Unlocking success: Insights from the Family Office Operational Excellence Report 2024
While the purposes of any single family office can range from managing the family assets to overseeing an expanding set of other important wealth and family matters, they are at their core businesses striving for excellence, just like any other enterprise.
The significant expansion of services family offices are being asked to deliver has necessitated a greater need for professionalisation and higher accountability for achieving good outcomes (not just investment related). However, as family offices are typically unique and private, gathering information on how they operate is naturally a difficult task.
The Family Office Operational Excellence Report 2024, the inaugural survey conducted by Campden Wealth and AlTi Tiedemann Global, reveals how business is conducted within these family-run organisations. The research, conducted between April and September 2023, involved interviews with 98 family offices with 66% of the respondents holding senior leadership positions within their respective family offices. On average, the participants had assets under management (AUM) of US $1.4 billion. The findings were split into three tiers by AUM size. (small: sub $250 million, midsize: $250 million to $1 billion and large: over $1 billion)
The report focuses on key drivers of operational excellence tied to how well the family and the office operate as two separate but integrated and equally important pillars driving success. How well the office operates is tied to key factors such as costs, talent, technology and risk management and how well the family functions is driven by governance, education, succession, and satisfaction.
Operational costs
The report found that investment management is the primary focus for the smaller-sized family offices (approx. 50 percent of costs) but it becomes less significant for larger family offices as the scope of services expands with investment management accounting for only 25 percent of costs in midsize to large family offices.
The report also reveals that compensation levels for C-level executives are significantly lower in smaller family offices versus what large family offices pay. Average compensation for a chief investment officer was found to be around US $337,000 for small v US $821,000 for large family offices.
Family office employee satisfaction
Recognising the cost and compensation differences between small and larger-sized family offices, it is interesting and perhaps not surprising to see the relationship to employee satisfaction. Most family office staff express contentment with operational dynamics and workplace culture, but family members working in a large family office (AUM > US $1 billion) are much more likely to be satisfied than those working in a small family office (AUM < US $250 million) where dissatisfaction levels are highest.
“In smaller and less structured family offices, it's common for the principal to exert significant control,” shares Adam Ratner, Director of Research at Campden Wealth. “However, this dynamic can sometimes result in tensions with staff members, whose relationships with the principal may be challenged by perceived gaps in performance or conduct.”
“Large family offices have more assets and can therefore be more comfortable with a higher cost structure that allows them to address a broader scope of services and needs, as well as building a more professional work environment that includes the creation of formalised governance structures, hiring a broad team of talent, and implementation of transparent decision-making processes,” says Erik Christoffersen, Head of the family office practice at AlTi Tiedemann Global. “With larger budgets, they can hire more staff, invest in stronger outsourcing partnerships, and create a robust culture. As a result, these large family offices are more likely to have clearly defined goals and outcomes, allowing family members to assess the success of the family office beyond just investment performance. All of which contribute to higher satisfaction.
“Conversely, small family offices typically focus on investment management since they have to prioritise a narrower scope of services. With the majority of their work being investment-related, family members may perceive the family office’s value primarily based on investment performance, which is subject to market fluctuations.”
Succession planning is difficult but critical
The survey reveals that despite the majority wanting to sustain the family office across generations, only a little over half (57 percent) of family offices have a succession plan and a large proportion of these plans are incomplete or only informally discussed and agreed upon.
“Although it is uncomfortable to plan for and talk about one’s death, it is essential for a family office to have a written and communicated plan in place at all times to ensure a smooth transition in the event of illness, incapacitation, or passing of family and/or office leaders,” says Jill Shipley, Head of Governance and Education at AlTi Tiedemann Global. “Avoiding or postponing this planning can have serious consequences for the family and may jeopardize the longevity of the family office.”
Dedicated staff vs. outsourcing
More than 80 percent of family members were satisfied with their dedicated staff, and three out of four said that in-house staff was the best way to ensure timely, consistent, high-quality output. Yet approximately 70 percent indicated difficulty recruiting staff and 65 percent of them were concerned about retaining existing staff.
Understandably, staff turnover was identified as the biggest operational concern for family offices after cybersecurity. Therefore, it came as no surprise to see that all family offices consider outsourcing an important solution for supplementing their in-house staffing and expanding the scope and quality of work they are capable of competently performing for the family. Also, many see this as an effective cost management approach since some of the work does not justify a full-time employee.
