The hidden costs associated with running a family office

Yes, the most expensive part of running a family office are staff salaries. But here’s another set of costs that rarely get mentioned and are potentially very expensive as well.

These costs are linked to governance and can cost a family office millions of dollars unless they are dealt with effectively. The first one is what is referred to as family blockholder costs and the second is called double-agency costs. They are among many topics discussed in a new publication released by the professional services group EY and called the Family Office Guide.

Family blockholder costs can emerge when not all family members agree on the strategy of the family office. The guide gives an example of these costs: “...one member of the family might be interested in short-term liquidity to finance lifestyle ambitions, whereas other members might be more interested in holding onto investments for potentially better long-term gains. This can lead to a misalignment of interest, which is a ‘cost’ to the efficient running of the family office.”

Similar to family blockholder costs, double agency costs, can emerge when the interests of the family conflict with the interests of those non-family members hired to manage the family wealth. “An example of this is when the family is more concerned with the long-term outcomes of managing their wealth, compared with the often short-term outlook of family officers and their subordinated asset managers who look to maximize their own financial benefits to the detriment of the family’s wealth,” says the guide. “This leads to a misalignment of interests, which is a ‘cost’ to the efficiency of the family office.”

OK, both of these costs are associated with governance, but are probably at least apparent in some form or another in many family officers. Anyway, more details of how to mitigate these conflicts and improve efficiency at family offices are found in the guide, which also looks in detail at the processes associated with setting up a family office, the investment process, IT platforms and risk management.