Pricing For Profitability - Family Office Exchange

©May 2008 Family Office Exchange

Pricing For ProfitabilityPricing Practices In An Evolving Ultra-Wealth Marketplace

2©May 2008 Family Office Exchange

Overview of Presentation

II.

A Diversity of Approaches

I.

Risk and Opportunity

III.

Our Common Solutions


Rapid But Uneven

Distribution of Costs and Revenues (Illustrative)

Source: Family Office Exchange Research; VIP Forum Research

An Evolving Service Process

Percentage of firms that frequently bundle investment management and non-investment management services: 71%


Risks to Current Pricing Practice

1 Essential Subsidies Erode

Embedded Subsidy Risk

2 Cost Pressures Accelerate

Service Expansion by Wealth Tier

3 Locked Into Low FeesMispricing

Risks (Illustrative)

4 Legal and Regulatory RisksSupreme Court Knight Decision 2008

Source: Family Office Exchange Research


Reframing the Discussion

Key OpportunitiesKey Risks

New Growth Opportunities

•

Access to new markets

•

More competitive fees

Profitability Gains

•

Improved fee realization

•

Improved understanding of costs and client profitability

•

Better alignment of costs and revenues

Service Improvements

•

Easier communication with clients

•

Improved understanding of client service needs

•

Essential Subsidies Erode

•

Cost Pressures Accelerate

•

Locked into Low Fees

•

Legal and Regulatory Risks



II.


I.


III.



Most Frequently Used Pricing Methodologies, 2008

Predictable Patterns

Notes:Q. Which of the following pricing methods does your firm use?

Percentages only include firms that use the method “frequently". “Occasionally" or “Never" responses are excluded.

Multiple responses permitted

Average Number of Pricing Methodologies per Firm, 2008



Fees for Services

Percent of Firms That Use Methodology for Services Specified, 2008

Asset-Based Fee


Project Fee

Notes: Percentages indicate the percent of firms that use the given pricing method for the services listed.

Firms may use more than one methodology per service, either separately (method A or B for service XYZ) or in combination (method A and B for service XYZ).

Responses for services delivered by a third-party or partner (e.g., that are outsourced) are not included.

Retainer Fee


Notes:Q. Which of the following pricing methods does your firm use?

Primary Model: If a firm uses only one model "frequently" then the model is designated the primary model

Multiple Models: This designation applies to firms that use more

than one model "frequently“

(excluding asset-based and retainer)

Other: e.g., hourly, retainer-only

Primary Pricing Model, 2008




Selected Pros/Cons of Common Pricing Methods

Pros:

Easier to communicate (less “sticker shock”)

Easier to calculate (more standardized)

Revenue growth requires lower incremental service spend

Alignment of client, provider interests around asset preservation and growth

Cons:

Requires higher levels of liquidity

Less suitable for many non-investment services

Contributes to service cross-subsidies

Contributes to client cross-subsidies

Pros:

Requires lower levels of liquidity

More suitable for many non-investment services

Improves alignment of revenue and costs

Greater transparency for client

Cons:

More difficult to communicate (“sticker shock”)

More difficult to calculate (less standardized)

Revenue growth requires higher incremental service spend

Greater transparency for client

Note: Pros and cons represent the way that models are currently implemented as expressed by FOX members, not necessarily permanent characteristics

Model: Basis Points Plus Retainer

24% of Firms

Model: Basis Points on AUA or AUM

52% of Firms



Pursuing Perfection

•

How well firms know each prospect and client and can assess “fit”

with their firm

•

How well firms understand their own economics and costs

•

How well firms position their fees and services to clients

Diagnostic (Illustrative)Three Predictors of Pricing Success




II.


I.


III.



Imperative #1: Improve Knowledge of Client Fit

Some Science, a Lot of Art

Percentage of Fees That Are Standardized Versus Customized, 2008

Notes:Q. How are asset-based fee levels determined?

Q. How are retainer fee levels determined?

Exhibit excludes firms that rarely or never charge an asset-based fee or a retainer fee.

Exhibit excludes “other”; totals, therefore, do not add to 100%



What We Say We Do?

Level of Fee Discounts, 2008*Prevalence of Fee Discounting, 2008

Notes:Q. How often does your firm provide fee discounts of any kind

to help acquire business?

