Europe’s ultra-high-net-worth families are rapidly getting their affairs in order ahead of the Great Wealth Transfer, but the biggest challenge in handing over their wealth is the apparent lack of available workers willing to take a pay cut to manage their billions.
AND new report HSBC Global Private Banking and Campden Wealth looked at the state of European family offices, looking at 101 offices that accounted for $136 billion in combined wealth. Ensuring strong returns and learning how to introduce generative artificial intelligence were key concerns for those families.
The biggest hurdle, however, is finding the right people to manage their wealth.
More than a third (36%) of wealthy survey respondents said there is a limited pool of talent available with the right personal skills to manage their estates. Just under a third (32%) said they found it difficult to find leaders with the right interpersonal skills.
Running a family office can be a lucrative business. The survey shows that the highest-paid CEOs in family offices earn $500,000 (€476,000) a year, although the average is $288,000 (€274,600). Although attractive, the figures do not compare favorably with other investment deals at a similar level. Executive search firm Heidrick & Struggles found the average salary for private equity-funded CEOs was $447,000 (€426,000).
Meanwhile, the lowest-paid directors of family offices earn only about $120,000 (€114,000) a year.
Billionaires look beyond the family
Looking deeper into the numbers, families with more than $1 billion in assets pay their CEOs an average of just $370,000 (€353,000) a year in base pay, with an 88% bonus.
The basic figure represents less than 0.037% of the wealth of these families. For family members, the figure is lower, as well as for directors of family offices worth less than $500 million.
In an effort to attract talent, the report says, family offices are turning to additional incentives to land top talent. Most offer a discretionary performance bonus, while a minority offer co-investment or profit-sharing opportunities.
Family offices have historically used prestige to recruit managers, who were also attracted by their smaller structure. They are usually a single-digit number of employees, which allows each worker a defined output. They also sought to attract heirs who wanted to carry on their legacy.
However, there is concern that these factors do not have the same effect on non-family members as they once did. Meanwhile, younger generations are less enthusiastic about preserving their parents’ legacy and more interested in building their own.
One British family office founder told the authors: “I think there will be a shortage of people to run family offices. Family members who were born in the 60s of the last century and have been running the family office for 15 or 20 years are retiring.
“Many of the next generation will want to do their thing away from the family office, and recruiting staff will become increasingly difficult. Who will fill the void? Family offices will be forced to bring in more professional staff from financial institutions and their culture will change.”
However, one family office executive told the authors that compliance and regulatory overload at larger investment firms is causing more investment managers to consider moving to a smaller family office.
The appeal of hiring a non-family member to run the family office is growing as baby boomers hand over their businesses and wealth to the next generation. This can save a gruesome succession battle among descendants, which increasingly includes multiple siblings and even cousins descended from the same founder.
“The chief executive of a UK family office told the authors: “Among our next generations are seven cousins, descendants of three siblings. All or some will continue to work in the family business or family office. I’m not sure how well they’ll be able to work together if there are actually seven family members competing for the top position.”
