While many investors are satisfied to accept the fees that their investment managers charge, others who have peered inside the fee maze to see what exactly their money is paying for might wish instead to negotiate new, lower rates with their manager. Of course, another alternative is to switch to a different manager. If your manager is interested in keeping your business, he may be open to trimming some of your costs. Negotiating may not be easy, but armed with concrete numbers and an enterprising mindset, you could be paying lower fees in the future.
To adequately arm yourself for a fee negotiation, you need to have a good sense of the actual costs that you are paying. Although certain fees, such as management fees, may be explicitly stated, other fees such as trading or custody fees may not be openly disclosed. Once you extract the true total costs of the services your investment manager provides, you are in a better position to determine whether the manager is delivering value to you in the form of excess returns that sufficiently justify the prices charged. After this appraisal, you can approach your investment manager with confidence backed by raw numbers to make a case for reduced fees. That said, the size of the reduction may depend on the amount you have invested, with higher-net-worth clients being granted larger reductions. According to "Financial Advisor" magazine, it is more difficult to negotiate the size of a fee reduction than the reduction itself.
You are in a better position to negotiate a lower fee if your investment manager's performance has fallen below what you desired. After the recession of 2008, many investment firms lowered their fees as a whole and were more amenable to doing so for their clients. On the other hand, lower fees in and of themselves should not be your sole focus. Investment managers who can deliver superior results compared with comparable managers charge high fees regardless of the investment climate, and clients who hire them are more than willing to pay a premium for the rewards they see in their portfolio.
Rearranging the Portfolio or Fee Structure
You can directly address the lowering of fees in a negotiation discussion, or you can more indirectly discuss with your investment manager different administrative recourses available to you that could also lead to what you are looking for: lowered fees. By shifting assets in your portfolio or setting up a separately managed account, you may find that you can lighten some of your fee burden, as compared to participating in a mutual fund, for example. Alternately, depending on the firm's fee structure, you may find that by negotiating a flat fee or hourly rate, you can save over paying commissions.
Attitude and Bargaining Power
In a study about investors negotiating fee reductions conducted over 12 years, "Financial Advisor" magazine found that what separated successful negotiators of investment fees from those who were not as successful was not only the amount of money they held, but their attitude as they approached the bargaining table. Those who showed up with a competitive spirit and winner-mentality found that they got the lowered fees they asked for. However, this was also accompanied by the belief that they understood the investment industry well. While it helps to be a high-profile client with exceptionally high net worth, a genuine confidence in your position and experience in financial services can help serve you in negotiating reduced rates with your investment manager.
Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.