The wealth management sector dreads having to raise fees, and many family offices haven't hiked them since 2021, worried about losing clients. But that creates risks that clients who only choose a firm on price grounds can easily defect, and it also suggests that organizations aren't good at showing their value proposition.

“If you haven’t raised fees in the last three years, you need to catch up,” was the blunt message from Family Wealth Alliance’s senior director of strategic planning Brandelynn Perry to family offices and wealth managers serving ultra-high net worth clients.

Half of wealth management firms and nearly one-third of family offices surveyed in the FWA’s recently released Fees and Pricing in Family Wealth study haven’t, in fact, increased client fees since 2021.

Fear of losing clients to a competitor is implicitly the main reason why firms are reluctant to raise fees, said industry consultant Jamie McLaughlin, who co-authored a recently released report on fees and pricing for ultra-high net worth client services for Schwab Advisor Family Office.

But it is also clear “that the client who buys a firm’s service on price alone is a client that’s inherently at risk if they think they can get the service somewhere else for less,” McLaughlin said. Even more concerning, he added, “Perhaps advisors can’t articulate their value or, worse, they lack the confidence that they’re delivering value.”

The FWA survey didn’t explicitly ask firms why they haven’t raised their prices. But after “speaking to hundreds of firms all the time,” Family Wealth Alliance founder Tom Livergood (main picture) believes that some firms “just aren’t paying attention and staying the course,” while others may not even realize that they are undercharging. Other firms are aware that they should be charging more, he said, but “may not have the confidence to approach their clients about it.”

Those fears are misplaced, according to Livergood, whose company is now a subsidiary of Charles Schwab. “Firms need to be more confident about articulating their value to the client,” he told Family Wealth Report. “When we see firms tell their best clients they need to increase fees because they need to be profitable to best serve them and be able to hire the best talent, and spread the increase out over six to eight quarters, we see very little pushback.” 

Creepy
Increased fees are also critical to combating service creep, where firms give clients more and more non-asset based services without properly charging for them, a phenomenon the report calls the industry’s “worst enemy.” 

Firms are subject to what Perry calls “scope creep” when they’re providing services “not directly correlated to the client’s level of assets.” As a result, family offices and wealth managers are increasingly turning to retainer fees. In 2015, nearly 60 per cent of multi-family offices only charged clients an asset-based fee, according to an FWA study. This year, just 30 per cent of MFOs only charge an asset-based fee, while 70 per cent also charge a retainer fee. 

“Leveraging multiple pricing methodologies supports our long-term strategy,” said Tim O’Hara, vice chairman, Rockefeller Global Family Office. “We find that the basis point fee does not align well to the cost of staffing required to serve as the outsourced family office. Therefore, we normally engage with a retainer fee for those services.” Rockefeller also sometimes charges clients a flat fee to “provide flexibility and price each set of services for profitability,” O’Hara added.

Don’t be afraid to ask
How should family offices and wealth mangers approach clients about raising fees?

A firm’s best clients want them to succeed and should be approached first, the report recommends. “Use the analogy of the building of a custom home and how the builder structures the cost.” 

If the firm is charging 100 per cent on a percentage of assets under management, convert to a mix, the report suggests. “Keep the fee levels the same, but do a split, typically two-thirds AuM and one-third retainer, depending on the client.” And if a firms’ fees are too low, “stair-step increases over six to eight quarters.”

Firms should also renew engagement letters annually to “reframe your relationship, create boundaries, and [delineate] inclusions and exclusions,” the report stated. Currently, only 5 per cent of MFOs and 12 per cent of wealth managers revise engagement letters annually, according to the study. And only 19 per cent of family offices and wealth managers itemized included and excluded services, while 38 per cent didn’t itemize at all.

Growth and anxiety
Overall, the industry appears to be thriving, according the report. MFOs reported client growth rate of 9 per cent last year, and the median profit margin for family offices and wealth mangers combined was 25 per cent. Mean minimum client fees for MFOs rose significantly, jumping 42 per cent to $100,000 this year from $65,000 in 2015.

Those numbers reflect a maturing industry, Livergood said, bolstered by consolidation, an infusion of private equity capital and demand for services outstripping supply.

But competition remains fierce and aggressive and well capitalized players continue to enter the market. And as global geopolitical concerns mount, wealthy clients are in a state of high anxiety, triggering “a flight to quality,” Livergood said. “It’s a huge opportunity for firms who get it right.”