Over the past 12 years, the number of affluent investors negotiating fees for investment management services has more than tripled—a fact that may prompt more investors to review their own fees, putting pressure on an industry that has enjoyed attractive margins during a period of long-term growth.

Through our work, we’ve interviewed hundreds of high-net-worth investors about their negotiating habits and tactics. We segmented investors into three categories based on the total assets they had under management with their primary advisor: $1 million to $5 million; $5 million to $10 million; and more than $10 million (Exhibit 1). We consistently asked the respondents to answer a battery of questions about the agreement they have in place with their primary investment manager. In cases in which an investor used more than one investment manager, the respondents answered the questions about the manager with the largest share of their assets.

Wealth Provides Leverage Against Advisors
Over time, all three segments of investors grew more aggressive in negotiating fees with their primary asset managers (Exhibit 2). In 1995, just 9 percent of investors negotiated their fees. Twelve years later, 29 percent of investors did so—an increase of roughly 300 percent. Investors with more money were more likely to have negotiated a fee reduction; this pattern remains consistent over the years. In 1995, three times as many investors with more than $10 million in assets were negotiating fees than investors with $1 million to $5 million in assets. In 2007, nearly half of investors with $10 million or more had negotiated a fee reduction with their primary investment manager, a number proportionately twice as large as those investors with just $1 million to $5 million to invest.

Another figure that has increased over time is the amount of the reduction investors were able to realize (Exhibit 3). In 1995, the average fee reduction was 11.1 percent. This means investment managers charging 100 basis points (or 1 percent) delivered the same service to investors that negotiated a fee arrangement for 88.9 basis points. Numerically speaking, the fee for a $1 million investment dropped from $10,000 to $8,890. In 2007, the average fee reduction is almost twice as large, at 20.9 percent, meaning the negotiated fee for a $1 million investment is now $7,910.

All investor segments nearly doubled the amount of their fee reduction over the 12-year period but, as expected, those investors with more assets negotiated larger reductions in fees, underscoring the leverage that frequently accompanies wealth. In 2007, investors with $1 million to $5 million in assets obtained an 11.2 percent fee reduction, the group of investors with $5 million to $10 million in assets achieved a 21.4 percent reduction, and the group with the most assets increased their reduction to 31.1 percent.

Interestingly, the majority of wealthy investors say they faced very little resistance from their asset managers when broaching the subject of a fee reduction. What pushback there was just eight or 12 years ago has decreased as the number of asset management offerings has increased and the competition for assets intensifies (Exhibit 4).

But as discounting has become more common, asset managers are keeping a tighter rein on the amount of the discounts offered. More investors indicate that it was harder to influence the size of the reduction than it was to achieve any reduction at all (Exhibit 5). Over time, investors with $5 million or more in assets found it easier to negotiate that point.

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.

At the same time, those investors who negotiated their fees were extremely confident in their knowledge of the business; a confidence that translated into a willingness and ability to engage in fee negotiations (Exhibit 8). In effect, they were informed consumers.

It stands to reason that a by-product of broader exposure to money managers is greater knowledge, and that is the case. About 70 percent of the investors who negotiated their fees cited the asset managers themselves as the most important educational resource (Exhibit 9). Fortunately, there are additional valuable sources of information that investors can draw on in an effort to learn more about the business. Nearly 60 percent of investors rely on the media to inform them, 30 percent turn to other advisors such as accountants and attorneys, and 14 percent receive their information from peers and other investors.

Earning Your Share
The trend toward more frequent and more flexible fee negotiations should be good news for investors in all financial brackets—not just the highest ones. However, research shows that fee reductions don’t simply happen without the client taking the initiative or creating the right conditions. Effective negotiators credit the following factors with their success:

• A competitive mind-set, a willingness to negotiate and the desire to shape a favorable outcome for themselves.
• A detailed understanding of the business model of the individual or organization with whom they are negotiating.
• And a belief that everything, no matter what it is, can be negotiated.

The Methodology
Over the course of 12 years, we’ve surveyed more than 1,500 different investors. Each investor has a minimum of $1 million and each uses a fee-based asset manager. We do this to understand the depth of their relationships, the extent to which they negotiate their fees, and the factors that contribute to their success in doing so. We conducted the surveys every four years to develop a longitudinal database, allowing us to track progression over time. To better understand the link between fee negotiation and assets under management, we segmented each survey sample into one of three categories based on the total assets entrusted to an investment manager: $1 million to $5 million; $5 million to $10 million; and more than $10 million (Exhibit 1). Note that these affluent investors may have had additional investable assets in other vehicles such as hedge funds, private equity, securities, pooled funds and retirement accounts, as well as assets with commission-based providers.

Illustration by Gary Hovland.

Russ Alan Prince is president of Prince & Associates, a market research and consulting firm for the affluent, and the author of more than 35 books on related topics. Hannah Shaw Grove, an author and columnist, is an expert on the behavior, concerns and finances of affluent consumers.

Additional Information
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