The Cost of Being Wealthy

A family with $500 million in assets could pay 1.15% to 1.75% of total wealth in costs and fees annually, amounting to $5.75 million to $8.75 million, according to Cambridge Associates, for example. writing in a thesis. Recent reports.

To ensure fees are reasonable and reasonable for families, Cambridge provides a framework that can be used to assess the cost of managing wealth.

“Sometimes when families think about costs, they just look at the data. They may look at surveys that just look at the final numbers of costs against some kind of benchmark, but they never quantify it. Charlie Grace, Managing Director, Family Enterprise Solutions, Private Clients, Cambridge Associates.

Penta The report’s author, Grace, spoke of approaches to ensure families are spending the right amount to manage family wealth for generations.

cost of asset management

Investment management fees typically represent more than 50% of the annual cost of all wealth management services, according to Cambridge Associates. But it’s not always practical to reveal all the costs your family is paying. Some investment fees come from mixed investments, such as hedge funds and private equity, which can be expensive but difficult to track, Grace said.

Even relatively inexpensive exchange-traded funds can present problems as fees are automatically deducted.

“I’ve seen a lot of examples where families don’t necessarily track it down,” he says.

Grace doesn’t recommend families scrutinize these costs weekly or monthly, but it may be helpful to scrutinize them every two to three years.

For a family with $500 million in assets, Cambridge Associates calculates third-party investment costs to be between 0.75% and 1.05% of annual wealth (US$3.75 million to US$5.25 million). -The investment cost is further 0.10% to 0.20% of the assets, or US$500,000 to US$1 million per year.

According to the report, these estimated investment costs include strategic investment advisors, third-party asset managers for both actively managed securities and funds, alternative strategies, custody, brokerage, research and related costs. It says.

On top of all of this, Cambridge Associates adds investment and non-investment costs for the family office (which may include the chief investment officer’s salary, as well as philanthropic management and other services). possible). These costs can range from an additional 0.30% to 0.50% of assets, or US$1.5 million to US$2.5 million.

But as Grace points out, costs are higher than most standard assumptions because certain fees, such as mixed funds, aren’t tracked or the methodologies used by families don’t capture specific costs. often become

This can happen, for example, when family members hold the shares intensively. Oversight of that investment may not be as active as a diversified portfolio. That means lower management costs, and when the value of that asset adds to your total holdings, it can appear to dilute what your family is paying for everything else.

“There will always be wrinkles like this in any kind of cost analysis,” says Grace.

The price of complexity

If your family has complex needs, your family’s wealth management costs can also fluctuate greatly. Cambridge Associates gives examples of his two virtual families, each with his US$300 million fortune, but with vastly different circumstances.

One family contains three households. Their wealth management plan includes 12 “entities” which represent trusts, partnerships and other arrangements. They do not have a family office and instead use third party advisors. They have filed 20 tax returns. And every year he allocates 10% of his assets to his private equity and hedge funds. The annual property management fee is 1% of total assets, or US$3 million.

A second, more complex family has 15 households. Their plan includes 45 entities, 65 tax returns, both third-party advisors and family offices. They allocate 30% of his assets annually to his private equity and hedge funds. What are their annual expenses? 1.5% of assets, or US$4.5 million. In other words, this family costs US$1.5 million more annually than other families due to its inherent complexity.

But families with that level of complexity may have to pay more to get the services they need. The key is to avoid paying more than you need. For example, one of his ways to cut costs is to outsource more assets to a single service her provider or investment manager.

For example, investment managers may receive lower fees if they manage more of a family’s assets. The report gives an example where the manager charges a fee of 0.58% per annum on his US$15 million investment, while charging only 0.34% per annum on a US$50 million investment.

Families can also see how much they are paying for services. For wealthy families, it may make more sense to pay for an advanced estate planning lawyer for specific cases rather than hiring a lawyer to handle all the family office’s legal services, Grace said. says.

No matter how families think of costs, they need to be factored into an overall wealth management strategy that includes family values ​​as well as goals.

For example, some costs are difficult to quantify, says Grace. “What is the value of having a professional service from a company with a really good reputation?” [for] You’ll sleep better at night,” he says. “Even if it is not easy to quantify, I would argue that it should also be taken into account when considering the cost-benefit analysis.”