Evaluating Advisor Fees
As a wealthy investor, you’re likely paying several different professional advisors to help you successfully undertake your wealth management process.
Being able to objectively evaluate the cost of the services you’re being provided with is critical to ensuring you’re getting the best out of your team in a sustainable way for everyone involved.
This post outlines the type of professionals you may be working with, and how to start conversations about the value you are receiving.
Which Professionals?
Here is a short list of the professionals you may be working with:
- Lawyers
- Accountants
- Investment Managers/Advisors
- Family Office Advisors
- Insurance Advisors
- Other Consultants (e.g. philanthropic advisors)
A short description of the way each professional works and is compensated is provided below.
Following a table listing the various attributes of each professional and some same questions to ask, a cost breakdown of a typical wealthy family is provided below also.
Lawyers
Lawyers generally work on an hourly basis. When starting a new relationship with a lawyer, you’ll be able to meet and see whether it’s a good fit and whether the lawyer has the expertise and capacity to help you. This first meeting is usually free, but if you’d like to have legal work done, then you’ll need to submit a “retainer” payment. This retainer is a lump sum payment that the lawyer will draw on as work is done.
Lawyers will quote a rate per hour for themselves, and for the other lawyers that may work on your file including law clerks.
Accountants
Accountants also generally bill by the hour, but depending on the type of the accountant, their work tends to be more regular/consistent compared to lawyers. This is certainly the case with filing tax returns for individuals, corporations, and trusts which happen annually.
Accountants also provide ad-hoc consultations and will do special projects. In these cases, its important to outline the scope of work and deliverables before beginning.
Investment Managers
Investment managers make up the largest amount of fees paid annually by most wealthy investors. Investment managers are typically paid by a percentage of your account value or the value of your investment. For example, a fund manager may get paid 1% of the value of the fund they are managing.
Sometimes the fees investment advisors charge is embedded inside the investment service they are providing (like mutual funds). Other times, the fees investment advisors charge is explicitly listed on a client’s statements (like for fee based advisors).
Family Office Advisors
Some family offices are in fact investment managers in disguise. In these cases, the family office might charge a fee based on the amount of wealth being managed. Other family offices charge an annual fee based on a suite of services being provided. Usually, clients can choose which services they would like and receive an annual fee based on those specific services.
Insurance
Insurance agents are generally paid a commission based on the amount of insurance they sell. Their commission might also be different based on the type of insurance sold and the company they are representing. The fees paid to insurance advisors are usually embedded inside the insurance product being purchased, so clients won’t see those fees specifically.
Other Consultants
Wealthy families typically work with several other consultants to manage their affairs. These consultants might provide a wide range of professional and personal services. To control costs and receive the best value, wealthy investors should make sure to outline the scope of work being proposed before the work is undertaken and then regularly evaluate the value they are receiving.
| Service Provider | Compensation Metric | Questions to Ask |
| Lawyers | Hourly, per project | – How is your fee structure determined? – Do you charge per project or by the hour? – Which way will you charge? (billing process/format) – Why do you charge the way you do? – Can you provide an estimate of total cost? – Can you provide examples of why the cost might be lower or higher? (i.e. what are the factors that determine cost) |
| Accountants | Hourly, per tax return, per project | – How is your fee structure determined? – What is the estimated cost of our engagement? – If I consolidate more of my tax work with you, will my cost go down? |
| Investment Managers | Commission, percentage of assets, bonus | – How are you paid? – Can you show me how those fees are broken out? (firm, advisor, etc) – Will I see the fees paid on my statement? – How will statements of my account be provided? (frequency, contents, etc) |
| Family Office | Flat fee, per service(s) | – How are you paid? – Are you paid based on a percentage of assets under management or some other metric? – Can you provide me with a list and description of the services I will be provided? |
| Insurance | Commission | – How are you paid? – Can you provide me with a breakdown of your compensation/commission based on the various products that you offer? – Are you able to offer products from various insurance companies? (provide a list) |
| Other Consultants | Hourly, per project | – What do you see as the scope of work, timeline, and tangible deliverables? – How do you determine the project fee? – How or when should we review your fee in case the work turns out to be more or less involved? |
Client Example – Tim & Tom
Tim & Tom are wealthy brothers who each have spouses. They also have 4 kids between the two families. They co-ordinate their financial affairs with a shared group of advisors. An update to their wills & powers of attorney need only be updated periodically. But, other services such as investment management and accounting services are paid for on an ongoing basis. The family owns a $40 million portfolio of commercial buildings (warehouses, plazas, land) and a $75 million portfolio of stocks & bonds.
The family earns approximately $3.5 million annually from their investments before taxes & the fees outlined below.
Here is a breakdown of the annual fees they pay:
| Legal (estate, real estate) | $20,000 | 2.57% |
| Accounting (8 personal returns, 3 corporate returns, annual review) | $40,000 | 5.14% |
| Investment ($75 million of Assets Under Management (“AUM”)) | $562,000 | 72.23% |
| Family Office (admin support, document management, bookkeeping) | $36,000 | 4.62% |
| Insurance (life, variable annuities, estate planning) | N/A | |
| Property Management (asset management, bookkeeping, admin, brokerage) | $120,000 | 15.42% |
| Total Annual Cost | $778,000 | 100% |
The most important thing to note from the table above is that investment management fees represent 72% of the total annual fees the family pays. This is typical for wealthy investors with a passive investment portfolio, but it could be lower with some negotiation/review. Based on an account value of $75 million between advisor relationships at two bank owned brokerage firms, the family is being charged an annual fee of 0.75%.
Overall, the family is paying a 0.68% fee of their assets under management or 22% of the gross income they receive.
Our Family Office
Evaluating your expenses is critical to successful wealth management. Surprisingly, many wealthy families have not undertaken a comprehensive review of their budgets. But doing so could result in large cost savings. For example, reducing the annual fee on investment management by 25 bps could save a family with a $75 million investment portfolio more than $185,000 per year.