Former spy chief and US ambassador Dennis Richardson announced he was quitting the probe as he was "surplus to requirements".
Originally brought on to run an independent investigation into possible intelligence failures leading up to the December 14 terror attack, his report was rolled into the broader anti-Semitism royal commission.
The wide-ranging federal probe was called after almost a month of lobbying from Australia's Jewish community.
Jenny Rotyur, the niece of Boris Tetleroyd who was fatally shot at the Hanukkah celebration at Bondi Beach, said the families were worried "everything would fall apart".
"We wanted a really close look at the intelligence agencies and their failures," she told AAP.
"We are becoming extremely concerned that this royal commission is turning into a farce.
"We need the truth to be found, and without an expert on security agencies, I'm finding it hard to believe they're going to be able to do that."
Speaking to reporters in Canberra on Thursday, Mr Richardson said his departure would not affect the inquiry's investigation into intelligence services.
Sabina Kleitman, the daughter of Holocaust survivor and Bondi victim Alex Kleytman, said she and the community were "shocked" by Mr Richardson's announcement.
"Due to his credentials he would be the best person to get down to the reason behind what had happened," she said.
The families only found out about his resignation through media reporting and were awaiting a full response, Ms Kleitman said.
Her 87-year-old father was shot in the chest as he died shielding his wife of almost 60 years from the gunmen.
Mr Kleytman had survived the horrors of World War II and persecution in the Soviet Union before relocating to Australia with his family for a safer life.
He was among 15 people killed by a father-son duo in one of the nation's worst ever mass shootings.
The inquiry, headed by former High Court judge Virginia Bell, will hand down an interim report by the end of April.
