Advising the Ultra-Wealthy: The State of the Industry

Advising the Ultra-Wealthy: The State of the Industry

The Family Office Exchange (FOX) has released a report on the state of the ultra-wealthy advisory business.

The report, based on a survey and interviews, draws three broad conclusions: first, the business is in a healthy condition; second, its value proposition is in transition, away from asset-based and toward retainer-based revenue; and third, many advisors are rethinking their marketing and branding.

A Healthy Business

Regarding the underlying matter of health, the advice business’ revenue has “shown resilience to lower asset values,” the report says. The median firm revenue was $12.8 million in 2016, $13.7 million in 2017, and $15.5 million last year.

Asked “how many new ultra-wealthy family clients joined your firm [in 2017]?” the answers ranged from one to 10: for 2018, the range was from three to 13. The median new assets obtained for administration from a given new client were $32 million for 2017, but they were $42 million for 2018.

This is fortunate, because it is often difficult to negotiate a fee increase with the established or “legacy” clientele. With the new clients (“prospects”), one has more of a clean slate.

Total expenses have grown in recent years, but the pre-tax operating margin has remained constant 2016-18. The median margin actually increased slightly, from 34% in 2016 to 37% in 2018.

Price and Value

Advisors participating in FOX’ survey were asked, “If you were presented with the following opportunity what fee would you charge for this piece of business?” Respondents were asked to include all sources of wealth management-related fees, but to exclude fees paid to third parties. Where the opportunity at issue was the business of a new $100 million client, the proposed fee was 31 basis points.  That is down from 34 basis points in 2017.

FOX maintains that this downward shift is not simply the spontaneous result of supply and demand. It is part of a deliberate shift away from asset-based revenue. Asset based fees decreased year to year from 67.5% to 67.3% of revenue, while retainer-based fees increased from 27.9% to 28.2%.

Many firms are offering a wider range of services in order to encourage retainers and allow for a fee structure on that basis.

Unfortunately, a resistance to this shift is developing. In 2017 none of the advisors surveyed by FOX believed that their clients misunderstood their value proposition in ways that caused the advisors to have to “explain and re-explain the benefit of what they deliver.” But in 2018, 12% of the interviewees believed exactly that.

In 2017, likewise, 52% of the interviewees said flatly that their clients understood the “strategic services” offered. In 2018, that number is down to 23%.

Prospects have a better understanding of these things than do legacy clients. As one interviewee said, when there is no prior history “it is much easier to explain our comprehensive scope of services and how [we] are compensated.”

Marketing and Branding

A lot of family offices changed their names in 2018. They’ve offered several reasons why:

  • A desire to raise visibility;
  • The consequence of an organizational change or acquisition;
  • An increase in capabilities, whether “built” or “bought;” and
  • A change in positioning vis-a-vis the market.

One FOX member described the significance of its new name as “conveying the value of our softer (strategic) services and differentiating among other firms who either do or appear to deliver similarly comprehensive services.”

A name change is only one (through sometimes an important) aspect of branding and marketing. The report speaks to several other pieces of the puzzle. For example, those surveyed were asked about the size of their marketing budgets. The question read, “Have you added any new marketing and/or sales resources in the last year?” and asked the respondents to reply with the size of the budget and the size of the marketing staff. In 2017 only 50% said that they had increased their marketing budget, and 19% said that they had hired new (not replacement) marketing staff. Those numbers were both up in 2018, to 83% and 25%, respectively.

One interviewee said, “Despite being strong practitioners in client-facing roles, we are facing how to deal with younger generations….the very nature of the client experience must change.”

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