Determining the right price — a wealth management cost framework for families

May 19, 2023
1 year ago
Charlie Grace, Cambridge Associates

This is an excerpt of a white paper by Cambridge Associates' Charlie Grace, managing director of family enterprise solutions.

Families of wealth are always curious about wealth management costs and often want to benchmark those expenses against their peers. Costs are an important consideration when devising an overall wealth management strategy. What is the right price, and how is it determined?

In some cases, a lower-cost approach may not be sufficient to do the job of wealth management well. Indeed, a family may have good reason for paying a higher price, including superior service and better results. Two of the most notable factors that can increase wealth management costs are the use of sophisticated wealth structuring strategies — often as part of tax efficiency and estate planning — and the execution of alternative investment strategies like private equity and hedge funds. In all instances, cost should be commensurate to the value delivered to the family.

This paper presents a framework that families with substantial diversified portfolio investments can use to evaluate the costs of managing their wealth. The analysis is broken into four parts: evaluation of costs, factors that can cause costs to fluctuate, key questions to ask when evaluating wealth management costs, and best practices. While the paper presents a range of cost estimates drawn from real-world examples, each family’s wealth management cost formula is different. The focus here is to provide families with insights and tools for determining how to meet their unique service requirements and goals at a reasonable cost.

Evaluation of Costs

Families addressing the issue of cost should start by evaluating their total wealth management expenses. Two high-level inputs — investment costs and noninvestment costs — make up total wealth management expenses (Figure 1).

In accordance with a family’s service requirements and goals, investment and noninvestment costs may be linked to a family office, if there is one, or incurred through third-party service providers.

Costs also consist of a wide range of more granular line items, including asset management, next-gen education, financial reporting, tax compliance, trustee fees, record-keeping, property management and family retreats, among others. Often families require broader and more varied services than they initially expect. Figure 2 inventories the wealth management services that families should consider as part of a cost analysis. In many cases, a family office will also serve as a gatekeeper and coordinator of all wealth management activities.

Both a family office or third-party provider can be used to perform designated investment and noninvestment functions. The notion of “build or buy” comes into play when families consider whether to construct their own wealth management capabilities and individualized services inside a family office or to outsource some or all of these tasks to a third-party provider. Some of these costs may also be shared. For example, there may be some accounting services performed by the family office and other accounting services performed by a third party. In this scenario, the two cost buckets should be allocated accordingly.

Figure 3 illustrates typical ranges for annualized investment and noninvestment costs and their allocation between a family office and third-party service providers. Total cost is usually more than 100 basis points (bps) (1.00%) of investable assets, and in Figure 3, the range is between 115 bps and 175 bps. For wealth owners with substantial assets, there can be a wide range of cost levels that fluctuate in relation to individual family circumstances, and a good number will be outside the ranges above. Measuring cost in terms of basis points compared with investable assets — not total net worth — is common practice.