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When it comes to status symbols, a family office may be one of the most coveted. The general rule of thumb used to be that a family had be worth of at least $100 million to start a family office, given the costs associated. Today, $100 million would barely make you a preferred client at a private bank, let alone family-office material.

“I’d say the number today is at least $200 million,” said one family office advisor. “Below that, it doesn’t make economic sense.”

This week Inside Wealth gets a rare look at how much it costs to operate a family office and why a talent war is driving up demand – and expenses. We also look at a new way to invest in the art market, a new push for a global wealth tax and a famous $2 million watch that comes up for sale next month (and that I got to try on for size).

If you have story ideas, comments or ideas for Inside Wealth, email me at robert.frank@cnbc.com. Thanks for reading and supporting!

Best, Robert

Credit: SDI Productions | Getty Images

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 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. Fully 15% 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 includes private equity, venture capital, real estate and hedge funds. According to the J.P. Morgan survey, U.S. family offices have more than 47% of their portfolios in alternatives, compared to 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 principle 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. Botoff said more family offices are adding long-term incentive plans, like 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 like 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 mid-level managers at PE firms and giving them more authority, better access to deals and 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.”

G20 flags. Credit: David Talukdar | Getty Images

More than a dozen European countries used to have wealth taxes. Now it’s only three – Norway, Spain and Switzerland. In the U.S., proposed wealth taxes from Sens. Elizabeth Warren, Bernie Sanders and Ron Wyden attracted widespread attention, but never got off the ground in Congress, even when Democrats controlled both houses.

Now, members of the G20 are considering a new global wealth tax. Germany, Brazil, Spain and South Africa are supporting a proposal for the G20 nations to impose a tax of 2% on the assets of the world’s ultra-wealthy. They say it would raise about $313 billion a year.

The plan will be put in front of the G20 in June.

Gabriel Zucman, a professor of economics at UC Berkeley and the Paris School of Economics, and the author of several wealth-tax plans, is working on the details of the proposal. Zucman told me his report to the G20 “will discuss various options for a coordinated minimum tax on the superrich.”

One option will be what Zucman calls the “global minimum tax on high-net-worth individuals,” similar to the global minimum tax on companies. Those who already pay 2% or more of their net worth in taxes would not owe any additional tax. But those who pay less or none would owe the balance of 2%.

Zucman and the G20 have not defined “high-net-worth individuals,” other than to say it could be “billionaires, for instance.”

He said most countries already value net worth for estate-tax purposes and that international cooperation could combat evasion. Complaints about paying the tax on illiquid assets are unfounded, he said.

“The notion that a billionaire does not have enough liquidity to pay a minimum amount of tax does not withstand scrutiny,” Zucman said.

So far, the U.S. has not opposed the plan, but it also hasn’t endorsed it. Daniel Bunn, president and CEO of the Tax Foundation, told me he thinks a wealth tax would be ruled unconstitutional in the U.S.

 “A global net wealth tax would immediately entrench double and often triple taxation of capital income with a policy that is more punitive for individuals whose wealth is in low-return assets or closely held businesses with little liquidity,” he said.

A Sothebys auctioneer supervises a charity wine auction in Beaune, on Nov. 20, 2022, in central France. Credit: Jeff Pachoud | Contributor | Getty Images

As the art market soars in value, it’s also becoming more financialized. Auction houses, banks, investment funds and startups are dreaming up ever-more complicated structures to turn art into an investment tool.

The latest comes from Sotheby’s Financial Services (SFS), which provides lending to Sotheby’s clients. Last month, SFS announced the sale of $700 million in securities backed by art loans. SFS makes a loan to collectors, the loans are then bundled and rated as securities, which are then sold to investors. They’re like traditional asset-backed securities used with car loans, aircraft leases and credit card receivables – but with artworks.

Art loans have surged to over $30 billion, according to Deloitte and ArtTactic, as collectors borrow against their existing collections to buy more pieces. SFS has about $1.5 billion in loans outstanding.

The new securities, sold through a master trust, include 89 loans secured by 2,484 works of fine art and collectibles, according to Morningstar DBRS, which rated the transaction. The loans are divided in five tranches with different ratings, from AAA to BBB.

According to Morningstar, 43% of the collateral on the new securities is in contemporary art, 21% is in Old Master paintings, 16% is impressionist and modern art, 5% is Latin American impressionist, and 4% is Chinese works of art. More than 80% of the works are in storage, with only 18% in a collector’s home or office and 1% in a museum or exhibit. 

Doo-Sik Nam, a senior vice president for U.S. asset-backed securities credit ratings at Morningstar DBRS in New York, said Sotheby’s has a long history of working with borrowers as well as valuing art for auctions. He also said Morningstar DBRS looked at the past performance of the art market over time to get more comfortable with the collateral during market swings and downturns.

“Art is not just for emotional attachment, it’s also an investment for diversification, for an inflation hedge and a safe haven,” Nam said.

Robert Frank with the $2 million Schumacher F.P. Journe. Credit: Crystal Lau | CNBC

Remember when the Apple Watch was going to kill the mechanical-watch market – especially among millennials? The opposite happened.

During Covid, millennials caught the fever for mechanical watches, driving up the prices for some models of Rolex, Patek Philippe and Audemars Piguet by 200% or more. Prices for the top models are down over 40% from their peak, but they’re drifting back up and industry experts say demand remains strong.

Remi Guillemin, Christie’s Head of Watches for Europe, said millennials in their 20s and 30s are among the biggest buyers of the most expensive watches being auctioned.

 “So many of our participants in the auction are millennials, you know, and people who are starting to collect,” he said.

They also like to bid for expensive watches online, which helps explain why 80% of all bidding at Christie’s is now online.

Christie’s sales of watches have soared by 77% since 2019, to over $230 million last year, according to Guillemin. The big test for the top of the market will be next month, when Christie’s plans to auction eight watches once owned by Formula 1 legend Michael Schumacher. The watches include a unique Platinum Vagabondage 1 that was commissioned for Schumacher as a gift from his one-time Ferrari boss, Jean Todt. The watch, which features the iconic Ferrari prancing horse, Schumacher’s helmet and the number “7” to honor his seven championships, could sell for over $2 million.

All eight watches combined could fetch over $4 million – especially since the fan base will include both watch collectors and Formula 1 followers.

Guillemin said if past auctions are any indication, millennial buyers will likely be out in force for the Schumacher collection. One millennial buyer paid $31 million for a rare Patek sold last year, he said.

“It’s amazing, these people in their 20s and 30s love these watches,” he said.  

• Packard Foundation makes $480 million donation to help save the oceans.

• Billionaire Tom Siebel gives $50 million to University of Illinois for new computing and data school.

• Mansions in San Francisco are selling fast again.

• A premium seat on Blade’s new Hamptons luxury bus costs $275, cashmere blanket included.

• “I get that we’re rich assholes, but at some level I’m also a father,” Billionaire Cloudflare founder Matthew Prince, suing his neighbors over their dogs.

• Taylor Swift’s private jet flew 178,000 miles last year, equal to flying around the Earth 7 times.

Taylor Swift attends the 66th Grammy Awards on Feb. 4, 2024, in Los Angeles. Credit: Neilson Barnard | Getty Images for The Recording Academy

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