Small accounts (although there’s no formal definition, many advisors refer to accounts under $100K as “small accounts”) can seem like a losing proposition with whisper-thin profit margins, if any at all. Time spent on portfolio management and client meetings are all part of your service, but with minimal financial reward, the work may come at your cost. And now there may be even more time required to manage these accounts with the Department of Labor’s fiduciary rule and its new record-keeping standards.

The Small Account Challenge

Advisors struggle to give full attention to all their accounts, regardless of size. Providing small account owners the same quality of service as large account owners therefore may seem unrealistic—unless the right technology can be used to streamline management.

The Problem With Ignoring Small Accounts

Applying your best thinking to each and every account is a key tenet of your service model. That kind of attention to a small account can result in a twofold gain:

1.     Your client who starts with little might come into a larger sum of money and continue to trust you with their affairs.

2.     It’s never a bad deal to keep a small account owner happy for the sake of maintaining a good name.

And there are a lot more small accounts available in the marketplace and far fewer advisors willing to manage these accounts. A study by PriceMetrix revealed the average Revenue on Assets (RoA) was highest for small households, suggesting there’s a lot of money to be made on small accounts.

The key is being able to manage small accounts just as efficiently and cost-effectively as larger ones.

Four Keys To Managing Small Accounts

1. Cover costs up front. Termination rates can be higher for smaller accounts. Often in these cases, investors who have less experience or room for risk are less willing to wait through a long-term strategy’s development. Consider creating a higher setup fee and offsetting it with lower fees down the road to secure your income and incentivize your clients to stay. Be clear and consistent when communicating with clients about your pricing philosophy. You may also want to pursue an asset-based pricing platform that avoids ticket charges on trades, which can erode smaller accounts.

2. Set a minimum. Advisors managing small accounts typically set a minimum of around $5K-$10K per strategy. This is so the account can accommodate a diversified strategy. If the account is too small, assets can’t always be allocated to all components of the model.

3. Boost efficiency with the right technology. Using a model-based trading platform enables you to make decisions at the model level, not the individual account level. This means trading and rebalancing each account—regardless of size—shouldn’t take up more of your staff’s time. A model management approach also helps you get the best prices by trading at the omnibus level (all account-level trades can get aggregated into one model-level block trade).

4. Implement dedicated strategies. To accommodate lower minimums, you can create specific strategies for small accounts. By using a platform that supports fractional share technology, your smaller accounts can own pieces of individual stocks within a diversified portfolio. This gives you the ability to provide greater flexibility and diversification within the portfolio.

Few advisors start their businesses to manage small accounts, but almost all end up with having at least a handful of smaller accounts. By implementing the right technology and a smart approach, you can manage smaller accounts just as quickly and cost-effectively as large ones, making them a profitable segment of your business. And since smaller accounts represent a large, potentially untapped part of the market, serving smaller accounts could even present an opportunity for you to develop a new target niche.

Mike Lover is senior vice president of key accounts for Trust Company of America.