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A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
As the world’s wealthy grow in wealth, they are spending more on running private investment companies, according to a recent report from JPMorgan Private Bank.
Family offices with at least $1 billion in assets spend an average of $6.6 million a year in operating costs, according to the bank’s research. Compared to JPMorgan’s last family office survey in 2023, average costs have increased by $500,000.
Family office consultant Kirby Rosprock said the increased spending is a natural consequence of soaring wealth.
“Typically, when offices feel their assets are shrinking, they try to reduce expense items,” said Rosprock, CEO of Tamarind Partners. “Most people don’t realize that the amount of wealth created over the past decade means we need more heads, more bodies, more people to support more systems.”
William Sinclair, global co-head of family office practice at JPMorgan Private Bank, attributes much of the expense increase to higher compensation costs for investment talent, which makes up the majority of operating budgets.
“There’s a war for talent, and as family offices try to build investment teams, they’re competing with other financial services and related businesses, private equity and hedge funds,” he said.
Family offices have embraced outsourcing, but Mr. Sinclair believes this is more due to a lack of talent than a cost burden. Approximately 80% of family offices reported outsourcing at least part of their portfolio, but only 28% said the main reason for this was to reduce costs and resource commitments.
The report found that factors such as desirable track records and access to private investment ranked far higher when choosing external advisors.
Family office advisor Natasha Pearl said some family office principals pay little attention to rising costs and prioritize the confidentiality and control that comes with a single-family office over the use of third-party vendors.
He added that many members of ultra-wealthy families have multiple investment and holding companies, making it difficult to keep track of their spending.
But their children are likely to experience sticker shock, Pearl said. After a parent passes away, she says, it’s common for heirs to consider consolidating expenses or eliminating the family office altogether.
“The next generation is going to look closely and say, ‘Hey, our parents were paying that much money? We want that money,'” she says. “If you think about the human lifespan, at that point the next generation may have their own children, they may have grandchildren, right? So they need to worry more about how they’re going to grow that money.”
