The term “ad valorem” comes from the Latin for “of the value” and refers to the management fees you pay to the institution. These are usually charged annually and are calculated as a percentage of the amount of assets you have entrusted to the wealth manager.
How much are they?
Ad valorem fees are usually around the 1.5% mark, although clients will larger portfolios may well be able to negotiate a discount on fees. This is because you could argue that the costs to the wealth manager (for the custody and administration of your assets, and for the expertise of your adviser) do not double for a portfolio twice the size. Economies of scale can apply to wealth management, just as any other industry. Ultra high net clients with tens of millions of pounds to invest are sometimes able to negotiate very significant discounts. Are you paying too much? This is an important question to answer. It can make a huge dent in your long term performance. Benchmark your fees now: CLICK HERE to search for your best matching wealth management companies and get fee quotes from them.Pros and Cons
Clients tend to like ad valorem fees as they are easy to understand and offer a degree of certainty over how much they will be charged. However, if the value of a client’s portfolio rises dramatically in value, so too will the management fees payable – in line with the increase in assets under management. More importantly, critics of ad valorem fees point out that this charging method does not align the interests of the client and the institution since it gets paid regardless of investment performance. It is also arguable that ad valorem fees could encourage investment managers to take on more risk than is appropriate for the client, so that they can chase a level of performance which will better justify the charges being levied. (The irony here of course, is that clients are usually more worried about losing significant amounts of money than “missing out” on investment returns; the former certainly causes investors more psychological pain, various studies have shown).There are clearly pros and cons to ad valorem wealth manager fees but this is the charging method both clients and institutions are most used to and so we probably won’t be saying good-bye to them any time soon.There are firms which use different pricing methods; they may even completely “unbundled” their fees so that the charges for transactions, their investment expertise and advice, and the custody and administration of the assets are broken down. It may surprise you to learn that the cost of doing business is actually quite high for wealth managers. Charging in this way holds out an admirable degree of transparency to clients, but such granularity may be too much detail for some people.
