Pressed by very wealthy clients who feel they are overpaying, and under cost pressures of their own, multifamily offices increasingly are searching for alternatives to asset-based fees, according to industry executives and observers.
NEW YORK — Pressed by very wealthy clients who feel they are overpaying, and under cost pressures of their own, multifamily offices increasingly are searching for alternatives to asset-based fees, according to industry executives and observers.
“We’re seeing a lot more experimenting with pricing structures,” said John Benevides, president of the Chicago-based Family Office Exchange, a leading industry trade and research organization. “There’s quite a bit going on in this area.”
Charging clients a flat monthly or annual fee for investment management, advice and other services is emerging as a favorite option for many multifamily offices, according to Tom Livergood, chief executive of another prominent industry trade and research group, The Family Wealth Alliance LLC in Wheaton, Ill.
“Clients seem more comfortable with it,” he said. “They like going into a year knowing they are going to pay a certain amount of dollars based on a flat fee.”
What’s more, Mr. Livergood said, flat fees often are in the best interests of the client. If a family wants to give money away to charity, he said, a potential conflict may arise for a multifamily office that would be losing management of those assets, thereby reducing its fee.
By contrast, Mr. Livergood argued, a flat fee would “match up” the interests of the multifamily office and the family.
The price is right?
Asset-based fees tend either to overcharge or undercharge the client, according to Brian Hughes, senior vice president and national director of business development for Jenkintown, Pa.-based Pitcairn Financial Group.
What’s more, he said, firms usually lack benchmarks when determining fees to help them accurately gauge a fee break point that is both favorable to the client and profitable for the firm.
Asset-based fees also tend to be “too expensive for upper-end clients,” said Rhona Vogel, president of Vogel Consulting LLC, a Brookfield, Wis., multifamily office that now bills the majority of fees on an hourly basis.
“It puts us on the same side of the table as the client,” she explained. “There are no conflicts of interest. Families pay for what they get. They don’t pay for something whether they get it or not.”
At Pitcairn, the use of flat fees and retainers has “grown dramatically,” Mr. Hughes said. “We’ve been able to customize the fees and services provided, and that’s been beneficial to both the client and the firm.”
Noting that many firms are placing more emphasis on family governance and “soft” side advisory work (InvestmentNews, June 18), Harris myCFO Investment Advisory Services LLC of Chicago has explored charging a “blended rate” for investment and advisory services, said Steve Braverman, the company’s Fort Lee, N.J.-based president.
Downside of flat fees
But Dale Veitch, partner and managing member of Daytona Beach, Fla.-based Lexington Family Office Services LLC, speaking at the annual Family Office Forum in Chicago last month, warned that flat fees represented “a very dangerous” option for multifamily offices.
In a subsequent interview, he acknowledged that flat fees may well be “the future of pricing” in the industry. But, Mr. Veitch said, a flat fee could set an expectation for clients that family offices may find hard to meet in the future.
“Families will expect more and want to pay the same fee,” he maintained.
Mr. Veitch suggested that firms consider charging wealthy families a percentage of their net worth or a negotiated “entrepreneurial fee” based on special projects performed for clients.
Some multifamily office executives, however, see no reason to move away from the standard percentage of assets under management fee. Such a model is beneficial to clients because it is transparent and easy to understand, they say.
Since advisers earn more when assets grow and less when they shrink, asset-based pricing also aligns the interests of clients and advisers, proponents say.
Whatever fee model a multifamily office uses, Ms. Vogel said, it’s critical that it and its clients examine their relationship on a regular basis and “discuss whether both parties are satisfied.”
Indeed, said Mr. Benevides of the Family Office Exchange, “we’re finding that firms often are inappropriately focused on the pricing model as opposed to how they communicate their pricing and the value they offer. Clients want to hear the rationale for the fees. That should come first.”
