FundFire reports that “family offices are putting ‘relentless pressure’ on external management fees as they seek to offset higher costs they face in other areas, according to a survey from Family Office Exchange.” The study found that family offices surveyed reduced their spending on external management fees by 10% between 2014 and 2017.
FundFire interviewed family office executives, who point to a growing focus on lowering fees in order to boost returns for families. Andy Hart, president of Delegate Advisors, was among the advisors interviewed.
“There are multiple ways family offices are going about reducing fees paid to external managers,” saysHart. For example, in the private markets, family offices are increasingly looking to cut out the middleman by engaging in direct deals. “Larger family offices are pooling assets to go direct and using the expertise that families have in various sectors to identify and directly invest in private opportunities, cutting out the layer of private fund fees,” he explains.
Hart explains that as family offices are starting to become more skeptical about the value added by active managers over time, they are increasingly turning to passive strategies in vehicles like ETFs. However, managers that can provide outsized returns in markets where there is a large spread between top-quartile and lower-quartile managers can still command a premium.
“If you’re going to spend on manager fees, they would rather do it in a place that they have a much higher confidence that they’re going to get paid well for the fees they’re spending and the difference in quality is significantly different,” Hart says.
Ultimately, both managers and advisors need to demonstrate they are adding value to justify their fees.
“I think the only way you’re going to be paid well for advice is if you can prove that your advice adds real value over time and that it’s worth paying you for that advice,” Hart says.
To read more, see the full FundFire article available to subscribers here.