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.