Talent war between family offices and Wall Street drives up salaries

Sdi Productions | E+ | Getty Images

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.

The typical family office costs more than $3 million a year to operate, as competition for talent drives up staffing expenses, according to a new study.

Wealthy families are spending anywhere from $1 million to more than $10 million a year to operate their family offices, with the average now at around $3.2 million, according to the J.P. Morgan Private Bank Global Family Office Report released this week. While the costs vary widely depending on assets, experts say expenses are growing across the board as family offices explode in size and number and compete more directly with private equity, hedge funds and venture capital.

“There's a real war for talent within family offices,” said William Sinclair, U.S. head of J.P. Morgan Private Bank's Family Office Practice. “They're competing for talent against private equity and hedge funds and banks.”

Smaller family offices spend less, of course. According to the report, which surveyed 190 family offices with average assets of $1.4 billion, family offices that manage less than $500 million spend an average of $1.5 million a year for operating costs. Family offices between $500 million and $1 billion spend an average of $2.7 million, and those above $1 billion average $6.1 million. Fifteen percent of family offices spend more than $7 million, while 8% spend more than $10 million.

The biggest cost is staffing, which has become more expensive as family offices have tripled in number over the past five years. Family offices are increasingly competing with one another for senior talent, according to recruiters.

More importantly, family offices are shifting more of their investments into alternatives, which include private equity, venture capital, real estate and hedge funds. According to the J.P. Morgan survey, U.S. family offices have more than 45% of their portfolios in alternatives, compared with 26% for stocks.

As they expand their reach into alternatives, they're increasingly in direct competition with big private equity firms, venture capital firms and deal advisors to bring in top talent.

“We've seen over the last decade, the professionalization and institutionalization of the family office space,” said Trish Botoff, founder and managing principal of Botoff Consulting, which advises family offices on recruiting and staffing. “They're building out their investments teams, hiring staff from other investment firms and private equity firms, so that has a huge impact on compensation.”

According to a family office survey conducted by Botoff Consulting, 57% of family offices plan to hire more staff in 2024 and nearly half are planning on extending raises of 5% or more to their existing staff. Experts say overall pay at family offices is up between 10% and 20% since 2019 due to frenzied demand for talent in 2021 and 2022.

The average compensation for a chief investment officer for a family office with less than $1 billion in assets is about $1 million, according to Botoff. The average comp for a CIO overseeing more than $10 billion is just under $2 million, she said. Botoff said more family offices are adding long-term incentive plans, such as deferred compensation, on top of their base salary and bonus, to sweeten the packages.

Competition is even driving up salaries for lower-level staff. Botoff said one family office she worked with was hiring a junior analyst who asked for $300,000 a year.

“The family office decided to wait a year,” she said.

Competition with private equity firms is getting especially costly. As more single-family offices do direct deals, buying stakes in private companies directly, they're trying to lure talent from the big private equity firms such as KKR, Blackstone and Carlyle.

“It's the biggest quandary,” said Paul Westall, co-founder of Agreus, the family office advisory and recruiting firm. “Family offices just can't compete at a senior level with the big PE firms.”

Instead, Westall said, family offices are recruiting midlevel managers at PE firms and giving them more authority, better access to deals and higher pay. Family offices are now sometimes giving PE recruits a “carry” — meaning a share of the profit when a private company is sold — similar to PE firms.

He said better pay, access to billionaires and their networks, and the benefit of “not feeling like just a cog in a big wheel” are making family offices more attractive places to work.

“If you look back 15 years ago, family offices were where people went to retire and have work-life balance,” he said. “That's all changed. Now they're bringing in top talent and paying their people, and that's pushed them into competition with the big firms and the banks.”

Sign up to receive future editions of CNBC's Inside Wealth newsletter with Robert Frank.