Tuesday, October 17, 2023
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Family Office Finds Success With Flat Fee Structure



Financial firmsĀ  who are basing fees on assets under management are doing it wrong, particularly when it comes to ultra-high-net-worth clients, according to Douglas Campbell, a financial advisor with Alpha Capital Family Office.


Fees should be based on the services that are provided for each client, no matter what the asset level is, he said, adding that the fee for each service should be based on how much time and resources are required to execute the service.


That is the way Alpha Capital Family Office calculates the fees for its 60 wealthy families who make up the firmā€™s clientele, Campbell said in an interview. Alpha Capital is a multifamily office based in Greenwood Village, Colo., that serves some clients with $1 billion or more in assets. Campbell said he anticipates more firms moving to this type of fee structure.


ā€œOther fee structures are not wrong, but the fee for service model makes sense,ā€ Campbell said. ā€œIt is also fairer to the advisors and to the client. Why should an RIA or family office client with $10 million be charged double the amount than a client with $5 million when they are receiving essentially the same or very similar services?ā€


Although fee-only pricing structures have been pushed as an alternative in the financial industry for years, most firms, especially those servicing high-net-worth and ultra-high-net-worth clients, still charge by assets under management.


According to the 2023 Fidelity Benchmarking Study, the most common fee for a client with $1 million in assets is 100 basis points, regardless of the number of bundled services the firm includes in that fee. ā€œSimilarly, irrespective of the firm size, thereā€™s no clear relationship between the number of bundled services a firm provides and the fees that they charge,ā€ the Fidelity study said.


Many firms offer discounts to some clients, but on average the biggest discounts are offered to the smallest clients, the Fidelity study revealed.


To fight the trend toward fee compression when it is based on AUM that is sweeping the financial industry, many firms offer discounts to come clients. However, Fidelity said a lot of firms offer discounts to grow the client based, which does not always serve the clients well.


Alpha Capital Family Office changed that thinking when developing its fee structure ā€œby electing to charge their UHNW clients a fixed fee, with every client paying a specific dollar amount, which essentially saves clients thousands in fees and provides a better experience that clients truly value,ā€ Campbell said. The total fee for each client depends on the services that are provided.


ā€œThis type of fee structure makes the advisor a true fiduciary,ā€ he added.


For other firms with a 1% fee structure, a client would initially pay an annual fee of $10,000 to an advisor to manage a portfolio worth $1 million. ā€œBut, the value of the client’s portfolio at the start of the year can fluctuate due to market returns, new investments, distributions, and other factors,ā€ he explained. ā€œAlthough the AUM percentage remains constant for these clients, the actual fee varies based on the changes in the value of the assets under management.ā€


Over a period of years, the assets under management probably will grow. If the firmā€™s fee is based on AUM, the fee will grow even if the services provided do not change. ā€œThat is not in the best interests of the client,ā€ Campbell said.

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