New Family Office Angst; the annual cost of running a $100 million family office is as high as 1% of assets, or $1 million. That’s four or five times more expensive than the cost of operating a larger shop of, say, $1 billion

July 1, 2013, 4:19 P.M. ET

New Family Office Angst

By Robert Milburn

According to Robert Casey, senior research director at the Family Wealth Alliance, the annual cost of running a $100 million family office is as high as 1% of assets, or $1 million. That’s four or five times more expensive than the cost of operating a larger shop of, say, $1 billion.

As Penta first noted two years ago, compliance costs associated with the Dodd-Frank financial legislation was forcing single and multifamily offices to merge. That’s what it has done. The market for single family offices seems to have reached the mature stage, with no asset growth since 2005, while the average assets of a multifamily office have grown threefold to $7.4 billion.Consider Threshold Group, the multifamily office that manages the money of the Russell Family. Threshold lowered its minimum account size to $5 million, allowing it to absorb smaller family offices and gain in the economies of scale associated with spreading costs across a larger group of clients. The rationale is simple, explains Richard Wilson, CEO of the Family Offices Group; at a certain level you might only need one or two more account managers to take on another billion dollars in assets.

But even larger single family offices run the risk of operating inefficiently if not up on the latest best practices. Wilson, whose firm provides research and training for the family office industry, describes being approached by an $850 million single family office. This medium-sized office was run single-handed by a son who conducted day trading, oversaw its hotel and resort management, while also vetting  the hedge fund and private equity fund managers the family wanted to invest in.

“If you don’t connect with other single family offices and learn industry best practices then it’s easy to be caught flat footed,” Wilson says, “leaving the firm exposed to fraud or excessive fees simply because you don’t have enough eyeballs on the problems.”

Wilson’s narrative is consistent with the finding of a security survey by the Family Wealth Alliance, an independent advisory for families seeking wealth management intelligence. The group notes a high incidence of theft and security breaches, with 29% of those surveyed reporting incidence of fraud, and another 21% reporting a burglary or robbery. Meanwhile, 71% of family offices do not employ an outside security consultant. It is striking that 25% of clients are either “not sufficiently informed” or “not informed at all” of everyday security threats.

The Alliance estimates there are about 3,500 single family offices in the U.S., with average assets of about $500 million, and around 200 multifamily offices, with assets around $7.4 billion. Alliance’s clients continually claim that basic sustainability is their primary concern, but anyone reading the newspapers these days will be aware that beefing up cyber security is a basic necessity in an era that is increasingly digital.

“The criminal business model is relatively simple,” explains Paul Viollis, CEO of Risk Control Strategies. “The wealthy are the low hanging fruit and the family office is where that fruit is stored with very little protection.” His firm, which provides security advisory services for wealthy clients, found a 52% year-to-date increase in cyber attacks alone in the second quarter versus this time last year. The threats are numerous, Viollis says, including disenfranchised Russian hackers, Southeast Asian organized crime, and dishonest family office employees.

Viollis cites a trove of horror stories, including a case where a data-filled laptop was stolen from an executive at an airport, and a family office employee who became a thief when her son began having financial issues. One bold burglar even made off with an exchange server that was kept in a broom closet and was storing all the office’s financial data.

The good news? The Alliance researchers are quick to downplay the added cost of increased security, arguing it’s more an issue of consciousness rather than massive costs – as the avoidable broom closet fiasco illustrates. Indeed, the Alliance’s Managing Director Kathleen McBride calls the gap between awareness and the actual threat “an opportunity for education” rather than any serious operational  impediment.

Let’s see in the coming year how many family offices actually get educated.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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