Broadly speaking, affluent investors who choose to negotiate
their asset-management fees have been successful, and that success has increased
over time. It’s safe to say that the environment for negotiations has improved
for investors, and it is now easier to obtain a fee reduction and to affect the
size of that reduction. Not surprisingly, we can also conclude that affluent
investors with more money to invest have an advantage when it comes to fee
negotiation. But assets are only part of the equation; the frame of mind and the
savvy of the investor play critical roles as well.
Employing the Right Negotiating Tactics
We identified two intangible factors that contribute to
successful fee negotiation. First, successful negotiators boast a competitive
mind-set. Investors that rated highly for an aggressive attitude agreed strongly
with the following statements:• Winning is all that matters.
• I believe everything is negotiable.
• I approach business relationships to win, no matter what.
• I know how to get the best possible deal from vendors.
• I’m always on the lookout for an edge. Conversely, the respondents disagreed with the following
statements: • I strive to achieve win-win solutions.
• I approach negotiations with an open mind to the other side’s
perspective.
• I’m always very interested in being fair. Based on the criteria, roughly 70 percent of the wealthy
investors we surveyed had a strong competitive mind-set (Exhibit 6). This
quality is slightly more prevalent among wealthier investors. It is important to remember that all of the wealthy investors
involved in fee negotiation, regardless of their asset level, possess this
characteristic. In other words, the proper outlook can spell the difference
between accepting whatever fee structure an investment manager presents and
taking charge of the pricing discussions and negotiating to a satisfactory
result. But having a competitive mind-set is just the beginning. Further
analysis shows that a competitive mind-set is necessary, but not sufficient, to
successfully negotiate a reduction in investment management fees.
The second—and decisive—factor in the ability to negotiate fees
is the investor’s understanding of, and experience with, the business of
investment management. Predictably, investors who study and comprehend this area
and gain experience in it better position themselves to negotiate.
One measure of experience is the number of investment managers
currently employed by an investor. On average, investors who negotiated their
fees worked with three or more investment managers, double the number used by
investors who didn’t negotiate their fees (Exhibit 7). Simply put, investors
with more money management relationships had more exposure to the
business.
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