is an editor of Private Wealth magazine and the president of Prince
& Associates, Inc., the leading market research firm specializing
in private wealth. He is a highly sought consultant to the
ultra-high-net-worth and elite advisors and originated the use of
high-net-worth psychology in the financial services sector. He is the
author of more than 40 books on private wealth and is frequently cited
as an expert in the national and international press.
Ms. Grove is a respected author, columnist and speaker and a leading authority on the mindset, behavior, concerns, preferences and finances of high-net-worth individuals. She is the executive editor of Private Wealth, the first and only magazine for professionals with ultra-affluent clients, and Cultivating the Affluent, a practice management newsletter for financial professionals.View all articles by Hannah Shaw Grove
Over the past 12 years, the number of affluent investors negotiating the fee they pay for investment management services has more than tripled-a fact that may prompt more individuals to review and perhaps reduce their own fees, putting further downward pressure on an industry that has enjoyed attractive margins during a period of long-term growth. This trend could have a significant impact on the profitability of asset managers, an outcome that may reverberate through the financial services world in unexpected ways if not prepared for or managed.
During this 12-year period we surveyed more than 1,500 different investors, each with a minimum of US$1 million with a fee-based asset manager, to understand the size of their relationships, the extent to which they negotiated their fees and the factors that contributed to their success in doing so. Surveys were conducted every four years to develop a longitudinal database allowing us to track progression over time. To better understand the relationship between fee negotiation and assets under management, we segmented each survey sample into one of three categories based on the total assets they had entrusted to an investment manager (Exhibit 1): investors with $1 million to $5 million; those with $5 million to $10 million; and a final group with more than $10 million. It's important to note that this group may have had additional investable assets in other vehicles such as hedge funds, private equity, securities, pooled funds and/or retirement accounts, as well as assets with commission-based providers.
Once segmented, we asked them to answer a battery of questions about the agreement they have in place with the investment manager with the largest share of their assets.
What They Got
Over time, all segments of investors grew more aggressive in negotiating fees with their primary asset managers (Exhibit 2). In fact, just 9% of investors negotiated their fees in 1995 while 29% of investors did so in 2007-an increase of roughly 300%. Investors with more money were more likely to have negotiated a fee reduction, a pattern that remains consistent over time. 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. And 12 years later, nearly half the 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 increased over time is the amount of the reduction investors were able to realize (Exhibit 3). In 1995, the average fee reduction was 11%. This means that investment managers charging 100 basis points, or 1%, delivered the same service to investors who 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 was almost twice as large, at 21%, meaning the negotiated fee for a $1 million investment was 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% fee reduction, the group of investors with $5 million to $10 million in assets achieved a 21% reduction, and the group with the most assets increased their reduction to 31%.
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 push-back there was just eight or 12 years ago decreased as the number of asset management offerings increased and the competition for assets intensified (Exhibit 4).
As discounting became more common, asset managers kept tighter reigns 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.
Broadly speaking, wealthy investors who chose to negotiate their asset management fees have been successful, and that success has increased with the passage of time. It's safe to say that the environment for negotiations has improved for investors, and it is now easier to get a fee reduction and to affect the size of that reduction. Not surprisingly, we can also conclude that investors with more money to invest have an advantage when it comes to fee negotiation. But assets are only part of the equation; the frame-of-mind and the savviness of the investor play a critical role as well.
What It Takes
We identified two intangible factors that contribute to successful fee negotiation. The first factor is a competitive mindset. Investors who rated highly for a competitive mindset agreed strongly with the following statements:
Winning is all that matters.
I believe everything is negotiable.
I approach business relationships to win, no matter what.
I know how to get the best possible deal from vendors.
I'm always on the lookout for an "edge."
Conversely, they disagreed with the following statements:
I strive to achieve "win-win" solutions.
I approach negotiations with an open mind to the other side's perspective.
I'm always very interested in being fair.
Based on this criteria, roughly 70% of the wealthy investors surveyed had a strong competitive mindset (Exhibit 6). This quality is slightly more prevalent among wealthier investors, which is not surprising given its importance in general business success and the creation of private wealth.
It is worth noting that 100% of the wealthy investors involved in fee negotiation, regardless of their asset level, possessed this characteristic. In other words, the right attitude can be the difference between accepting whatever fee structure is presented and taking charge of the pricing discussions and negotiating to a satisfactory result. But having a competitive mindset is just the beginning. Further analysis shows that a competitive mindset is necessary, but not sufficient, to successfully negotiate a reduction in investment management fees.
The second-and decisive-factor in the ability to negotiate fees is the investor's understanding of, and experience with, the business of investment management. Predictably, the greater an investor's understanding and experience, the better positioned they were to negotiate.
One measure of experience is the number of investment managers currently employed by an investor. On average, the investors who negotiated their fees worked with three or more investment managers, double the number used by investors who didn't negotiate their fees (Exhibit 7). Simply put, investors with more money management relationships had more exposure to the business.
At the same time, those investors who negotiated their fees were extremely confident in their knowledge of the business; a confidence that translated into a willingness and ability to engage in fee negotiations (Exhibit 8). In effect, they were informed consumers.
Approximately 70% of the investors who negotiated their fees cited the asset managers themselves as the most important educational resource (Exhibit 9). There are also other sources of information that investors can draw on in an effort to learn more about the business of asset management. Nearly 60% of investors rely on the media to inform them, 30% turn to other advisors such as accountants and attorneys, and 14% get their information from peers and other investors.
Advisors should be aware that many affluent clients may already have managed to lower the fees they pay to other firms and hope to achieve similar reductions across all their financial relationships. Even if they have not yet done so, there is a clear trend toward more frequent and more flexible fee negotiations between wealthy individuals and their investment firms. This fact will, of course, impact advisors to the wealthy and providers of investment expertise differently depending on their chief capabilities and their current fee structure.
It is easiest for the wealthy to leverage their assets in an advantageous way when a product is being sourced like a commodity-to play a specific role in a broader plan or be part of a portfolio's asset allocation. Such a reduction in fee revenue will have a greater impact on the asset manager than it will a wealth manager, who can recoup the difference through other product-related or service-based fees.
Effective negotiators have a competitive mindset and a belief that everything in life is open for discussion. While many financial professionals will not want to ease the process of lowering fees, it is valuable to know how high-net-worth individuals think about and approach fees and to use that knowledge to communicate and set expectations more effectively over time.