Practice Models and Fees Structure

Responding to continuous increasing demand for wealth management services by HNWI’s, many individual wealth managers, investment management firms, private banks and other financial institutions are competing fiercely amongst themselves to tap maximum possible market. Each entity invest considerable amount of time in deciding practice model that would address issues such as time management, income growth, client service and business growth in a satisfactory manner. Further due to intense competition amongst the service provider, it forces them to think hard on methods of fee structure to be charged to the clients. Let us see few of the practice model and fee structure of wealth management service.

Practice Models

There are three different ways of classifying wealth management practice models. They are as follows

1) Individual planners

2) Corporate firms

3) Team structures

Individual planner: It is further divided into three parts namely:

- The Hourly Planner

- The Niche Planner

- The Virtual Planner

The Hourly Planner: Many clients do not qualify for the need of full time wealth manager because of limited net worth. Moreover they cannot afford the costly fees charged by wealth managers for such services. Alternatively, some of them have sufficient knowledge about the wealth management and prefer doing it on their own, some of them feel insecure disclosing their all wealth to wealth manager. These clients under certain situations are not able to take right decisions at right time and feel

themselves at the cross roads. At that time they need advice for that particular situation only. The Hourly Planner, type of wealth manager provides guidance at that particular time and charges equivalently. This results in win-win situation and does not require both of them to have permanent relations.

The Niche Planner: Clients wealth management goal, profit expectation, risk taking capacity not only varies from person to person but also from profession to profession. Niche Planners are known to provide services to certain group of clients, who have unique requirement than other people. Such planner builds expert level knowledge about the particular profession and takes into consideration the future prospects of the client’s profession while providing wealth management service.

The Virtual Planner: Leveraging the technology, wealth managers provide services to the clients through internet. They use advanced technological tools, in order to get in touch with distant clients and provides services at their ease and convenience. Though it involves high investment in initial days, this model helps wealth managers to reduce overheads cost by a great margin. Technology is also helpful in outsourcing certain administrative work and helps wealth manager to concentrate fully on his core job.

Corporate Firms: Corporate entities including private banks, brokerage firms and family offices apart from providing their core services, have now started providing wealth management services on a large scale. Such firms hire professionals and have offices across the world.

Private Banks no longer operate merely as banking destinations. HNWI’s in recent times, apart from asset management services, demands services to manage their excess wealth in manner that compliments their lifestyle. Major global banks with the help of robust technological infrastructure and extensive research provide comprehensive wealth management services such as tax advice, retirement planning, international property acquisition and so on.

The Family Office: By this model, wealth managers provide investment management, tax planning and wealth management services to a single family or a number of families.

Moreover they also provide guidance to personal issues of family such as security, travel, distribution of wealth to legal heirs etc. Family offices operated in three different models depending on the number of families served.

Single family offices serve only one family. Multi family offices serve more than one family, where one family operates as anchor family. Commercially family offices serves number of families, but there exists no anchor family.

Of these, Multi family offices are most renowned model. They provide services to a group of families, which share common needs. Sometimes assets of the families are pooled together, which results in economies of scale for wealth managers.

Team Structure: Alternative method of classifying model of wealth management is method of forming different team structures. Three widely prevalent team structures are discussed below:

i) Sole Model: Under this model, sole practitioner possesses requisite advisory talent and other client characteristics. This model is generally consider to be the first stage in career of most wealth managers. Such wealth managers prefer to remain in direct contact with the clients and hence do not hire more people and delegate responsibilities to them. Though they engage themselves in servicing few clients, they derive immense satisfaction from them. They have flexibility to choose the number and type of clients.

ii) Ensemble Model: This model involves multiple wealth managers working together, towards a unique goal. This model can be further classified into three types depending upon the kind of relationship maintained amongst the professionals.

The most simple and widely prevalent structure is Parent Company Team.

Here wealth manager would maintain relationships with experts from other fields such as insurance agents, income tax professionals, and charitable trusts experts and so on. These experts are not hired but are consulted when specific need arises. Hence it results as cost effective model.

Second model is Self contained team, whereby experts from different fields are hired by the organization and they provide, whereby experts from different fields are hired by the organizations and they provide client service as a team. The cost incurred by this model is high as compared to parent company team but with large number of clients being served, the incremental profits may overshadow the cost.

Third model is Virtual team, where managers work themselves and consult the specialists as and when needed. Once the need is taken care of, there is no compulsion to maintain relation with the experts.

iii) Silo Model: This model is combination of solo and ensemble model. Under this model a group of solo practitioners come together and establish organizations, but however they have individual goals. They provide individual client services and earn individual profits. Since they operate from same office they share the overhead costs. Moreover they also share their expertise as and when required.

Fee Structures: Wealth managers invest their knowledge, time and resources for the client and in return expect decent profit for their sustenance. Unless profit is ploughed back, wealth managers cant grow and provide more advanced services to the client. At the same time increasing competition and ever increasing demands of the client has resulted in experimentation with different fee structures.

Depending on the model of practice adopted by the wealth manager, the fee structure vary from as simple as fees for a particular advice for an individual client, to a lifetime fees charged for multi family office. Generally there are four types of fee structures:

1) Percentage of Assets Under Management (AUM): It is a most traditional pricing mechanism. But, there exist a constant argument on which assets to be

included in AUM and which to be excluded. Further since the AUM keeps on fluctuating, depending on the investment activities, revenue of wealth managers also fluctuates equally. Moreover sometimes clients may suspect that in order to earn more fees, wealth managers would take more risk while investing client’s assets.

2) Hourly basis: Hourly planner and solo practitioners use this model on a large scale that has its roots from accounting and law firms. Fee charged depend on the time spent by the wealth manager in understanding clients goals, needs and thereby, providing advice. Though it looks simple, it can be difficult to keep a track record of exact time spent on a client.

3) Flat Fees: Depending on the services to be provided to the client, wealth managers decide a flat fee per year and charge them quarterly. Many large financial institutions are generally known to follow this practice. Only disadvantage with this pricing mechanism is that, the extent of service provided to client may increase sometimes, than what was agreed upon at the start of year. In those cases it becomes very difficult for wealth manager to ask for extra fees from client.

4) Percentage of Net Worth: Though it is less practiced it is an important fee structure.

Apart from above four pricing mechanism, a new mechanism called Unbundled pricing is emerging. Under this mechanism, the client is allowed to choose from the list of services, the services he intends to receive from wealth manager. Each service is allocated fixed basis points. After deciding portfolio of services, a consolidated fee is charged from client based on cumulative basis points of services.

It is very tough to identify any practice model and fee structure to be the best one. It rests with wealth manager to choose the optimum options depending on the services provided by him, characteristics of client, industry movements and competitor behaviour.