Investment fees are a major expense for family offices (FOs) and high-net-worth individuals (HNWIs), yet these charges are often opaque and confusing. This lack of transparency stems from the complex and fragmented nature of the financial industry, where no single financial intermediary has the incentives to clarify the fee structure. In this article, we will discuss the impact of investment fees, the complexity of fee structures, and how FOs can reduce their financial costs.

The Real Impact of Fees on Long-Term Returns

But what is the real impact of investment fees on long-term returns? Charges, including management fees, performance fees, transaction costs, and other expenses, can accumulate to a significant amount over time. For a family office, understanding the nuances of these fees is essential for effective financial management. The total true investment cost can amount to as much as 2-3% per year, based on case studies from our clients. These costs can have a substantial impact on long-term financial returns, as illustrated in the following example:

Imagine you have $10 million to invest over 10 years, aiming for a net average annual return of 10%. If you can save just 1% in annual costs, your investment could compound at 11% instead of 10%. That seemingly small difference can add up to big gains - approximately $2.4 million more in returns (i.e., $29.4M at 11% compounding - $27M at 10% compounding), or about 25% of your initial investment. It's a significant amount that's worth considering, and with the right investment strategy and fee structure, it's within reach.

Visible vs. Hidden Costs: Unmasking the Complexity

Let's delve deeper into the problem. Some costs are visible and can be seen on your quarterly bank account statements, such as custody and advisory fees. For single family offices, these fees can be particularly significant due to the concentrated nature of their assets. Others are hidden and deducted from the instrument price or NAV, such as forex bid/ask spreads and charges imposed by mutual fund managers. For family offices in general, uncovering and managing these hidden costs can lead to substantial savings. In some cases, hidden expenses can even reach up to 100% of visible costs, effectively doubling them. The complexity of fee structures can make it difficult for investors to compare the cost of different investment products and to understand the true cost of their investments.

A Structured Approach to Cost Optimization

So, what can you do to navigate these costs? We suggest a structured approach focusing on capturing, benchmarking, and reducing investment charges. Firstly, by capturing all relevant data, one can identify areas where costs can be lowered. A family office can significantly benefit from a proactive approach to cost management by implementing robust tracking and analysis systems. Secondly, benchmarking against industry standards and peers allows for better negotiation with advisors and custodians. This is especially important for single family offices that may not have the same negotiating power as larger institutions. Lastly, by implementing a comprehensive cost monitoring system, charges can be reduced and savings can be passed on to the client. This approach is designed to be iterative and ongoing, allowing for continuous cost reduction over time.

Identifying Sources of Cost Optimization

Based on our client case studies, we typically see three major sources of investment cost optimization:

1. Recovering wrongly charged expenses by intermediaries - think of unexpected additional brokerage costs in what is supposed to be an 'all-in' discretionary mandate.

2. Aligning your costs with industry benchmarks and best practices - Do other investors with similar AUM pay much lower fees for the same services?

3. Learning and using industry best practices to avoid hidden expenses – Did you negotiate outrageous 1.5% of FX fees that all private banks apply by default on smaller amounts or, our favorite example in early 2023, forget to put idle USD cash on a 5% deposit?

Internal Management vs. Outsourcing: Weighing the Options

Investors have two options when it comes to optimizing their investment costs. They can choose to tackle the task internally, which requires a significant amount of manual work, specialized knowledge, and additional analyst staff. The investor would need to conduct detailed cost benchmarking, engage in continuous cost negotiation with multiple intermediaries, and monitor industry trends to ensure they are not being overcharged. These operating costs can add up, especially for smaller family offices.

However, with GreenLock's expertise, investors can rely on a trusted partner to handle the entire process for them, delivering cost savings and freeing up their time to focus on other aspects of their investments. This can be a particularly attractive option for family offices looking to streamline their operations and leverage external expertise.