Wealth is not the only decisive factor: Why “small” single family offices are worthwhile

"Without €250 million in investable assets, you shouldn't even consider establishing your own family office." We hear this statement a lot these days. Whether it's a long-time venture capital investor, private banker, or multi-family office board member, from the perspective of these market participants, structures formed below this asset threshold appear more like a hobby than a serious family office.

And this view is not uncommon abroad either: The author of a major US family office newsletter recently wrote that, in his view, the threshold for a proper single family office would be more in the range of 1.5 to 2 billion (!) dollars.

Such statements, of course, must be viewed in their respective context. For example, the statement regarding the 1.5 to 2 billion threshold was made in the context of family offices that themselves want to pursue an institutional direct investment strategy in asset classes such as private equity. To be fair, we also advise our family office clients to exercise caution when entering the direct investment business too quickly.

“As we have experienced in practice, ‘small’ family offices are profitable much sooner than traditional market participants claim.”

However, the question of minimum size often arises in the context of what exactly defines a family office. We often see market participants defining a "real" family office by whether it has a dedicated team for each asset class or enables the internal provision of niche services – which, in fact, are only worthwhile for those with substantial assets.

But that's not our definition of a family office. For us, a family office serves to support owners, especially in all their wealth-related matters, and therefore always has a right to exist if it delivers (perceived) added value for the owners in these matters beyond the associated costs. Regardless of the size of the underlying assets.

We would like to explain how we define the range of services offered by a “small” family office and how we have experienced in practice that such structures pay off much sooner than traditional market participants claim – with both quantifiable and qualitative examples.

What defines a small family office?

As evident in our introductory paragraph, the definition of a (single) family office is a much-discussed topic. The minimum size is undoubtedly just as much a point of discussion as the precise scope of services. More relevant to us, however, is the question of what, in our view, characterizes a small family office. We see three key points:

• The small family office has a limited circle of owners. Some small family offices are founded by a single owner. We often also see joint structures of co-founders of a joint venture or a first-generation family.

• A small family office has limited capital. This investable capital allows for a clear return on investment on the family office's costs. Nevertheless, the combination of limited capital and a small team necessitates weighing up which issues can be effectively managed internally and which must be outsourced.

• The small family office has limited complexity. Since it (usually) doesn't have to manage multi-billion dollar structures with double-digit numbers of globally distributed family members, the complexity of the issues is relatively manageable. Unlike with large family offices, it's also much clearer which issues are even eligible for internal management and which can be clearly ignored and outsourced from a commercial perspective.

At first glance, this may sound unspectacular, especially for entrepreneurs considering establishing a family office. Why establish a structure that may not be able to comprehensively address all issues? Ultimately, the owners determine their priorities – whereas, in our view, the role of a family office lies primarily in the sometimes less spectacular issues such as asset structuring and asset management.

These aspects alone can usually be covered profitably internally, but at the end of the day there is still capacity for smaller but exciting topics for the owners - but more on that later in the article.

So, how do we experience small family office structures in practice? We would like to attempt to address the key questions that entrepreneurs raise in the debate for and against a small family office – starting with the question with which this article also began: the minimum assets.

What does a small family office do – and what doesn’t it do?

In our view, establishing a family office can even be viewed independently of available assets. Every family office has a right to exist, as long as the owners consider the necessary expenditures worthwhile—even if the amount may appear irrational or unprofitable from an external perspective.

Nonetheless, few entrepreneurs consider the matter so detached from financial matters, but rather ask themselves the critical question of what structure makes economic sense for a small family office. Ultimately, the answer varies from case to case, for example, with regard to the desired range of services or the breadth of asset classes managed internally.

In general, however, we find that a small family office can be worthwhile with assets between 25 and 50 million euros, but is definitely profitable in the range of 75 to 100 million euros and more.

We know of family offices that operate successfully with as little as 5 to 10 million euros, but here the benefit of the family office must clearly be generated from a resulting additional return and not just from potential cost savings. In the range between 10 and 25 million euros, we like to use the analogy of a niche asset manager who, with the right strategy, certainly has a right to exist.

Some traditional market participants would argue that structures of this size are not family offices – we are happy to leave this assessment to the owners themselves.

Moving on to the question of team size and the necessary skills. As mentioned previously, the team size of a small family office is often limited by the available capital, as it's generally not worthwhile to hire a 10-person investment team with assets of €50 million.

At the same time, however, the limited complexity offers advantages in terms of the range of services: There is no need to debate whether the family office should hire an in-house tax lawyer or not if the cost analysis clearly speaks in favor of working with external lawyers and/or the person simply cannot be fully utilized internally.

With this in mind: What does the team of a small family office typically look like? We typically see such a family office led by a 'Head of Family Office' with a generalist role and previous experience. While large family offices divide this role between the CEO, CIO, and COO, the management of all these areas rests with one person who can handle all day-to-day challenges, whether investment, tax, or private matters.

Particularly at the lower end of the wealth range, this individual remains the sole collaborator, but we often see one or two additional team members - usually a junior analyst supporting the Head of Family Office, as well as a hybrid role between executive assistant and (preparatory) accounting.

Some readers may wonder how such a team of just one or two generalist investors can cover the complexity of the typical investment spectrum of family offices. And that brings us to the most important competency of the small family office: The team and owners know their strengths and weaknesses, or as the English saying goes, "they pick their battles."

They know which competencies they can build internally, which areas they should outsource to partners (e.g., certain asset classes, as well as services like legal and tax advice), and in many cases, they actively decide against activities in certain areas and asset classes. This includes, for example, the direct investment business mentioned at the beginning, which, while very lucrative, can often also be just as time-consuming—and time is a scarce commodity in a small family office.

