Ultra-rich families are spending more at private investment firms as their wealth rises

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

As the world’s richest people invest their wealth, they are spending more to run their own investment companies, according to a recent report from private bank JP Morgan.

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

Family office consultant Kirby Roslock said rising expenses are the natural result of rising wealth.

“Offices typically try to reduce their expense items if they feel their assets are shrinking,” said Roslock, CEO of Tamarind Partners. “Most people don’t realize that the amount of wealth created in just the last decade means you need more heads, more bodies, and more people to support more systems.”

William Sinclair, global co-head of the family office at JPMorgan Private Bank, attributed most of the increase in expenses to higher compensation costs for investment talent, which represents the bulk of operating budgets.

“There is a war for talent, and family offices are competing with other financial services and related firms — 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 to a lack of talent rather than to shouldering the costs. About 80% of family offices reported outsourcing at least some of their investment portfolio, but only 28% said reducing costs or resource burden was a key factor in doing so.

When selecting outside advisors, factors such as desirable performance records and access to private investments ranked significantly higher, according to the report.

Some family office managers don’t care much about rising costs, prioritizing the confidentiality and control that comes with a single-family office versus using outside vendors, said Natasha Pearl, a family office consultant.

She added that many wealthy family managers also miss out on expenses because they have multiple investment entities and holding companies.

However, Pearl said their children are more likely to suffer from sticker shock. 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 take a hard look and say, ‘Oh my God, our parents were paying this much money? We want this money,'” she said. “The next generation may have children at that point or even grandchildren, given how long people live, right? So, you know, they should be more interested in how to grow that money.”