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.
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