The number of family offices - secretive firms that manage the financial affairs of Europe's richest families - has proliferated in the past few years as ultra-wealthy clients have become increasingly disenchanted with mainstream private banks and wealthmanagers. But family offices don't suit every investor's needs. They also cost a fortune to run.

They vary in size - some are small outfits employing just two or three people for administrative tasks. Others are fully-fledged investment offices employing 10 to 20 professionals responsible for day-to-day investment decisions.

European families with their own investment offices include the Sainsburys, the Pears and the Guinnesses.

Wharton Global Family Alliance, a specialist unit at the Wharton School at the University of Pennsylvania, estimates there are around 1,000 single family offices in the world. Paul Pratt, managing director of the London branch of the Family Office Exchange, an advisory consultancy, thinks this is an underestimate. He says: 'A more realisticestimate is likely to be closer to 1,000 just in Europe.'

Cost-Efficiency

Families need to be exceptionallywealthy to consider setting up their own offices. 'To really get the most cost-effective pricing on investment products and afford the best staff, half a billion dollars in assets is probably a good rule of thumb,' says Pierre-Alan Wavre, the head of the multi-family office at Pictet, a Swiss private bank.

Greycourt, a US-based financial advisory firm to some of America's wealthiest families, has estimates it takes a $1 billion fortune to justify a 'fully integrated' family office, handling the full array of investment, accounting, legal, educational and concierge services.

A survey of European family offices by Merrill Lynch and Campden Research found that the average cost of running an office is around 0.6% of assets under management. The bigger the family office, the cheaper the costs, said the report.

Costs for staff alone can run into the millions a year. Typically a fully-integrated family office would have a chief executive, chief finance officer, chief investment officer, at least two investment analysts, four accountants, one controller and five administration staff. Some might also employ a lawyer.

'The cost of employing a good chief investment officer will run into at least 100,000 a year before bonus,' says Mr. Pratt. A chief executive for a family office will typically cost around 150,000 - plus bonus - a year.

Those with only tens or a few hundred million dollars are increasingly turning to private investment offices which cater for a small number of like-minded families. Sometimes these are single family offices that have decided to take on third party assets. Some multi-family offices accept as little - these things are of course relative - as 20 million in liquid assets.

Multi-family offices claim to have the advantage of greater resources. Daniel Pinto, founder of multi-family office Stanhope Capital, says: 'In a single family office, it is often difficult to have the breadth and depth of expertise required to build truly diversified portfolios. Screening and selecting managers across asset classes and regions takes a large team.'

Specialists say the financialcrisis has prompted more wealthy families to turn away from the large global banks to family offices. Bespoke money management solutions have become increasingly appealing for investors that have been hit by the credit crunch.

Critics argue that family offices concentratemanagement risk and that wealthy investors should still talk to other fund managers to get a more balanced range of advice. Thierry Lombard, sixth generation of the Swiss banking family and managing partner of the private bank Lombard Odier & Cie, says: 'A family office cannot be a substitute for a wealthmanager - it cannot have the breadth and depth of expertise, resources and experience that a bank can provide.'

Frank Stangenberg-Haverkamp, chairman of the board of partners of Merck and a member of the 11th generation of the family that controls the company, says: 'When a family has invested everything in their company and there is no money lying around in need of an investment then you are not in need of a family office.'

For those that are persuaded by the rationale for multi-family offices there is a plenty of choice with more than 100 independent firms in Europe alone.

But making an informed choice can be difficult. There is no independent body that evaluates the performance of multi-family offices, although Asset Risk Consultants, which tracks the portfolios of many wealthmanagers - including some multi-family offices - does offer some insights for those based in the U.K. through its private client indices.

Multi-family offices often have a longer-term investmenthorizon than more traditionalwealthmanagers. This resulted in some missing out on the equity market rebound last year. Marcuard Family Office, a multi-family office based in Zurich, says its medium-risk portfolios were up an average of 12% last year, compared with the 30% achieved by the MSCI World Index.

But it hopes its longer-term perspective will prove right. 'We like physical assets, like gold and agricultural land,' says Jonathan Guest, a partner at Marcuard.