The Cost of Being Wealthy

A family with a half-billion dollars in wealth could pay anywhere from 1.15% to 1.75% of their total assets in costs and fees annually, amounting to US$5.75 million to US$8.75 million, for instance, Cambridge Associates wrote in a recent report.

To ensure fees are reasonable and make sense for a family, Cambridge offers a framework that can be used to evaluate the costs of managing wealth. 

“Sometimes families, when they think of cost, they just look at the data—they might see a survey where they just look at the bottom-line number of the cost versus some kind of benchmark, but they don’t put it into a framework and look at some of the nuances,” says Charlie Grace, managing director of family enterprise solutions in the private client practice at Cambridge Associates.

Penta spoke with Grace, who wrote the report, about the approach families can take to ensure they are spending the right amount to manage their family wealth for generations. 

The Cost of Wealth Management 

Fees for managing investments typically are equal to 50% or more of annual expenses for all wealth management services, Cambridge Associates said. Yet it’s not always practical for a family to unearth every cost they are paying. That’s because some investment fees are from commingled investments, such as hedge funds or private equity—which can be expensive, but difficult to track, Grace says. 

Even exchange-traded funds, which are relatively less expensive, can pose problems because fees are automatically deducted. 

“I’ve seen lots of instances where families don’t necessarily track that,” he says. 

Grace doesn’t recommend families dig into these costs weekly or monthly, but it could be useful to take a deep look at them every two or three years. 

In terms of overall expenses for the family with a half-billion dollars in assets, Cambridge Associates calculates that third-party investment costs will equal between 0.75% and 1.05% of assets (between US$3.75 million and US$5.25 million) annually, while non-investment costs will be another 0.10% to 0.20% of assets, or between US$500,000 and US$1 million annually. 

These estimated investment costs include a strategic investment advisor, third-party asset managers for both actively managed securities and funds and alternative strategies, custody, brokerage, research, and related costs, the report said. 

On top of all that, Cambridge Associates also adds in the investment and non-investment expenses of a family office (which could include the salary of a chief investment officer in addition to philanthropic management and other services). Those costs can range from another 0.30% to 0.50% of assets, or between US$1.5 million to US$2.5 million. 

But, as Grace points out, costs can often be higher than most standard assumptions because certain fees, such as those for commingled funds, aren’t tracked, or the methodology used by a family doesn’t capture certain costs. 

This can happen when a family has a concentrated stock holding, for instance. Oversight over that investment may not be as active as a diversified portfolio, meaning it’s less costly to manage, and when the value of that asset is added to total holdings, it can appear to dilute the costs a family is paying for everything else. 

“There are always wrinkles like that that come up in any kind of cost analysis,” Grace says. 

The Cost of Complexity 

Family wealth management expenses also can vary widely when families have complex needs. Cambridge Associates gives the example of two hypothetical families, each with US$300 million in assets, but in very different situations. 

One family includes three households. Their wealth management plan includes 12 “entities,” meaning trusts, partnerships, and other arrangements; they don’t have a family office and instead use third-party advisors; they file 20 tax returns; and allocate 10% of their…