Q. What is a typical discount that your firm will provide to prospective clients to help acquire business?

* Excludes firms that rarely or never discount



Locked In

Frequency of Fee Communications and Fee Renegotiations, 2008

Notes:Q. How often does your firm renegotiate fees with existing clients?

Q. How frequently does your firm communicate fees to clients (include both in-person or in writing)?



Playing With Fire?

Large Number of Trusts

Complex Reporting Requirements

Large Number of Legal Entities

Complex Legal Structures

Large Number of Households

Large Number of Transactions

Sample Complexity Factors

QUOTE:

“It is absolutely essential that we know [the prospect] that we are dealing with… for example, are they really hands on?

Are they laissez-faire?”

Managing Director, Wentworth



Case Study #1: Prospect Scorecard

Pricing Goals, Knightly Trust Company* Essential Background, Knightly Trust Company

Pricing Methodology

•

Primarily a la carte pricing (fees for individual services); bundled pricing only for clients that request it

Typical UHNW Client Profile

•

$100 million client that is not looking for a single service provider, including families with an existing single family office

•

Business owners, pre-

and post-liquidity event, including families selling ownership in a company or seeking advice for a specific project or transaction

Business Model

•

Knightly Trust provides private banking services, fiduciary services, retail and institutional asset management; it is a division of a diversified (multi-

line) financial services firm

Goal:

•

Ensure pricing strategy supports firmwide

profitability targets

•

Position fees appropriately to enable clients to make meaningful fee comparisons between Knightly Trust and other advisors

•

Ensure clients understand service process and value

Prerequisites:

A Disciplined Process

•

Establish relationship managers (RMs) as the single point of contact for all client interactions, including fee discussions

•

Create incentives for ensuring RMs

and sales officers adhere to pricing processes

A Fully-Informed Fee Quote

•

Understand the full scope of client service needs before making a fee quote

•

Evaluate critical client characteristics; e.g., decision making dynamics and sophistication before making a fee quote

•

Identify clients’

existing advisory relationships and fee structures before making a fee quote

*Pseudonym



Component #1: Client Profiling Checklist

Pricing Process, Knightly Trust Company* Pricing Checklist, Knightly Trust Company

Client Profiling Checklist – Required

Page 1

Total market value of the relationship

Analysis of client asset mix, including:

• Real estate

• Closely-held partnerships

• Marketable securities

-Firm manages

-Firm custodies

Number of accounts and associated market values

Number of decision makers

Other current providers and their fees

Likely service needs (from a range of service options)

QUOTE:

“Sometimes an RM runs away and tells the client the price ranges too far in advance and we are forced to honor that pricing—the cake is baked. However, we also pay aggressive sales bonuses. If that happens, we do not pay out a bonus and we do not provide sales credit. It gently nudges people to follow our process.”

– Senior Executive, Knightly Trust Company

*Pseudonym



Component #2: Centralized Pricing

Cost Plus Model, Knightly Trust Company

Pricing Methodology:

•

A la carte pricing (fees for individual services) “Our service model can make everything seamless, and we can show how everything fits together, but we are generally not doing a bundled price.”

•

Hourly charges (e.g., fiduciary tax preparation, partnership accounting)

•

Time and materials (e.g., for special projects)

Pricing Inputs:

Costs

•

Anticipate service costs (determined largely on the basis of anticipated time)

•

Anticipate service utilization

•

Fee schedules for common service packages

•

Fee schedules for specific services (e.g., for certain technology services, such as Web design and hosting, fees vary by service functionality)

Complexity and Discounts

•

Knightly Trust adjusts for complexity (e.g., establishes a set fee for X hours of tax return preparation; beyond X hours, clients are billed by the hour); specialized reports or other labor-intensive services are billed at time and materials

•

Senior managers provide discounts using a standard service package as a reference point; discounts are generally provided only if needed to compete for new business

QUOTE:

“We have a [pre-tax] profit margin of 35%. We cannot go lower, so we build that into client proposals. We know how to create a bid to meet their

needs, that they understand, and is competitive in our market. [Our prices] seem high but once you explain your full service to clients, they get it.”

