The name of the game for modern wealth is family offices. It is a vital trend among the world’s rich, and family offices are quickly gaining momentum.
In the world of family offices, which collectively manage over $6 trillion worldwide, the question of whether to outsource services or manage them in-house is a crucial decision that can significantly impact the efficiency, cost-effectiveness, and overall success of the organization. As the wealth management landscape continues to evolve, family offices are increasingly considering the benefits and drawbacks of each approach to determine the best fit for their unique needs and goals.
The Rise of Outsourcing in Family Offices
Outsourcing has become an increasingly popular choice among family offices in recent years. In fact, a study revealed that 68% of family offices now outsource at least one service, with investment management being the most commonly outsourced function at 45%. This trend can be attributed to several factors, including the desire to access specialized expertise, reduce costs, and improve operational efficiency.
One of the primary reasons family offices choose to outsource is to tap into the knowledge and experience of external professionals. By partnering with service providers who specialize in specific areas, such as investment management, tax planning, or philanthropic advisory, family offices can benefit from their expertise without the need to build and maintain an extensive in-house team.
This is particularly valuable for family offices with limited resources or those that require niche services. Notably, family offices that outsource investment management have reported impressive returns, with an average of 15% in 2019.
Outsourcing can also lead to significant cost savings for family offices. Maintaining an in-house team can be expensive, especially when considering salaries, benefits, training, and infrastructure costs. By outsourcing, family offices can convert fixed costs into variable costs, paying only for the services they need when they need them.
The Case for In-House Management
While outsourcing offers numerous benefits, there are also compelling reasons for family offices to consider managing certain services in-house. One of the primary advantages of in-house management is the ability to maintain greater control over the family’s affairs.
By keeping functions such as investment management, risk management, and financial reporting within the organization, family offices can ensure that decisions are made in alignment with the family’s values, goals, and risk tolerance. This is particularly important given that privacy is a top priority for 87% of family offices.
In-house management also allows for a more personalized approach to service delivery. Family office staff who work closely with the family over an extended period can develop a deep understanding of their unique needs, preferences, and dynamics.
This intimate knowledge can lead to more tailored solutions and a higher level of responsiveness to the family’s evolving requirements. In fact, more than 90% of family offices customize services to specific family needs.
Managing services in-house can foster a stronger sense of trust and confidentiality. Family offices deal with highly sensitive information, and some families may feel more comfortable keeping this information within the organization rather than sharing it with external service providers.
By maintaining an in-house team, family offices can implement robust security measures and confidentiality protocols to safeguard the family’s data and privacy.
Another advantage of in-house management is the potential for long-term cost savings. While outsourcing can provide immediate cost reductions, building an in-house team can be more cost-effective in the long run, particularly for larger family offices with significant assets under management.
A study found that family offices with assets exceeding $500 million reported lower costs when managing functions in-house compared to outsourcing.
Factors to Consider When Making the Decision
When deciding between outsourcing and in-house management, family offices must carefully evaluate several key factors to determine the best approach for their specific situation. One crucial consideration is the size and complexity of the family office.
Smaller family offices with limited resources may find outsourcing to be a more viable option, as it allows them to access a wide range of expertise without the need to invest in a full-time staff.
On the other hand, larger family offices with substantial assets and complex needs may benefit from the control and customization offered by in-house management.
Another important factor is the family’s long-term goals and objectives. Family offices should assess whether outsourcing or in-house management aligns better with their strategic vision.
For example, a family office focused on aggressive growth and investment performance may prefer to outsource investment management to a specialized firm with a proven track record.
Conversely, a family office prioritizing privacy and control over their affairs may opt for in-house management to maintain a tighter grip on decision-making.
It’s worth noting that around 63% of family offices invest in real estate as part of their diversification strategies, and 54% report having international investment exposure.
The availability of talent is also a critical consideration. Family offices that choose to manage services in-house must be able to attract, retain, and develop top talent across various disciplines.
This can be challenging, especially in highly competitive markets or for niche skill sets. Outsourcing can provide access to a broader pool of talent and expertise, without the need to invest in extensive recruitment and training efforts.
Finally, family offices must weigh the costs and benefits of each approach. While outsourcing can provide immediate cost savings, it’s essential to consider the long-term financial implications.
In-house management may require significant upfront investments in personnel, technology, and infrastructure, but it can lead to greater cost efficiency over time. Family offices should conduct a thorough cost-benefit analysis, taking into account both quantitative and qualitative factors, to determine the most suitable approach for their needs.
A Hybrid Approach: The Best of Both Worlds
For many family offices, the optimal solution may lie in a hybrid approach that combines outsourcing and in-house management. By selectively outsourcing certain functions while retaining others in-house, family offices can strike a balance between cost efficiency, expertise, control, and customization.
A common hybrid strategy is to outsource investment management while keeping other functions, such as financial planning, risk management, and family education, in-house.
This allows family offices to benefit from the specialized knowledge and resources of external investment managers while maintaining control over the broader aspects of wealth management.
A study found that 63% of family offices that outsourced investment management reported improved investment performance compared to those that managed investments entirely in-house.
Additionally, 82% of family offices have a structured approach to risk management, which can be effectively managed in-house.
Another hybrid approach is to outsource non-core functions, such as tax preparation, legal services, and IT support, while keeping core functions, such as strategic planning and family relationship management, in-house. This allows family offices to focus on the activities that are most critical to the family’s long-term success while leveraging external expertise for more routine or specialized tasks.
A whopping 85% of family offices actively engage in tax planning strategies, which can be outsourced to specialists.
Family offices also recognize the importance of providing educational services to younger generations, with over 58% offering educational initiatives about wealth management.
This function can be effectively managed in-house, ensuring that the family’s values and legacy are passed down to future generations.
Various Solutions, One Destination
The decision to outsource or manage family office services in-house is a complex one that requires careful consideration of multiple factors, including the family’s goals, resources, and unique circumstances. While outsourcing offers access to specialized expertise, cost savings, and improved efficiency, in-house management provides greater control, personalization, and confidentiality.
Ultimately, the best approach will depend on the specific needs and priorities of each family office.
By weighing the pros and cons of each option and considering a hybrid approach that combines the best of both worlds, family offices can develop a customized strategy that maximizes the value they provide to the families they serve.
With an average client retention rate of 94%, it’s clear that family offices are succeeding in delivering high-quality services that meet the diverse needs of their clients.
As the wealth management landscape continues to evolve, family offices must remain flexible and adaptable in their approach to service delivery. By staying attuned to the changing needs of their clients and leveraging the most effective mix of outsourced and in-house resources, family offices can position themselves for long-term success and ensure the sustained prosperity of the families they support.
With 92% of family office clients reporting satisfaction with their services, it’s evident that a well-designed and executed strategy, whether outsourced, in-house, or a hybrid approach, can lead to exceptional results and long-lasting relationships.
The best way to expand and secure your family office services is to find the great outsource talent. And NTL Trust today has a comprehensive offer of professionals and a company structure that exist for three decades, making it one of your best outsourcing resources.
NTL Trust’s family office services are comprehensive and operate on a global scale. The flexibility of the service combined with the expertise of the team running it makes it the optimal starting point for your partnering for financial prosperity.
Contact NTL Trust today to learn more.
