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.