–

Senior Executive, Knightly Trust Company

Pricing Factors, Knightly Trust Company*

*Pseudonym



Case Study #2: Quality Assurance Committee

Quality Assurance Committee, Convergent Wealth Advisors

The committee comprises representatives of six operational areas

and is responsible for:

•

Meeting whenever necessary to evaluate potential new business

•

Assessing the relative complexity of prospective client needs

•

Informing pricing decisions for new service proposals

•

Adjusting standard fee schedules based on anticipated complexityOutcome:

Committee Intervenes to End Pursuit of Low-Quality Prospects

Outcome:

Appropriateness of Fees Improves Over Time

Everyone in the company—from senior management on down—

uses a net-based time accounting system to track hours spent on every client activity.

This has allowed Convergent to get a solid understanding of the costs of delivering various services.


Boxed Into a Corner


Imperative #2: Improve Understanding of Costs

Competition by Client Segment (Illustrative)


Fear of the Unknown

How Well Firms Understand Costs Per Client Relationship, 2008

Percentage of Clients That are Not Profitable, 2008


Note: Excludes “Don’t Know”

or “No Answer”


To Track or Not Track

Percentage of Firms That Track Time and Understand Costs, 2008



Case Study #3: Metric Driven Management

Pricing Model, Wentworth Family Partners*

Wentworth has a standard fee schedule based on size of assets for liquidity management

Wentworth passes all third-party fees to clients (e.g., from third-

party managers and custodians)

Wentworth receives no indirect third-party payments

Wentworth charges time and materials for special projects (e.g., rectifying prior period tax issues)

Wentworth charges a retainer fee for planning and family office services, including tax advisory, tax preparation, philanthropy, insurance, bill pay, etc.

The retainer is based on management’s assessment of client complexity

Fees are not dependent upon liquid assets

Certain clients are onboarded

on a time and materials schedule and subsequently converted to retainer once scope is more clearly determined

*Pseudonym



Component #1: Link Time Tracking to Pricing

Time Tracking and Fee Negotiation Process, Wentworth Family Partners*

Wentworth employees always track time allocated to delivering family office services as a condition of employment

Each employee has a billable rate and is required to track their time using electronic time keeping and client codes

Employees typically come from other professional services firms where time tracking is commonplace

By tracking employee time, Wentworth is able to calculate realization rates per clients (realization rate = revenue/service costs)

Realization rates allow Wentworth to assess whether it is charging appropriate fee levels for the services provided

By tracking time and realization rates, Wentworth is able to effectively evaluate the operating costs of regional offices (e.g., by more precisely allocating the costs of centrally-delivered services to regional offices)

In language governing Wentworth’s retainer fees, the firm only commits to providing services for one year

If Wentworth’s service costs are higher than their fees, they will renegotiate the retainer and/or the scope of services.

*Pseudonym



Outcome: Control Costs and Track Profitability

Client Relationship Metrics, Wentworth Family Partners* (Illustrative)

QUOTE:

“We have tightened our operations, we know how much everything costs, and we have good management controls in place to track profitability. Only a minority of our clients are over-serviced.”

Senior Executive, Wentworth Family Partners

*Pseudonym



Case Study #4: Disciplined Expansion

Instilling Operational Discipline, Brandon Family Wealth*

*Pseudonym

Step 1Identify and control costs firm wide by creating a culture where tracking hours is ingrained in the culture

Step 2Support this practice with a technology platform that enforces and standardizes time tracking across all areas of firm operations

Step 3Centralize all firm functions around billable hours format to ensure compliance and encourage accuracy



MethodologyInputs

•

Staff member salaries

•

Staff members directly involved in client services enter hours by client name and project description. Staff also enter hours for non-client related work

•

Internal operational staff enter time by project to track non-client related firm expenses (IT, Marketing, Facilities, etc.)

