Family offices and Wall Street are engaged in a fierce competition for talent, resulting in rising salaries.

• According to a J.P. Morgan Private Bank report, family offices, which are private investing wings operated by wealthy families, cost an average of $3 million to operate.
• Over the past five years, the number of family offices has tripled, resulting in a significant increase in the cost of staffing.
• Competition for talent is intensifying among banks, private equity firms, and hedge funds.

The original article was published in CNBC's Inside Wealth newsletter with Robert Frank, providing a weekly guide for high-net-worth investors and consumers. To receive future editions, subscribe and have them delivered directly to your email inbox.

A new study reveals that the average annual cost of running a typical family office exceeds $3 million, due to increased competition for talent leading to higher staffing expenses.

The J.P. Morgan Private Bank Global Family Office Report reveals that wealthy families are spending between $1 million and more than $10 million annually to run their family offices, with the average now at approximately $3.2 million. This is due to the growing size and number of family offices, which are increasingly competing with private equity, hedge funds, and venture capital.

"Family offices are facing intense competition for talent from private equity, hedge funds, and banks, according to William Sinclair, the U.S. head of J.P. Morgan Private Bank's Family Office Practice."

Family offices with smaller assets spend less on operating costs, according to a report that surveyed 190 family offices with average assets of $1.4 billion. Family offices managing less than $500 million spend an average of $1.5 million a year, while those between $500 million and $1 billion spend an average of $2.7 million. Family offices with assets above $1 billion spend an average of $6.1 million. Fifteen percent of family offices spend more than $7 million, and 8% spend more than $10 million.

Family offices are facing a significant challenge in terms of staffing, as the competition for senior talent has intensified due to the rapid growth of family offices over the past five years.

Family offices are increasingly investing in alternatives such as private equity, venture capital, real estate, and hedge funds, with U.S. family offices having over 45% of their portfolios in alternatives compared to 26% in stocks, according to a J.P. Morgan survey.

As they expand their reach, they are increasingly competing with private equity firms, venture capital firms, and deal advisors to attract top talent.

"Over the past ten years, the family office industry has undergone professionalization and institutionalization, as stated by Trish Botoff, founder and managing principal of Botoff Consulting. Family offices are now investing heavily in building out their investments teams and hiring staff from other investment firms and private equity firms, which has a significant impact on compensation."

Nearly half of family offices plan to extend raises of 5% or more to their existing staff, while 57% plan to hire more staff in 2024, according to a family office survey conducted by Botoff Consulting. Experts say overall pay at family offices has increased between 10% and 20% since 2019 due to the frenzied demand for talent in 2021 and 2022.

According to Botoff, the average compensation for a chief investment officer of a family office with less than $1 billion in assets is approximately $1 million, while the average compensation for a CIO overseeing more than $10 billion is just under $2 million. Botoff also stated that many family offices are adding long-term incentive plans, such as deferred compensation, to their base salary and bonus packages to make them more attractive.

Even competition is pushing up salaries for entry-level employees. Botoff stated that a family office she worked with hired a junior analyst who demanded $300,000 annually.

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

Private equity firms are facing increasing competition from single-family offices, who are increasingly buying stakes in private companies directly and trying to attract top talent away from firms like KKR, Blackstone, and Carlyle.

"According to Paul Westall, co-founder of Agreus, a family office advisory and recruiting firm, the biggest challenge is that family offices cannot compete at a senior level with private equity firms."

Family offices are increasingly giving midlevel managers at private equity (PE) firms more authority, access to deals, and higher pay. In some cases, they are even giving PE recruits a "carry," which is a share of the profit when a private company is sold, similar to what PE firms offer.

Family offices are becoming increasingly attractive places to work due to their offer of better pay, access to billionaires and their networks, and the feeling of not being just a cog in a big wheel.

"Family offices were once the go-to places for people to retire and achieve work-life balance, but now they are attracting top talent and offering competitive compensation, putting them in competition with big firms and banks."

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