What’s in a name? That which we call a rose by any other name would smell as sweet.
Ah, Romeo and Juliet. If you didn’t sleep through high school English classes, you remember that this is a famous line from Shakespeare’s play. It is commonly used as an adage that the name of a thing does not affect what it really is.
I stroll down Adolescence Lane to raise the point that calling something a Verification Proposal does not actually define it as such. The verifier world is rather small and we find ourselves in competition with each other frequently. I have been doing this long enough that if you tell me about your firm, answer my questions and then tell me the name of the five firms you received a bid from, I can probably tell you the order of firms (from highest fee to lowest fee), the quote from each provider +/- 10% and the most likely premise for each particular bid. This is the benefit of experience and the fact this is not rocket science.
In general, there are certain items that will drive the fee you will be quoted by us or any verification firm. I have split them into two categories – “What should affect your fee?” and “What should not affect your fee?”. Items like professional hours, travel, overhead and technology are key considerations when your fee is generated.
What should affect your fee
- Fixed Costs – It may surprise you that there are a certain level of fixed costs associated with performing a verification. As you can imagine, the lower the fee, the higher this percentage of that fee. Fixed costs cover items like working paper documentation, standard communication with the client, quality review processes and opinion issuance. Regardless of the project, these items will be present and accounted for in the fee.
- Complexity of the Project – This is pretty straight forward. Ultimately, a large portion of our hours are tied to how your firm is structured and operates. From our perspective, this is driven by the length of time we are verifying, the number of accounts you manage, how many strategies you manage and how you maintain all that data (performance systems, composites systems and the like). These tend to be hard variables that we can use to formulate a fee. Notice how AUM is not included. We can deal with that later.
- Consulting/ongoing support – Every firm has different needs and expectations of their verification firm, especially during the initial engagement. This is a variable that we have to consider and is driven by our initial assessment about how much time we will need to provide to assist you in gaining compliance and then to help you maintain it. If you firm is very complex or you like to have frequent ongoing support like marketing material reviews, your fee will be necessarily higher than a firm that doesn’t. What should not be included here is all the back-and-forth communication that we as the verifier firm have to have internally. I will touch on that later.
What should not affect your fee
- Assets Under Management – I touch on this one first because it doesn’t benefit firms. AUM is not a driver of complexity. It is simply an indicator of your ability to pay. If you have two managers each managing small cap core mandates, each with one account, each on the same accounting system and each doing a five year verification, it shouldn’t matter that one manager is $10 million and the other is $10 billion. At this point, you are just talking about having to enter three extra zeros in your testing apparatus. Including AUM as a parameter hurts smaller firms since the firm’s complexity and consulting needs are in no way tied to this. It hurts larger firms because the expectation is that you can afford it and it helps subsidize other projects. Either way, it skews what should be reflected in your fee.
- Technology – If verification firms sold software, this would not be here. But we don’t. We make use of it to assist in the execution of the project. It may make the client more efficient, but it definitely makes the verification firm more efficient. Thus, why would it be included. The time savings on our end more than cover this cost.
- Training – This is a necessity for most verification firms but why should clients pay for it directly. Certainly, this cost is reflected in the overhead portion of the targeted hourly rate each firm has, but why would you double that up by adding hours for it as well. For some firms, like ours, you are dealing directly with experienced individuals who work with a set of clients on all aspects of the engagement. Training junior staff is not a consideration. Other firms have more team structures where you might have two or even three people assigned to your account and possibly others you never know working on your account. At least part of this structure is designed for training. It also usually means that most of the work is being done by junior personnel. If, with my 15 years of experience, I can complete a task in one hour but I let my two year associate perform it over 2.5 hours, you can consider that 1.5 hours of inefficiency and training costs. That is built into your hours and thus your fee.
- Automated or Expected Annual Fee Increases – The verification business is very much like the asset management business with respect to being an annuity business. A verification firm that performs an initial 10-year verification with no ongoing annual work will be about as profitable as an asset manager who manages a new $1 million account for one quarter and then loses it. Fee increases are certainly a necessary part of the verification business, although asset managers seem to do fine without being able to raise fees. Whether it is a change in the firm’s complexity (not AUM mind you) or frankly if enough years pass, there will need to be a fee adjustment. However, as the years pass and verifications are performed, we become more efficient not less. Thus, why would there need to be annual fee increases?
I hope this list helps when you are evaluating the Verification Fee portion of the Total Cost of Verification.