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Family wealth advisors struggle to price their services

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The lives of wealthy families in the U.S. have become increasingly complex over the past two decades, making it harder for family wealth providers to set client fees at appropriate levels, according to a new study by The Family Wealth Alliance.

Multifamily offices participating in the study said client complexity had become the chief factor both in determining pricing policy and in setting fees for individual client families, and external chief investment officer/wealth manager firms saw this as a major issue as well.

Forty-five firms participated in the re­search, 73 percent of which were multifamily offices and the remainder a mix of external CIO firms and wealth management firms offering a narrower scope of services than the multifamily offices. The study was conducted in 2014 and early 2015, and asset figures reported in the study were as of year-end 2013.

Study participants said several factors played off one another, complicating client complexity in setting their fees. Increased longevity has added an extra living generation to many families, making wealth transfer planning and family governance more complicated.

As well, taxes on investment income are dramatically more complex than two decades ago, and now a trend has emerged toward multiple ownership entities to hold family assets.

In order to deliver their services profitably, firms must be able to put a price on a given level of complexity. In some instances, however, they are flying blind, the research found.

One participant said the firm based its pricing on the complexity of the client’s needs. “Since we do not have the reporting systems to know if an engagement is profitable, we have to rely solely on our team personnel for these judgments.”

Many firms have begun to revisit their approach to pricing and to experiment to see how open to change their clients and prospects are, according to the study.

It said à la carte pricing for individual family office services had become routine, and firms were increasingly employing two-tier service models.

“Many times the full-service family wealth firm is unwittingly compared to an investment advisory firm that is sporting a narrower service model and thus lower (and sometimes hidden) fees,” the Alliance’s chief executive Thomas Livergood said in statement.

“Yet the latter types still call themselves a family office. No wonder families are confused.”

Moreover, many family wealth firms’ high reliance on asset-based fees is adding to the confusion, with savvier organizations diversifying their fee mix, Livergood said. As a result of these efforts, overall revenues rose 11 percent to 13 percent and pre-tax profits were in the healthy 21 percent to 26 percent range.

Other findings

Multifamily offices said communicating their firm’s value proposition was their main challenge where fees and pricing were concerned, and this was tied for top challenge among external CIO/wealth manager firms.

Fee compression and price competition also tied for the top challenge among external CIO/wealth manager firms, while multifamily offices ranked it third.

Multifamily offices worry about pricing, with 53 percent saying they reviewed client fees once a year or more, compared with only 17 percent of external CIO/wealth manager firms that did so.

Multifamily office participants also reported they had raised prices, with 56 percent having changed fee levels for existing clients in the last three years, and 53 percent restructured fees for existing clients during that time. Comparable figures for external CIO/wealth manager firms are 50 percent and 33 percent.

External CIO/wealth manager firms have been more aggressive than multifamily offices in raising prices for new clients. Sixty-seven percent had changed new client fee levels and 58 percent had restructured their fees for them in the last three years, compared with 34 percent and 38 percent, respectively, for multifamily offices.

Asset-based fees predominated among participating firms. Multifamily offices reported that asset-based fees as a percent of revenue were 77 percent in 2010 and 75 percent in 2013. For external CIO/wealth manager firms, comparable figures were 80 percent and 78 percent.

Fifty-three percent of multifamily offices and 33 percent of external CIO/wealth manager firms said they charged flat annual fees or retainer fees, typically as a supplement to asset-based fees. A third of firms surveyed used hourly fees, and half used project or consulting fees.

Recent pricing changes reported by participants entailed a wide variety of actions, but tended not to involve raising asset-based fees. These actions included increasing retainer fees or à la carte activity fees, hiking minimum annual fees on clients with smaller accounts and adding automatic fee escalator clauses to client agreements.

Looking forward, 31 percent of multifamily offices and 25 percent of external CIO/wealth manager firms said they would hike prices for existing clients within the next year or so. Most said they would focus on retainer fees or à la carte activity fees and leave asset-based fees alone. Very few planned pricing changes for new clients.

The study found that 38 percent of multifamily office participants and 33 percent of the external CIO/wealth manager firms offered two-tier services. These typically involve a full-service offering for top-tier clients and an investment-only arrangement with lower fees and lower asset minimums for the second tier.

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