One of the more elusive but also most commonly sought bits of advice when it comes to running single (SFO) and multi-family offices (MFOs) and wealth management firms is how to best price their services. In a recently released report, Fees & Pricing in Family Wealth: 2020 Report, the Family Wealth Alliance in association with Schwab Advisor Family Office gives advisors from both ends of the spectrum detailed insights into fee levels, pricing methodologies and discounting.
Private clients are increasingly more educated about conflicts of interest and have a deeper focus on hidden fees. They desire greater transparency and conflict-free advice and are willing to pay for value, convenience and objective expert advice.
Tom Livergood, founder and CEO of The Family Wealth Alliance and author of the report, says that “Pricing speaks volumes, serves to align your firm with your client, and helps clients understand how their fees directly relate to the valuable services you deliver. Fees also have a direct bearing on your top and bottom line, allowing you to be a sustainable business.” In addition to pricing services profitably, it’s critical to be in line with your competition when charging fees.
However, despite an evolution of compensation models and the range of services offered in the industry over the years, the study finds that many firms are still under the impression that tying success to assets under management is the only path to take. Asset-based fees are the preferred method of billing for eight out of 10 services. Further, confusion abounds as firms are struggling to differentiate themselves from the rest. Taking control of how firms charge fees is a major factor in controlling their business and creating opportunity.
Hybrid Fee Model
One solution to the conundrum is hybrid fee models, an approach firms are beginning to embrace, which use a combination of asset-based and retainer fees and are designed for maximum transparency and sustainability—something the study finds clients deeply value. Clients are also more comfortable with a fee model in which they understand how much they’re paying for each product or service, unlike in a bundled fee structure, which may diminish the value of the services in their eyes. It also eliminates the feeling that clients are paying for services they don’t need.
According to the research, “If clients think they are paying the asset-based fee for investment management and are getting any additional services ‘for free,’ they may not recognize the true value of these unique and tailored services.”
As to how to approach clients with this new model, firms that haven’t regularly been reviewing and revising their fee schedules with regularity should have a transparent conversation with existing clients to communicate that, “We’re re-aligning our business model to better serve you, which ensures your evolving goals will be met, allowing us to be here to serve you and succeeding generations.”
The study also finds that MFOs offer a “more comprehensive service menu” than their wealth manager counterparts. And with good reason. First, the number of global ultra-high-net worth (UHNW) families continues to rise, and so do their expectations and wealth management options. The modern family office, either an SFO or an MFO, has the flexibility to adapt quickly to expand services and meet higher expectations, as opposed to traditional private banking firms or wirehouse channels. This is one of the major contributing factors as to why the family office segment has been growing faster than their counterparts in the wealth management industry.
A more transparent and custom pricing model also resonates with UHNW private clients and prospects by elevating the value of bespoke services. SFOs and MFOs are more likely to offer multiple services in-house, such as tax and compliance work, trust and fiduciary services and risk and security management, resulting in a one-stop-shop, something that contributes to their ability to win and retain more UHNW clients.
Unlike private banking firms that are subject to the most onerous governmental regulators as well as internal compliance departments when it comes to setting fees and changing how they charge; family offices have the freedom to develop a much more transparent pricing model.
According to Livergood, “Though also regulated, independent registered investment advisors have much more freedom when it comes to fee charging, as when they want to change their fee schedules, they just have to amend their Form ADV filed with the SEC and disclosed to their clients and prospective ones.”
Hybrid, flexible pricing models can also help avoid so-called “service creep,” which affects both MFOs and wealth managers, with almost seven in 10 MFOs and eight in 10 of wealth managers responding that they simply roll new services into their existing fees.
In addition to having a good pricing model in place, advisors need to track their hours per client relationship in order to track relationship profitability, something few firms do. Lack of insight about service costs is a key obstacle. “While the revenue side is known, often the tracking of time (which has a direct bearing on the costs) a relationship team spends on any given relationship is not done, or if it is, it is only an estimate,” says Livergood.