscriptions can add up, particularly those for SaaS that can run into the thousands per year.
Professional services cost
Advisory – everyone that gets paid to assist the office.
Why Do this?
Discover the true costs of running the office and decide on where there is over or underspend, where there are insource vs outsourcing options available.
Provide a benchmark for the family and other stakeholders as part of a yearly review of running costs.
Provide internal staff agency to run it like a company, increase efficiencies and have an ability to provide evidence they are performing.
Determine the efficacy of your suppliers, also gain clarity on where your basis points of costs are allocated.
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