“Family offices are finding themselves in an ongoing war for talent. We have seen many family offices use outsourcing as an effective way to get access to specialised skills and expertise where recruiting efforts come up short,” said Richard Joyner, Family Office Advisor at AlTi Tiedemann Global.
Operational risks with an emphasis on cybersecurity
The report highlights the relatively high awareness family offices have to a host of operational risks but also calls attention to the inadequacies many of these same offices have taken to properly manage them. First and foremost is cybersecurity was ranked as the #1 risk (59 percent of participants) and just this past year 12 percent experienced an incident.
The findings here just confirm what has been an issue for family office for many years now. But it seems that many are not making much progress in mitigating this risk with over 50 percent reporting there were less than confident with the steps they have taken. As Ratner points out, “there is a perception (and a true reality) that one can never stop investing in cybersecurity otherwise the family office will become more and more vulnerable each year.”
On a positive note, more than two thirds of family offices have taken a number of measures to minimise operational risks. These include back-up servers to protect against data loss, dual-authorisation of payments, remote access controls and business continuity planning. These are important steps and should give them comfort that they are making progress in some key risk areas. However, the majority of small family offices have adopted fewer risk mitigation solutions.
“Small family offices might perceive themselves as less likely to be targeted compared to larger financial institutions or corporations” says Ratner. “This perception of low risk could lead to serious vulnerabilities. This, coupled with limited budgets, may result in small family offices de-prioritising operational risk management over other family office needs. The net results being complacency and underestimation of the consequences of their vulnerabilities.”
Investing in technology can make a real difference if done right
While technology investment ranks high among family offices’ priorities, just 26 percent of respondents report having leading-edge solutions for investment and operations technology. It appears that in many cases technology investment is tied to the decade the family office was created, which means many older firms have technology that is inefficient or sub-optimal.
Many families are hindering better operational excellence by investing too little in technology,” says Christoffersen. “Their reliance on outdated methods and tools risks them falling behind in getting better data faster and with lower utilisation of resources. It likely also includes higher error rates. Without awareness of more efficient systems or the risks involved, they may operate with a false sense of security, potentially leading to inaccuracies or lower efficiencies.”
A prime example of this is with data aggregation solutions. Wealth aggregation software, which provides an enterprise view of family office assets and relevant wealth information, is a relatively new addition to the technology stack, but the adoption rate is still low at 25 percent. “For some smaller family offices, the necessity of knowing their financial position at any given point in time may not be as pronounced,” remarks Peter Toeman, Senior Researcher at Campden Wealth. “In such instances, the perceived benefits of investing in an expensive wealth aggregation system may not outweigh the associated costs.”
Proper governance documentation is essential
In closing, the findings around governance shortfalls starting with documentation should get the attention of every family office. If you consider the success of any governance framework depends upon how well it is documented and regularly used, while around 60 percent had some documentation in place (e.g., mission statement, investment framework), noticeably absent was documentation of a conflict resolution mechanism, family constitution, risk management guidelines and family history and values.
Taking the time to develop and proactively document a governance framework will provide more clarity and unity within the family and enable more effective decision-making in the family office.
“Our experience is that families and the family offices who serve them recognise the importance of formalising decision-making structures and dedicating time to document and integrate these practices into their operations. Governing documents help the office more effectively define annual objectives aligned with the family’s priorities, enhance multigenerational communication and relationships foster a cohesive culture, and effectively navigate conflict and division that may arise in successive generations,” says Jill Shipley.
Families are also witnessing a growing desire for the financial decisions in a family to be more driven by the family’s values and goals. ‘Making money’ just isn’t enough for many young family members, and decisions about family offices need to incorporate a mindset that reflects value and greater impact. Considering the needs and goals of the next generation in the family is critical to the longevity of the family office.
Summary
To best assess the operational excellence of the family office, it is essential to ensure that it is focused on the right goals and evolving needs of the family. And on the back-end, the family office must seek honest feedback from both family members as well as staff. Together this will form the cornerstone for organisational learning and adaptation which will determine just how successful the family office is in achieving excellence.
