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| First Person: Industry View |
The Costs of Counsel
Scott Welch
11/01/2005
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As
you sit down with your new wealth manager to negotiate an appropriate fee
structure, remember that, regardless of the pricing model, the key to all
successful business partnerships is that both parties believe that fair value is
being exchanged.A Typical Wealth Manager Fee Negotiation
1. The wealth manager has a standard schedule of fees quoted as %-AUM
(percentage of assets under management). This schedule typically contains break
points. As the assets under advisement increase, the schedule slides down (in
percentage terms). A firm might structure its break points as
follows:
• First $10 million: 1.50 percent
• Next $15
million: 1.00 percent
• Next $25 million: 0.75
percent
• Thereafter: 0.50 percent
2. As the asset size increases past a certain amount, which will vary from
advisor to advisor, families are usually successful in negotiating a reduced fee
away from the standard schedule (which is an interesting paradox, because the
complexity of the relationship and work to be done usually increases
correspondingly with the asset size). Families should determine a firm’s AUM
trigger for renegotiation as part of its overall discussion of the fee schedule.
3. After a certain asset size, most families simply won’t pay a %-AUM fee—the
gross number simply looks too big to be palatable. At this point a negotiated
flat fee is often the agreed-upon solution. It is in the best interests of both
parties that a flat-fee agreement contains language capturing the specific scope
of services to be delivered, as well as a process for periodic review and
evaluation of the relationship to ensure both parties remain satisfied.
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