To start a family office … or not? Question sparks heated debate on Reddit
The surge in growth of family offices in recent years has generated heated debate among ultra-high-net-worth people over the pros and cons of starting their own office. Such discussions have even spilled over into Reddit, the social media platform better known as a hangout for conspiracy theorists and other obsessives.
This past weekend, one user inquired about the level of wealth needed to start a family office: “how fat do I need to be?” They wondered: “I suspect once you factor in cost of staff, operations, etc. you might need to be in the $200M range.”
The responses ranged from the pithy to the philosophical and included a few revealing insights into the usually discreet world of family offices. When one user suggested that those on the lower end (less than $10 million) might be interested in a multifamily office, another responded:
“So hiring any ‘money manager’ to manage your assets is like playing Russian Roulette with 99 bullets in the gun and 1 open chamber. My friends have been swindled out of so much money this way. It's millions of dollars lost. I've never heard ONE positive story yet.”
That pessimistic attitude was dismissed by a user claiming to work for a major bank in Canada, which offers family-office services at $30 million for a 0.5% fee and includes lawyers, accountants, estate planning, private banking and portfolio management. “And you’re likely getting much better investment, tax & legal advice than you could hire yourself,” the user wrote. “It makes very little sense to do it yourself these days unless you simply want maximum control. But it’s hardly ever cost efficient.”
Another user chimed in with a more nuanced response:
“I'm the 3rd generation of a wealthy family that has a single family office. While I'm absolutely not an expert I feel like I'm somewhat qualified to answer this question… Ours is based in Western Europe and relatively small, it has ~10 employees: CEO, CIO, CFO and then the rest are accountants and admin staff. There are no investment analysts, the CIO is solely responsible for the investment decisions. Our family office was set up in the 90s and has expanded gradually over time. It's more about wealth preservation than capital growth so we're not overly aggressive in how we invest. At the beginning most of the wealth was tied up in one stake in a publicly listed company. Over the years it has become more diversified as windfalls were reinvested. There is still one relatively large stake in a name brand, publicly listed American company (it's only a small cap but it's well known). The rest has been reinvested into various different areas. Most of it is allocated into PE and VC funds. We also do some direct investments into real estate and private businesses. We invest a small amount directly into startups but that is more rare. There are some other smaller stakes in publicly listed companies but we're not stockpickers and tend to avoid doing stuff like that.
I can't say exactly how much it costs to run it because I don't know the employees' exact salaries but if I had to guess I'd say it's probably ~€2mn, so not far off what your estimate. Like I said, I'm not some family office expert but I do have some direct experience with one so I can offer some insight.”
That prompted a reader to quip:
“Your family office has 10 employees but only one that analyzes investments? That sounds insane to me. What does your CEO do?” The European family office member replied: “The CEO is more of a tax person and which takes up a considerable amount of time but to be fair I think the CIO and CEO both work on investment decisions, even though the CIO obviously spends more time on it. I could have worded it better. Also most of the investment analysis is outsourced since we mainly invest in funds and do a much smaller amount of direct investments. I'd also like to stress that I don't oversee the day to day operations so I can't comment on the exact functions of every employee, I'm simply one member of a large family.”
When another user suggested that CIOs could be hired for $400K, a reader replied:
“Do you think CIO only makes 200k more than [an] analyst? CIO jobs are all 1mn above. Believe me, I work in this industry. Analyst jobs can have a wider range of pay but maybe 100k for 22 year old and go up from there. Other considerations are how much you want to do in terms of private/alternative investments. Investing in mutual funds cost 0 to do essentially, but if you want to invest in private equity funds, review LPA, negotiate side letter, and do it correctly legally, then there is really no budget you can set for legal fees. It just depends on the GP and how long is the back and forth between the lawyers. Lastly, investment and operational due diligence cost money. Travel can be a huge piece. ODD is likely outsourced and run about 10k per fund. So much cost, but variable. If you have scale, like a multi billion dollars, a typical endowment is run by 25 bps of AUM. If you have less than 1bn, then that bps will look a lot higher because there is a minimum level of cost is required.”
And the debate continues…