Key Takeaways
- • Cambridge Associates' white paper finds total annualized wealth management costs for wealthy families typically exceed 100 basis points (1.0%) of investible assets, with a cited range of 115 to 175 bps.
- • Investment services usually account for half or more of total wealth management expenses, according to the study.
- • Complexity of alternative investments in a family's portfolio and economies of scale are the two main drivers of cost variation.
- • A higher number of accounting and tax entities typically requires more sophisticated tax and estate planning, advanced monitoring and more robust reporting, raising costs.
- • The paper, authored by Charlie Grace of CA's family enterprise solutions group, frames a "build or buy" decision between in-house family office capabilities and third-party providers.
Summary
A new white paper from Cambridge Associates examines the cost considerations that families with large wealth face in managing their assets, factors that often influence whether they rely on outside specialists or manage money in-house. The study, written by Charlie Grace, managing director of family enterprise solutions in CA's private client practice, looks at typical ranges for annualized investment and non-investment costs and how those costs are allocated between a family office and third-party service providers.
According to the report, total costs are usually more than 100 basis points, or 1.0% of investible assets, with CA placing the typical range between 115 and 175 bps. Grace cautions that costs for wealthy owners can fluctuate widely depending on individual family circumstances, and that a good number will fall outside the ranges shown in the paper. Investment services typically represent half or more of total wealth management expenses.
The paper identifies two main factors behind cost variation: the complexity of alternative investments in a family's portfolio and economies of scale. It notes that the number of family households or financial entities affects costs in a straightforward way, with more households and entities meaning higher costs. Other factors act less obviously; for instance, a greater number of accounting and tax entities generally requires more sophisticated tax and estate planning design, advanced monitoring and more robust reporting. Figure 5 of the study provides a hypothetical example showing how larger and more complex wealth management requirements can substantially increase a family's total cost.
Grace frames the central choice as "build or buy." Families can construct wealth management capabilities and individualized services inside a family office, or outsource some or all functions to a third-party provider. Costs may also be shared between the two, such as when a family office handles some accounting work while a third party handles other accounting services, in which case the cost buckets should be allocated accordingly.
According to the report, total costs are usually more than 100 basis points, or 1.0% of investible assets, with CA placing the typical range between 115 and 175 bps. Grace cautions that costs for wealthy owners can fluctuate widely depending on individual family circumstances, and that a good number will fall outside the ranges shown in the paper. Investment services typically represent half or more of total wealth management expenses.
The paper identifies two main factors behind cost variation: the complexity of alternative investments in a family's portfolio and economies of scale. It notes that the number of family households or financial entities affects costs in a straightforward way, with more households and entities meaning higher costs. Other factors act less obviously; for instance, a greater number of accounting and tax entities generally requires more sophisticated tax and estate planning design, advanced monitoring and more robust reporting. Figure 5 of the study provides a hypothetical example showing how larger and more complex wealth management requirements can substantially increase a family's total cost.
Grace frames the central choice as "build or buy." Families can construct wealth management capabilities and individualized services inside a family office, or outsource some or all functions to a third-party provider. Costs may also be shared between the two, such as when a family office handles some accounting work while a third party handles other accounting services, in which case the cost buckets should be allocated accordingly.
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