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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
As the world’s richest build their fortunes, they are spending more to run their private investment companies, according to a recent report from JP Morgan Private Bank.
Family offices with at least $1 billion in assets spent an average of $6.6 million in annual operating costs, according to the bank’s survey. The average cost has increased by $500,000 since JPMorgan’s previous family office survey in 2023.
Kirby Rosplock, a family office consultant, said increased spending is a natural result of increasing wealth.
“Typically, offices will try to reduce their expense items if they feel like their assets are decreasing,” said Rosplock, CEO of Tamarind Partners. “Most people don’t realize that the volume of wealth created in the last decade means more heads, more bodies, more people are needed to support more systems.”
William Sinclair, global co-head of JP Morgan Private Bank’s family office practice, attributed much of the spending increase to the increased costs of compensating investment talent, which accounts for the largest portion of operating budgets.
“There is a war for talent, and family offices are competing with other financial services and related businesses – private equity and hedge funds – if they are trying to build an investment team,” he said.
While family offices have embraced outsourcing, Sinclair attributes this more to talent shortages than to covering costs. Around 80% of family offices said they had outsourced at least part of their portfolio, but only 28% said reducing costs or resource burden was a primary factor in achieving this.
When selecting external advisors, factors such as desirable track record and access to private investment are given much more weight, according to the report.
Natasha Pearl, a family office advisor, said some family office executives pay little attention to rising costs, favoring the privacy and control inherent in a single-family office over relying on third-party providers.
Many leaders of ultra-wealthy families also lose track of their spending because they own multiple investment entities and holding companies, she added.
However, their children are more likely to experience sticker shock, Pearl said. It’s common for heirs to consider consolidating costs or even eliminating the family office altogether after their parents die, she said.
“The next generation will look at it and say, ‘Whoa, our parents paid that much money? We want that money,'” she said. “The next generation might have their own children by then, or even grandchildren, given how long people live, right? So, you know, they have to be a lot more concerned about how to make that money work.”