And here's another anecdote: We often see that, due to this selectivity, small family offices perform far better in their investment success than their 'large' counterparts. Unfortunately, it turns out all too often that size in terms of assets and team size is not an indicator of success – many investors – whether family offices or not – would fare much better if they thought more about what not to do.

How does the small family office pay off?

In the last section, we tried to provide initial examples of how small family offices structure themselves. But how exactly do they manage to make their money worthwhile even with relatively smaller investable assets? We also have concrete examples of this.

Fee negotiation / internal management of liquid assets:

In almost every case where entrepreneurs sell their businesses, we see that the assets are initially assigned to one or more asset managers/private banks for management. And while we fortunately rarely see such funds mismanaged, we almost always see opportunities for a better risk-return balance, for example, through careful reconciliation at the asset level rather than at the manager level, or through the renegotiation of fees.

A permanent family officer can create significant value by structuring the entire asset portfolio in a return- and fee-efficient manner, or even by managing entire assets (such as passive equity or bond portfolios) cost-efficiently in cooperation with the banks.

Example:

A family office with €50 million in investable assets, half of which (€25 million) is invested in liquid assets. With such liquid assets, we typically see owners divide the assets into two portfolios (€10 million to €15 million), each of which incurs fees of 0.50 percent to 0.75 percent per year before product fees.

If a family officer can manage these assets internally through the use of cost-efficient, passive investments, this would result in savings of EUR 75,000 per year, even with a (generous) custody fee of 0.20 percent per year.

Access to alternative investments:

Many family offices seek access to alternative investments to enhance their expected returns and/or to incorporate uncorrelated return sources. In our experience, an investor seeking direct access requires a ticket size of €1 million per fund, which requires significant minimum capital for at least three to four funds per year.

Accordingly, many family offices seek access through platforms or private banks, which, of course, charge generously for this. In our experience, a capable family officer often manages to gain direct access to high-quality funds through active networking and the hype surrounding family offices as investors, even with manageable asset sizes.

Example:

A family office wants to allocate €10 million to alternative investments. Using a feeder fund, the family office would likely pay 0.50 percent annually, or €50,000 per year, in additional fees. In our experience, a family officer can save at least half of these fees, or €25,000 per year, through negotiation and direct access. We would also expect additional financial value from a careful manager selection process.

Asset reporting:

Every family office should have a continuously updated overview of its assets and liabilities. Most of the high-net-worth individuals we work with have this based on a simple Excel or Google Sheets-based solution—which, in almost every case, offer potential for improvement and additional detail.

Service providers such as multi-family offices and tax consulting firms are becoming increasingly active in this market, but they also charge fair fees. In our experience, the fees charged for these services range from €25,000 to 0.10 percent to 0.20 percent of the assets under management, although in some cases they include tax consulting services such as annual financial statements.

To be fair, accounting issues are a topic that's difficult to handle internally without a team, so we generally advise small family office clients to work with a competent tax consulting firm. In cases of percentage-based fees and large assets, at least insourcing the reporting solution, even in combination with an external tax advisor, can often be worthwhile.

Example:

A capable family officer should be able to implement wealth reporting that is better and more tailored than the off-the-shelf solutions offered by external service providers. Even with reporting software costs of €25,000-50,000, alternative pricing of €100,000 (0.2 percent for €50 million in assets) still leaves room for savings of up to €50,000 per year.

What other potential does the small family office have?

These examples are generalized in nature, but they reflect the cost savings we ourselves have experienced in previous family office roles and among our family office clients on a daily basis. When added together, our experience shows that they quickly add up to a sum that covers the costs of the family office structure, including staff. However, the topics mentioned here are obviously not a full day's work, and a significant amount of time remains that could be used far more lucratively.

In our experience, these include the following topics:

• Time savings for owners: Successful entrepreneurs among our clients often don't just start a business. After successfully selling their company, they plan further entrepreneurial activities – and every minute a family office can save owners delivers long-term return potential that far exceeds the potential returns from conventional investments.
• Better investment decisions: Even a small family office can help its owners make better and more thoughtful investment decisions that pay off in the long term in the form of lower losses and/or higher returns.
• Support in all other matters: Whether it's the purchase of a vacation property, support in the next business project, or even private matters like the proverbial trip to the dry cleaners - even a small family office has its purpose in making the life of the owners easier.

So, to summarize: We firmly believe that, thanks to the ongoing democratization of financial markets, family offices will become profitable much sooner than perhaps has been the case historically. And their numbers will continue to grow: The next generation of wealth owners—whether entrepreneurs and/or heirs—has a significantly higher level of investment experience than the previous generation, which is reflected in correspondingly higher demands and levels of personalization, service, and technical depth.

And if they do not find this in asset managers, private banks and multi-family offices, the trend towards their own family office, even a small one, is hardly surprising.

So, anyone who sticks to traditional thresholds such as 250 million euros should not be surprised if the next generation of family offices, whether small or large, seeks their support elsewhere.

About the author:

Jan Voss is Managing Partner of Cape May Wealth Advisors, a Berlin-based wealth manager specializing in entrepreneurs and their family offices. He began his career in the private client division of Goldman Sachs before building two leading family offices in the technology sector in Berlin. Voss regularly shares his perspectives on topics such as family offices, asset allocation, and alternative investments with over 20,000 readers via LinkedIn and his newsletter, Cape May Wealth Weekly.