Judy Martel
06/01/2007
In the view of Mike Denove, 60, an independent investor who works as a management consultant in Clifton, N.J., "life is negotiation." He applies this principle to the bill he pays to his financial advisory firm. "As a consultant, people buy my services and they pay a fee for it, so I’m very attuned to fees," he says. "If a consumer gets value for the service, he should be happy to pay." Denove invested his money with Financial Advisory Consultants in Naples, Fla., several years ago, but only recently negotiated the amount he is charged. Initially, he hired the firm to manage the equity portion of his portfolio, and handled his fixed-income portfolio himself. But when he decided to invest his fixed portfolio in high-yield bonds, he sought professional help. "I didn’t know a junk bond from a hole in the wall," he says. He asked Brant Keller, president and founder of Financial Advisory Consultants, to manage the portfolio, but balked at the cost. "I felt the fee was unfair, because the return on bonds is lower than the return on equity, and I negotiated a fee that was a modest percentage of the return," Denove adds.
Keller admits that he does not often encounter a client who is savvy enough to distinguish how stock and bond portfolios are administered differently. "There is less management potentially on a day-to-day basis for bonds than for equity," he says. He and Denove negotiated a fee agreement for the bond portfolio that was acceptable to both. Denove initiated the discussion by stating that he thought the fee was too high, and Keller countered with a lower amount, which Denove accepted. "We went back to our third-party managers on the bonds and asked them to absorb some of the discount," Keller says.
In his 21 years in the business, Keller says that he only recently encountered clients seeking to negotiate a reduction. "Over the last 12 to 24 months, I’m seeing more and more fee pressure," he says. He attributes the increased focus on fees to smarter investors. Affluent clients usually hire more than one financial advisor, he points out, giving them more exposure and sensitivity to fees. Roughly 5 to 10 percent of his clients now negotiate, and those individuals tend to be former business owners, CEOs or CFOs. "They have a sense that in business all things are negotiable," Keller says. Clients typically bring up the subject of fee negotiation within the initial round of three or four meetings, before they invest with the firm.
"The more astute they are in the asset management side, the more often those higher-net-worth clients will try to negotiate," Keller says. His firm, founded in 1999, manages $160 million in assets and charges fees based on a sliding scale of assets under management, with no commissions or proprietary product fees.
Hunter Wilson, president of the Palm Beach office of Asset Management Advisors, a multifamily office, says, "In many cases, there’s an expectation about fees because of other financial firms." Clients come to him confused by the various methods companies use to calculate fees; many investors seem unable to reconcile different service models among firms. Asset Management Advisors began as a multifamily office, and has always charged a fee based on assets under management. The firm, founded in 1989, manages $10 billion, with an average client AUM of $25 million. It does not negotiate fees, Wilson says. "By holding to our published fee schedule, we are faithful to clients who are faithful to us." The firm brings clients together occasionally throughout the year, and Wilson says families may compare experiences, including their fees. "The only way we can be totally objective is to charge an up-front management fee based on assets."
Keep Your Friends Close . . .
Clients who intend to negotiate should master some
understanding of how fees are assessed in the financial services
industry—although this is often easier said than done. Advisors structure their
fees in a variety of ways, and some methods remain hidden. Embedded fees on
proprietary products or commissions can be difficult to discern.
"Pricing in the industry, unfortunately, remains a great mystery in terms of how it works," says David Welling, vice president of strategic marketing programs at Schwab Institutional. "If you need to read the fine print to understand what you’re really paying, it’s not a good sign." He recommends that individuals make sure they understand how their advisors are compensated—a fee-based structure benefits investors by offering both transparency and objectivity.
"You need to understand what you’re in the market for and what level of support you want before you start negotiating," Welling adds. Advisors are more likely to negotiate fees for investment portfolios starting at $5 million, because those investors’ situations are usually more complex and the level of advice often extends beyond the assets. "Very often, if you fixate on the pricing, you can overlook what’s really most important, which is what level of advice and support do you really need based on your financial situation."
Wilson and Keller agree. Their firms offer a full scope of wealth management services beyond investment counsel, including advice on tax preparation, estate planning and a variety of other specialized services catered to a client’s specific needs. Investors should translate that additional expertise into more perceived value, Keller says. He predicts many firms will have to raise their minimum investment level if fee negotiation becomes an enduring trend. Firms simply can’t afford to provide clients with the level of service they require if they aren’t paid enough.
Ron Roge, chairman of R.W. Roge & Co., a financial advisory in Bohemia, N.Y., predicts that investors’ focus on fees will drive more firms to commoditize themselves in an effort to compete on price. Roge’s company provides a full range of wealth management services for a fee based on assets under management. The firm manages a total of $250 million of discretionary assets. Roge will not negotiate fees, and says he rarely encounters clients who ask. "I think I’ve only had three or four people ask if fees are negotiable," he says, although he concedes that competitive pressures to reduce fees exist in the industry.
Tactical Advantage
When clients apply business tactics to their negotiations, as
Denove did, they are more likely to win their argument, Keller says. Clients who
can substantiate their request with other quoted fees from the competition, for
example, demonstrate that they’ve done their homework. "Being in the business,
we know if they’re being straight up with us," Keller adds. Additionally, the
more money investors invest with a single firm, the more likely they are to
obtain a reduction in fees.
According to Welling, a recent Schwab study found five factors that most affect variation in price: the size of the relationship; complexity of assets under management; type of services offered; level of customization; and other fees involved in the relationship, such as financial planning, bill paying and estate planning fees. "The entire relationship is on the table—everything is customized," Welling says. "The advice is customized, the circumstances in terms of the range of services are customized. Just like any highly customized service, they’re negotiating a fee based on some very specific levels of service."
Investor Jack Croul, 82, of Newport Beach, Calif., is satisfied
with his current financial institution to the point where he feels no compulsion
to negotiate a lower fee. "I’m fat, dumb and happy," he claims. Croul began
investing with Morgan Stanley in 1996. When he sold his company in 1999, he
enlarged his portfolio with the firm. Croul was part owner of Behr, which sells
paint to Home Depot. His partners conducted negotiations with the retailer, a
process they found exhausting, Croul says. Though he understands negotiations
are part of doing business, he says he has no idea what his fees are, and
prefers the status quo with his advisor because he’s pleased with the
performance of his portfolio. He meets with his advisor once a month. "We’re
making changes all the time," he adds.
Martel is a Certified Financial Planner and the author of
The Dilemmas of Family Wealth: Insights on
Succession, Cohesion and Legacy.
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Secrets of Negotiating with Your Financial Advisor