Ultra-rich families spend more on private investment firms as fortunes rise

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

As the world’s wealthiest pad their fortunes, they are spending more to run their private investment firms, according to a recent report by J. P. Morgan Private Bank.

Family offices with at least $1 billion in assets spent an average of $6.6 million in annual operating costs, the bank’s survey found. The average cost has increased by $500,000 since JPMorgan’s previous family office poll conducted in 2023.

Family office consultant Kirby Rosplock said the rise in expenses is the natural result of the surge in wealth.

“Usually offices try to reduce their expense line items if they feel like their assets are shrinking,” said Rosplock, CEO of Tamarind Partners. “Most people don’t recognize that the volume of wealth created just in the last decade means that you need more heads, more bodies, more people to support more systems.”

William Sinclair, global co-head of J. P. Morgan Private Bank’s family office practice, credited much of the increase in expenses to rising compensation costs on investment talent, which are the largest portion of operating budgets.

“There is a war for talent, and family offices are competing against other financial services and related businesses — private equity and hedge funds — if they’re trying to build out an investment team,” he said.

While family offices have embraced outsourcing, Sinclair attributes this more to talent shortage rather than defraying costs. About 80% of family offices reported outsourcing at least some of their portfolio, but only 28% of them said reducing costs or resource burden was a main factor for doing so.

When picking external advisors, factors such as desirable track records and access to private investments ranked much higher, according to the report.

Natasha Pearl, a family office advisor, said some family office principals pay little heed to cost creep, prioritizing the confidentiality and control that comes with a single-family office versus using third-party vendors.

Many principals of ultra-wealthy families also lose track of their expenses as they have multiple investment entities and holding companies, she added.

However, their children are more likely to get sticker shock, Pearl said. It’s common for heirs to consider consolidating costs or even unwinding the family office altogether after their parents pass, she said.

“The next generation will take a close look and say, ‘Whoa, our parents were paying that much money? We want that money,’” she said. “The next generation may have children of their own at that point or even grandchildren, given how long people are living, right? So, you know, they’ve got to be a lot more concerned about how to make that money stretch.”