March 3, 2011

Wealthy Families Can Cut SFO Costs by Reducing Complexity

Are family members aware of the complexity-cost equation in the family office? It’s crucial to sustaining the services they value most.

Complexity in family offices can lead costs higher, says the Family Office Exchange (FOX) in a new report released Thursday. “The Cost of Complexity, Understanding Family Office Costs,” states that the more services a family office offers and the higher the number of family members served by such an office, the higher the costs generally are. But while some “complexity” is necessary and good, other “complexity” could be unnecessarily raising costs, and could be eliminated, according to the executive summary of the report.

“Careful analysis of family office operations and cost data clearly shows complexity is the single biggest driver of costs,” Lisa Ottum (left), senior research analyst for FOX and lead author of the FOX study, said in a press release.

“Awareness” is a key issue, the report asserts: “Even those who are highly satisfied with their office services often have a limited awareness of the complexity of work done in the office and the resulting costs. This lack of awareness endangers the crucial link between effective cost communications and office sustainability.”

“The scope of services offered and the size of the family both contribute to complexity, but it is the number of entities supported by a family office—including individuals, households, trusts, and partnerships—that is the best predictor of office costs,“ Ottum states in the release. “Each of these entities generates additional service needs and transactions that must be fulfilled by office staff, stretching the capacity of existing employees and ultimately increasing office expenses through additional hiring.”

Engage Family Members

FOX recommends that executives in family offices take steps to understand the “drivers” of family office costs and “engage” family members in “deeper and more frequent conversations about office costs, fees, and office funding.” And to make sure these points get across, the report recommends that executives see how effective their communication is by checking in with the “least engaged” family member—“how well does the least engaged family member understand the service value relative to costs and fees?”

The report further advises that executives identify “necessary and unnecessary complexity” and change the factors that drive “unnecessary complexity,” such as gaps in “skill sets,” or technology that does not serve the needs of the family office anymore, such as “reconciliation and reporting.” Family office executives can also reduce “redundancies,” or “lack of coordination or communication among advisors.”

Pitcairn, a multi-family office and FOX member, co-sponsored the study.

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