Outputs•

Ability to analyze information in multiple ways

–

By client–

By project–

By department–

By individual•

Ability to analyze status on all projects and client accounts

•

Integrated system directly creates client bills

•

Ability to analyze all non-client firm operational costs (“costs of doing business”)

Centralized Technology System

•

Two FTEs manage systems and check

for accuracy

•

Assumption of 20% margin per staff member for unaccountable time

Component #1: Automate Time Tracking

*Pseudonym

Time-Tracking Methodology, Brandon Family Wealth*



Client Advantages Firm Advantages

•

Easy to understand, transparent pricing

•

Client only pays for actual work

•

Detailed billing available if desired

•

Cost implications of expanding or increasing services are clear

•

Better ability to break down and estimate project costs and easy to explain pricing to clients and prospects

•

Prevents giving away services when work scope is enhanced

•

Encourages delegation and team building to lower internal costs and end costs for clients

•

Ensures top executives stay focused on strategic level work

Component #2: Offer an Hourly Pricing Option

Hourly Pricing Advantages, Brandon Family Wealth*

*Pseudonym



Price Competitively:•

Research competitors prices

•

Use knowledge from time tracking to determine where firm has greatest efficiencies and can afford to lower fees

Hold Margins:•

Use cost data to establish valid firm profit goals

•

Set pricing competitively while still maintaining determined profit margin

Outcome #1: Competitive and Profitable

Compete Without Undercutting, Brandon Family Wealth*

*Pseudonym



Use Cost Knowledge to Profitably Serve a Wider Range of Clients,

Brandon Family Wealth*

Business Owners with Illiquid Wealth

UHNW Families and Individuals

Lower Wealth Tiers

Use Cost Knowledge to Predict Client Profitability and Weed Out Bad Business,

Brandon Family Wealth

2. Determine match with firm’s strengths and service efficiencies

1.

Meet with prospective family clients to discuss service needs

3. If prospect needs go beyond firm’s areas of expertise and efficiencies, recommend

another resource or price accordingly

Outcome #2: Expanded Market Options

*Pseudonym


Covering Our Costs

Number of Complexity Characteristics Impacting Fees, 2008

Percent of Firms That Charge Higher Fees for Various Client Complexity Characteristics, 2008

Notes:Q. Which of the following client characteristics impact the

fees charged by your organization? (Respondents selected “higher,”

“no impact,”

or “not applicable,”

from a list of 14 characteristics)


Imperative #3: Improve Positioning of Fees and Services


The Definition of Complexity

Single Family Office Complexity Benchmarks, 2006

Notes:Sample includes approximately 50 single family offices

Accounting Entities: Individuals, S corps, C corps, public and private foundations, LLCs, family investment partnerships/LLCs, family limited partnerships, private foundations, trusts, and offshore entities.

Inter-quartile range for family limited partnerships is 1-3 (median = 2)

Transactions include: General ledger accounts, bank accounts and

reconciliations, checks written, wire transfers, insurance policies coordinated, client phone calls and client meetings. Does not include trades

Source: Family Office Exchange Benchmarking 2007


Fee Levels

Basis Point Fees for Clients with Varying Levels of Assets (Median) Typical Retainer Fee Ranges (Estimate)

Service ModelTypically Includes:•

Asset Allocation•

Cash Flow Management•

Client Education•

Family Meeting Coordination•

Fiduciary Oversight•

Manager Research & Selection•

Tax Planning

Occasionally Includes:•

Estate Planning•

Financial Planning•

Serve as Trustee•

Trust Administration•

Custody•

Foundation Administration•

Family Governance


Typical Retainer Fee ServicesTypically Includes:•

Bill Payment & Budgeting•

Cash Flow Management•

Client Education•

Estate Planning•

Family Governance•

Family Meeting Coordination•

Financial Planning•

Insurance Review & Coordination•

Tax Planning

Notes:

Data are from firms that primarily use a basis points fee and bundle investment management and non-investment management services.

Data include fees for manager selection and oversight, not proprietary asset management or third-party manager fees

The service list is determined independently and represents services delivered internally (not outsourced) that are typically or occasionally included in asset fees.

Notes:

Small sample.

Estimate only. Firms were asked to estimate a typical retainer fee for a client with $100M in assets and average complexity

Includes only firms that primarily use an asset-based fee plus a retainer.

Retainer fee services are determined independently and represent

services delivered internally that are typically included in a retainer fee.


Sensitive or Timid?

