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Aligning Manager Fees With Endowment Results
Adapted for endowment and foundation boards from Chapter 3 of Centimillionaire Strategies by Richard C. Wilson.
In my book on centimillionaire families I wrote about what I call the fee frenzy. Once people know you have money, prices go up. Endowments see the same thing from fund managers, consultants and service firms.
The lesson I give families applies here. You have more bargaining power than you think.
Your bargaining power is real
Managers want institutional clients. An endowment brings a long time horizon, a stable capital base and a name other investors respect. Many managers will discuss lower fees or a better structure to win that.
This isn't about being cheap. It is about getting the most compounded return out of every dollar and not wasting it. For a perpetual fund, a small fee difference compounds for decades.
Ask for alignment, not just discounts
Sometimes it is smarter not to ask for a lower fee at all. Ask instead for more of the fee to depend on results. Pay for performance above a benchmark you agree on together, not for showing up.
I once told a panel of real estate managers this. One said picking a manager on fees is like picking a heart surgeon on price. My answer was that I'd feel better if the surgeon got paid nothing if I died on the table. Fees should mostly pay for results.
Structures endowments can ask about
- A lower management fee in exchange for a larger commitment
- A performance fee only above a hurdle rate
- A hurdle tied to a market benchmark, not zero
- Fee breaks on co-investments
- Most favored nation terms, so you get any better fee given to a similar investor
Not every manager will agree. Asking costs nothing.
Fees in context
Endowments publish their returns net of fees, so fees show up directly in the number trustees see. Vanderbilt's FY2025 financial report, for example, lists $17 million of internal management costs for its endowment. External manager fees are on top of that and usually much larger.
Frequently asked questions
Will asking for lower fees hurt our access to strong managers?
With the most sought-after funds, sometimes. With most managers, a fair ask is normal.
What is a hurdle rate?
A minimum return the fund must earn before the manager takes a performance fee.
Who negotiates fees for an endowment?
Staff, the OCIO or a consultant, with counsel reviewing documents.
Sources
- Centimillionaire Strategies, Chapter 3, Richard C. Wilson .
- Vanderbilt University, 2025 Financial Report: https://cdn.vanderbilt.edu/vu-sub/wp-content/uploads/sites/291/2025/10/01145328/2025_VU_Financial_Report.pdf
