Family offices: when the math works

In short

A friend of mine once asked whether a family office was something only the Rockefellers could afford. It is not, but it is not cheap either. A family office is a private company that runs the money and paperwork of one wealthy family. It costs real dollars every year, so the math has to work before the idea does. Add up the yearly cost of the staff, the advisers, and the software. Divide that by the assets the office would run. If the result is a small slice of those assets, the math may work. If it is a big slice, a cheaper setup probably fits better.

The whole of it

What it is

I once sat beside a man at a funeral who owned three businesses, two ranches, and a stack of trusts. He told me he spent more time on paperwork than on his grandchildren. That is the problem a family office tries to fix.

A single family office is a company set up to serve one family and no one else. It may handle investments, taxes, bill paying, trusts, insurance, and the family's giving. It may also keep the books for the family's homes, planes, and art. Some offices have a dozen employees. Some have two.

There is also a shared version, called a multi family office. One firm serves many families and splits the cost among them. That is a different animal, and its fee is often a smaller share of assets than a private staff would cost a family. This guide stays mostly with the single family kind, because that is where the math gets tricky.

A family office is not a magic trick. It does not make money by existing. It is a way to buy control and coordination, and those carry a price tag.

How it works

If you are weighing one, you have probably wondered who actually runs it. The answer is that the family hires people. A chief executive or office manager leads the daily work. An investment professional watches the portfolio. An accountant handles taxes and reports. A lawyer, often outside the office, handles trusts and contracts.

The office is usually a legal entity of its own, such as a limited liability company. That entity pays salaries, rents space, and buys software. The family pays the entity, or the entity is funded from the family's investments.

Here is a point that trips up many families. Pay for a family office is not like a fee on a fund. A fund fee is a percent of assets. A family office has fixed costs that stay put whether the markets rise or fall. A payroll bill does not shrink in a bad year.

That fixed cost is why size matters so much. Spread $400,000 of cost over $20,000,000 and it is 2 percent, which feels heavy. Spread it over $200,000,000 and it is 0.2 percent, which feels light. The office did not change. The base under it did.

A family should also know that the law treats these offices in particular ways. The Securities and Exchange Commission has a rule that exempts certain family offices from registering as investment advisers. The family office exclusion sits within the Investment Advisers Act of 1940, and the SEC publishes the current rule text on its own site. It has conditions, so a lawyer should confirm a given office fits inside it.

The numbers, and where to find yours

You probably want a few figures to test your own situation. Some of them come from your own records. Some come from the law.

Start with your own total. Gather the value of every account, business, and property the office would handle. Your latest statements and your accountant's balance sheet are the places to look.

Next, find your cost estimate. Ask for written quotes. Get a salary range for each role from a recruiter or a compensation survey, and add payroll taxes and benefits. Then add office rent, software, insurance, audit and legal fees, and outside adviser fees.

Then there are the numbers set by law. The federal estate tax exemption is the current figure, which the official source publishes each year. The annual gift tax exclusion is the current figure, which the official source publishes each year. The top federal income tax rate is the current figure, which the official source publishes each year. The Internal Revenue Service publishes these on its own site, and the site fills in the verified figure with its source and date. These matter because much of an office's work is planning around them.

One more number is worth finding. That is the total cost as a share of assets. Divide the yearly cost by the assets run. Keep that figure in front of you.

A worked example

Let me tell you about a woman I will call Margaret Hale. She sold her family's trucking company and now holds $60,000,000 in investments and real estate. She has two grown children and a tangle of trusts.

Margaret priced out a small single family office. She would need a chief executive at $180,000, an accountant at $120,000, and an investment analyst at $150,000. Her accountant told her to set aside a plain 20 percent for payroll taxes and benefits, and she used that as her own working figure, though the real amount depends on the state and on the benefits the office offers.

Pay comes to $180,000 plus $120,000 plus $150,000, which is $450,000. Her 20 percent working figure is 0.20 times $450,000, which is $90,000. So staff costs $540,000 a year.

Then she added the rest. Rent and office costs came to $60,000. Software and data came to $40,000. Insurance came to $30,000. Legal, audit, and tax filing help came to $70,000. That is $60,000 plus $40,000 plus $30,000 plus $70,000, or $200,000.

Her total is $540,000 plus $200,000, which is $740,000 a year.

Now divide by her assets. $740,000 divided by $60,000,000 is 0.0123, or about 1.2 percent of her assets. That is her yearly cost as a share of what the office runs.

Margaret then compared a multi family office. A firm quoted her 0.60 percent a year. 0.006 times $60,000,000 is $360,000. That is $380,000 less than her own office, since $740,000 minus $360,000 is $380,000.

So for Margaret, the math did not favor her own office at $60,000,000. Had she held $250,000,000, the same $740,000 divided by $250,000,000 is 0.00296, or about 0.30 percent, and the picture would change. Same office. Different base.

Where it goes wrong

I have noticed that good people get into trouble here for kind reasons. They want control, privacy, and a place for the family to gather. Those are fair wishes. They just have to be weighed against the bill.

The first trap is the fixed cost. Payroll keeps running when assets fall. A family that sizes the office on a good year may feel squeezed in a bad one.

The second trap is hidden work. Families often forget the cost of compliance, background checks, and cybersecurity. A single data breach can cost a family real money and real trust.

The third trap is the key person. If one trusted manager leaves, the office may lose its memory. Families should write down procedures so the office does not depend on a single mind.

The fourth trap is family friction. An office that serves several branches must decide who gets a say. Without clear rules, a fee schedule can turn into a feud. Write the rules early.

The fifth trap is the legal fit. An office that treats outsiders like clients may cross a legal line. The SEC exemption has conditions, so ask a lawyer before taking on a cousin's money or a friend's.

Last, do not forget the cheaper roads. A trust company, a private bank, a good wealth adviser, and a multi family office can each cover a lot of ground. A family can start with one of those and build up only if the need grows.

Questions to answer before you leave this page

Have you added up every dollar of cost, including payroll taxes, rent, software, insurance, and legal help, and divided the total by the assets the office would run? Does that share of assets feel fair next to what a multi family office or a private bank would charge? If markets fell and income dropped, could the family still carry the fixed payroll without strain? Who would lead the office day to day, and what happens if that person leaves? Have you written down who in the family has a say, and how disputes get settled? Has a lawyer checked whether the office fits the SEC family office exemption under the Investment Advisers Act of 1940? And have you asked yourself what you truly want from the office, whether control, privacy, or simple peace of mind, and whether a cheaper setup could give you the same?