Perceived Sensitivity to Fees, Ultra-Wealthy Clients, 2008

QUOTE:

“If (the client) earns 10% and I take 50 BPs, they barely notice… If I give them a bill for $250,000, they’re like ‘Wow, that’s a lot’.“

Senior Executive, Woodhouse Family Office


Percent of Firms that Believe Their Clients Would Pay More Than They

Currently Charge, 2008


Cutting Through the Clutter


A Bewildering Array of Options Detailed Client Communications


Case Study #5: Focused Re-Pricing Rollout

Basis Points on Assets

Old Pricing Model, Tilney

Wealth Management*

Retainer Fee for Non-Investment

Management Services

Total Fee

+

=

Old Pricing Challenges,Tilney

Wealth Management

1

2

3

2

3

4

1

Difficulties Calculating, Communicating Retainer FeeTilney

found it difficult to determine the quarterly retainer fee and explain it to clients. The result was subjective pricing

Inconsistent FeesExample: Over thirty years, Tilney

introduced numerous fee structures resulting in inconsistent pricing from client-to-client

DiscountsA number of clients had negotiated rates or were receiving special deals

Administrative DifficultiesLarge number of fee schedules and idiosyncrasies made billing an administrative chore

*Pseudonym



Action #1: Redesign Pricing Model

New Pricing Model, Tilney

Wealth Management*

Clients Pay the Greater of A or B

Basis Points on Assets Under Management

Old Schedule

AUM BPS

$ %

$ %

$ %

New Schedule

AUM BPS

$$ +%

$$ +%

$$ +%

A B Hard Dollar Flat Fee Based on Relationship Characteristics

High-fee clients are complex; “Complexity”is generally defined in terms of service needs and staff time

Low-fee clients are typically children or relatives

15x

10x

5x

2.5x

2x

x

Complexity High

Low

Sample Complexity Factors:

Anticipated Staff Time, Complexity of Financial Planning Needs, Income Needs, Human Capital Needs, Risk Management Needs

Notes:•

Most clients pay basis points on AUM

•

Goal is to ensure that, at a minimum, fees cover anticipated costs for all clients

•

Flat fee helps Tilney

cover service costs for clients with low levels of liquid wealth

*Pseudonym



Action #2: Rollout and Communications

Pricing Redesign Rollout, Tilney

Wealth Management*

QUOTE:

Sticking to Their Guns

“We definitely got some resistance, in particular from family members that used to be managed collectively who, over time, came to be served individually. But the conversation was: the family has

changed, the service has changed, the pricing needs to change, too.”

–

Executive, Tilney

Wealth Management

Detail Tilney

establishes a pricing Exceptions Committee

Committee includes accounting, client relationship representatives; mandate is to minimize inconsistencies

Relationship Managers must formally apply for fee exceptions

Results:

Only 1-1.5% of clients qualify as exceptions (typically longstanding, large relationships)

Face-to-face meetings for many clients, including those taking a large price increase

Notification by telephone or by mail for small pricing changes

Communications focus on service value (matching effort to fees)

Clients that object to changes are directed to discuss service value:

Why doesn’t the client see value?

Why doesn’t the client want to pay?

Elimination of retainer fee helped moderate client reactions

Results:

Reached 90% of clients in nine months

Client relationship teams review all client relationships to help prepare new pricing contacts

Results:

Tilney

developed new contracts for 100% of clients

Client-facing staff spend 1.5 days in training.

Training agenda focuses on communications and sales tactics (e.g., how to handle objections)

*Pseudonym



Outcome: Modified Pricing for Consistency and Simplicity

•

Easier to explain fees to clients

•

Discussions about service complexity only occur with a minority of clients—

most are covered by a single AUM fee

Dispersion of Percent Fee Change:2006 Actual vs. New Structure,Tilney* Wealth Management Simplicity of Communications

QUOTE:

“There were also many unexpected benefits [to client service]. This was a great opportunity to revisit all of our client relationships and ask ourselves: Are they a good fit? What do we do for them? What don’t we do and what should we be doing for them?“

–

Executive, Tilney

Wealth Management



Case Study #6: Simplified Complexity Pricing

Difficulties at Either End of Pricing Spectrum

Family A• 10 Households

• 120 Accounts

• 4 Decision Makers

• 17 External Entities

Family B• 3 Households

• 25 Accounts

• 1 Decision Maker


Family C• 7 Households

• 62 Accounts

• 7 Decision Makers


Pricing is too encompassing –

firm does not account for client differences

All-Inclusive BPs

Fee Applied Equally

Factors Required Resources Required Time

Number of Legal Entities

Number of Transactions

Number of Households

Number of Accounts

Report Customization

Contacts Per Family

Frequency of Contact

Number of Decision Makers

Number of External Managers

Number of Partnerships

Easy to Explain, Hard to Fit All Clients Good Fit for Many Clients, Hard to Explain

