Could competition for wealthy families mean a ‘race to the bottom’ on fees?
We might see more competitive pricing, but family offices say they won’t risk quality of service
It’s frequently said when you’ve met one family office, you’ve met one family office. Similarly, the fees charged by family offices can be equally diverse.
“Everyone is different,” says Neil Nisker, co-founder, chief investment officer and executive chairman of Our Family Office Inc. in Toronto. “Whether it’s a family with four children and 10 corporations, or two children and two corporations, the time we spend and services we provide can be quite different for each client.”
Family offices provide varied services for clients, ranging from investment management – portfolio asset allocation and access to high-touch, low-fee investment strategies – to helping clients prepare their children to be good stewards of wealth.
Family offices generally act as the financial central nervous systems for each unique family. In turn, the fees, while significantly less than what retail investors pay, vary from one office to the next.
The first distinction to make is between single family offices and multi-family offices.
“A single family office – serving one family – can cost a minimum of $1 million” per year to operate, says Nisker, who runs a “shared family office,” more commonly known as a multi-family office. Families typically need several hundred million in assets to make this expense worthwhile.
Multi-family offices use three fee models
Single-family offices, on the other hand, are borne of more hands-on work by family members who set up the office’s structure and hire the professionals to run it.
“Consequently, those professionals operating the single-family office are not charging fees,” says Tom McCullough, chairman and chief executive officer of Northwood Family Office, a multi-family office in Toronto. “They’re employees often drawing salaries from the family.”
Multi-family offices provide the same services as single-family offices. Because they serve more than one family, however, the annual cost to clients is less.
He further describes it as the difference between sole ownership of a private jet versus shared. “With a multi-family office, you get the private jet experience but you don’t have to pay for the jet’s entire cost.”
Multi-family offices generally use three fee models: fees based on assets under management (AUM), fees for service, and a hybrid of the two.
“The most common is a fee as a percentage of assets under management,” says Jeff Noble, the Toronto-based director of BDO Canada’s multi-family office services. The average charge might be 50 basis points annually on investable assets, he says, though the fee often falls the more AUM clients have.
No referral fees
The key piece of fees paid on AUM is investment management. This service includes asset allocation and access to and oversight of a variety of institutional-style strategies (such as private equity, venture capital and real estate) from best-in-class managers, independent of the family office.
“We don’t choose, for example, managers that pay us referral fees because we believe independence and objectivity are of the utmost importance for our clients,” Nisker says.
The second model, fee for service, is often used “when a family has a small amount of investible assets relative to their total net worth,” says McCullough.
An agreed-upon annual fee is often used, for instance, for clients with $300 million in wealth that may have only $30 million in investible assets. As such, an AUM fee model may not be sufficient compensation for all services provided.
“So that flat fee can generally range from $100,000 annually to $1 million,” he adds.
The third fee structure – the hybrid – often involves fees on AUM for core services, such as investment management and administration, and a flat fee for additional needs such as tax, estate and philanthropic planning.
“If the AUM is large enough, those additional fees are diminished dramatically and even in some cases can be eliminated completely,” Nisker adds.
In the ‘stay wealthy’ business
While annual fees of six figures and up may seem hefty to some, many ultra-high-net-worth Canadians understand the value, Noble says.
“These families are very concerned about getting things done the right way because many have spent a lifetime getting wealthy … and now they’re in the ‘stay wealthy’ business.”
Their needs are many, in the areas of investing, taxes, philanthropy, trusts and estate planning, all of which could be provided in-house. Or family offices might connect clients with professionals in these fields independent of the family office. Additionally, family office professionals say they often meet with these professionals on clients’ behalf and negotiate lower fees because clients in aggregate represent immense buying power, McCullough says.
“The main benefit is someone is looking at the whole picture like a CEO,” he says. “One person has the overall vision … integrated into day-to-day management.”
Increasing number of family offices
Wealthy Canadians looking for family offices have greater choices now, too, though the market is less developed than in the U.S. and Europe, he adds.
More independent firms have sprouted up, and large financial service providers have entered the space as well, leading to more competitive fee pricing, Noble says.
Yet he does not foresee “a race to the bottom” regarding fees. “These families know what that would mean: low margins and lower service.” Rather, Canada’s wealthiest families seek value for high-touch financial needs, he adds.
Still, costs should continue to fall with the rise of fintech. “Technology will drive costs down while improving service because turnaround times will be faster,” Noble says.
Yet fintech can improve high-touch, personal services only so much, and, in turn, reduce fees, he adds.
“There will always be a need for an empathetic listener to help navigate the [land] mines of intergenerational wealth that no chatbot could replace.”