Communicating a firm's value proposition is the top challenge faced by multi-family offices, a new study from the Family Wealth Alliance says.

The growing financial complexity of wealthy families’ lives is making it tougher for multi-family offices to set fees at the appropriate levels and for families to make comparisons, according to a new study.

Multi-family offices taking part in the study say client complexity has become the No. 1 factor both in determining overall pricing policy and in setting fees for individual client families, an inaugural fees and pricing study conducted by The Family Wealth Alliance said. (The final report is to be unveiled at FWA’s Alliance Fall Forum event October 28-29 at the Union League of Philadelphia.)

“Many times the full-service family wealth firm is unwittingly compared to an investment advisory firm that is sporting a narrower service model and thus lower (and sometimes hidden) fees,” Thomas Livergood, FWA chief executive, in the preface to the study, said. “Yet the latter types still call themselves a family office.  No wonder families are confused,” he said.

The study therefore comes back to an oft-repeated complaint in the industry about the lack of watertight definitions of what “family offices” are.

The 36-page study report includes composite fee tables, profit margins, challenges of communicating fees to clients, service menus, and other data.  A total of 45 firms participated in the study. Three quarters of the family wealth firm participants were US multi-family offices. The study was conducted in 2014 and early 2015, and asset figures reported in the study are as of year-end 2013.

Livergood went on to say that that many family wealth firms’ high reliance on asset-based fees adds to the confusion, with the more savvy organizations diversifying their fee mix.  As a result of these efforts, overall revenues rose 11-13 per cent and pre-tax profits were in the healthy 21-26 per cent range.

Firms must be able to put a price on a given level of complexity in order to deliver their services profitably, and in some cases they are flying blind, the report said. "We try to do our pricing based on the complexity of the client's needs," says one participant. "Since we do not have the reporting systems to know if an engagement is profitable, we have to rely solely on our team personnel for these judgments."

One development, for example, is that à la carte pricing for individual family office services has become common and, increasingly, firms are employing two-tier service models.

Communicating the firm's value proposition is cited by multi-family offices as the No. 1 challenge where fees and pricing are concerned, and is tied top challenge among external CIO/wealth manager firms. Fee compression and price competition were also deemed the top challenge among external CIO/wealth manager firms, while multi-family offices ranked it third.

Asset-based fees predominate among participating firms. Multi-family offices report asset-based fees as  77 per cent of revenue in 2010 and 75 per cent in 2013. For external CIO/wealth manager firms, comparable figures are 80 per cent and 78 per cent. Fifty-three per cent of multi-family offices and 33 per cent of external CIO/wealth manager firms say they charge flat annual fees or retainer fees, typically as a supplement to asset-based fees. Hourly fees, which are used by a third of participating firms, and project or consulting fees, used by half, are common.

Looking ahead, the report said, a third (31 per cent) of multi-family offices and 25 per cent of external CIO/wealth manager firms say they will raise prices for existing clients within the next year or so. Most will focus on retainer fees or a la carte activity fees and leave asset-based fees alone. Very few say they plan pricing changes for new clients, it said.