Pricing is too granular and clients get lost and/or aggravated by the volume of contributing factors

QUOTE:

“If you charge only basis points, you have to fit everything under one price so the clients are either paying too much or too little. The overpaying

clients obviously get a bad deal and the firm risks them leaving. The client that pays too little is also hurt because the firm is likely cutting back service levels

to a minimum trying to make the economics work when that client actually needs extended services.”

–

National Director, Darcy Wealth Partners*

QUOTE:

“Using a client complexity matrix to set pricing, we had a methodology that was based on the work and resources behind service fulfillment. It was brilliant but it never got off the ground.

It was very hard to explain to clients as it was very complicated and had many categories.

Communication and complexity broke this model.”

–

Senior Advisor, Thomas Management**

*Pseudonym **Pseudonym



Price for the Leading Complexity Factors

Methodology:1.

Use an economic model to determine a base level fee (service costs plus target profit margins)

2.

Determine leading cost drivers based on experience

3.

Assign specific fees to those factors

Fee Structure:Base Fee: Includes set number of households and legal entities

Variable Fee: $X

for every additional household

$Y

for every additional legal entity

Design Pricing Around Costs and Communications, Darcy Wealth Partners*

QUOTE:

“We felt that households and legal entities would be fair determinants of complexity. It is a somewhat imperfect system but it gets us closer to modeling in potential costs and service requirements while being SIMPLE so clients can absorb it.”

–

National Director, Darcy Wealth Partners

Factors Required Resources Required Time

Number of Legal Entities

Number of Transactions

Number of Households

Number of Accounts

Report Customization

Contacts Per Family

Frequency of Contact

Number of Decision Makers

Number of External Managers

Number of Partnerships

*Pseudonym


Factors Selected:

Darcy focuses only on the factors with the most impact on

service costs to ensure ease of communication


Summary

Goal:

Perfect Knowledge of Clients

How Firms are Responding:

Scorecards

Assessment-by-committee

Project-based work

Advisor reference checks

Referrals

Risks Addressed/ Opportunities Uncovered:

Risks Addressed

Cost pressures accelerate

Locked into low fees

Extended breakeven

Difficult renegotiations

“Letter of Understanding”with clauses of how to renegotiate

Pricing Model Benefits:

Alignment of fees and service costs

Minimize need for large future fee increases



Summary

Goal:

Perfect Knowledge of Costs and Economics


Hourly time tracking

Client profitability metrics

Top-down cost analyses

Minimum fee for thresholds

Activity-based Costing

Risks Addressed/

Opportunities Uncovered:

Risks Addressed


Opportunities Uncovered

More competitive pricing

Access to new markets

Better understanding of profitability

Fewer cross-subsidies


Alignment of fees and service costs

Easier to determine appropriate fees

Greater ability to communicate pricing clearly to client



Summary

Goal:

Perfect Positioning of Fees and Services


Simplification of pricing structures communications

Frequent (and detailed) communication of service value

Mandated pricing consistency and standardization

Training on “Objections Handling”

Using comparative dataon pricing

Risks Addressed/

Opportunities Uncovered:

Risks Addressed


Clients focus on fees, not value

Leave money on the table


Minimize “sticker shock”effect

Easier client communications



Summary


“From Standard Practice, to Good Practice, to Best Practice”

•

Scorecards

•

Selection Committees

•

Knowledge of Service Costs

•

Knowledge of Relationship Profitability

•

Client Service Communications

•

Simplicity of Fee Structures

•

Simplicity of Fee Communications


100 South Wacker Drive •

Chicago, IL 60606, USA

T: 312.327.1200 •

F: 312.327.1212

Winchester House Suite 204259-269 Old Marylebone Road

London NW1 5RA, United Kingdom

T: +44 (0) 20 7170 4235 •

F: +44 (0) 20 7170 4234

www.familyoffice.com

Pricing For Profitability - Family Office Exchange

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