Jennifer Cray loves doing financial planning work for her clients. She also loves making money from her efforts and working reasonable hours. Unfortunately, she’s found the former sometimes gets in the way of achieving the latter, at least when it comes to providing comprehensive financial planning services to clients with less assets than her ideal client size of $1 million to $5 million.

Cray, a partner at Investor’s Capital Management LLC in Menlo Park, Calif., started out as an hourly planner in the Garrett Planning Network. And as she’s amassed a number of higher-net-worth clients with sophisticated planning needs, she’s continued to provide comprehensive planning services to so-called “middle market,” or “mass affluent” clients. And that’s been a conundrum.

“These clients need just as much planning work as the higher-asset clients,” Cray says. “In fact, they often need more because they don’t have enough money to reach their goals. Because the asset management fee is small, these clients essentially are hourly clients, who are not as profitable for us. The asset management service isn’t as time-intensive for us to provide, but the planning work is.”

Among RIAs, particularly fee-only advisors with high-net-worth clients and sizable investment minimums, serving folks who don’t meet those minimums can be challenging. “It’s not hard to serve the mass affluent—it’s just hard to serve them profitably, particularly when you are set up to serve a larger client who demands greater expertise and a higher level of attention,” says Dan Inveen, research director and principal at the consultancy FA Insight. “A commission-based broker can more readily mix high-net-worth and mass affluent clients, although this business model is losing its appeal with the high-net-worth.”

Many higher-end advisory firms started out by serving middle-market clients, and ideally both grew wealthy together. And as the clients’ assets grew, their financial needs became more involved and complex, which required more comprehensive and sophisticated planning. Such planning takes time and effort on the advisor’s part, and the reward at the end of the day is client fees based on a percentage of assets that enable advisors to make a nice living and which the wealthy can afford to pay.

Mass affluent clients often can’t afford—nor can justify—paying an asset-based fee, particularly a fee that is often higher as a percent of assets than that charged to a client with a seven-figure portfolio. And depending on the advisor, charging them by the hour often won’t pay the bills.

But some advisors focused on high-net-worth clients have good reason for keeping the mass affluent in the fold. “Most firms that are handling both are doing so because their mass affluent business somehow contributes to the maintenance or growth of the high-net-worth business,” Inveen says.

Serving the children of existing clients, for example, both pleases the parents and ensures there will be a next generation of clients. Others take on middle-market referrals from clients or from centers of influence, particularly if they show a potential for growing their assets over time. And the mass affluent clients can be sort of a training ground for less-experienced advisors who can gain some experience serving a less complex client before taking on higher-net-worth clients, Inveen says.

But some advisors are struggling to find ways to serve the mass affluent profitably. Jennifer Cray says she loves the challenge, creativity and satisfaction that come with doing financial planning work, but has concluded it’s a tougher go of it for clients with assets less than $1 million. “I’ve tried and tried to find the Holy Grail of doing comprehensive financial planning [for the mass affluent],” she says.

Four Levels
It seems crass to dismiss people with holdings in the five- or six-figure range as unprofitable drains on an advisory practice when they, too, need help. Unfortunately, that is the case for some advisors’ business models. But again, some financial advisors who are focused mainly on high-net-worth clients see opportunity in the middle market.

David Blain, the president and chief investment officer at D.L. Blain & Co. LLC in New Bern, N.C., says he prefers that new clients have at least $1 million in investable assets. But he adds that some of the firm’s original clients still don’t have enough assets to meet that level. “I don’t want to just kick them out,” he explains. “We had to come up with a service level and fee structure to let us keep servicing these folks.”

At the same time, he also wants to serve the adult children of existing clients who are in the early stages of their professional and investing careers. “We think it’s worthwhile to begin developing that relationship because they’ll likely be inheritors someday.”

To accommodate both groups, a few years ago the firm created four service levels that combine an asset management fee of 1% on all clients (it decreases on a sliding scale above $5 million) with a planning retainer fee commensurate with the complexity of their needs. Because these four levels are based on planning fees, Blain & Co. says it can help new clients that have complicated planning issues but not necessarily a lot of assets.

Clients in the highest level, who typically are the $1 million-plus clients with more complex planning needs, pay a planning retainer fee of $5,000. Folks in the next highest level pay a fee of $2,000 to $5,000, while those in the level below that pay a fee between $1,000 and $2,000. A client in that level, Blain explains, could be somebody like a young business owner needing help with retirement and tax planning.

People in the lowest level, which the company describes as the “family and friends” level, typically have the simplest planning needs and pay a $1,000 planning retainer fee.

Blain says the firm excludes some more complicated planning services at the lower levels because they’re potential rabbit holes. “There’s no way to estimate ahead of time how long they’ll take to do,” he notes. The goal is to set the pricing where he’d make money on a particular client in a particular service level. “We realize we’ll probably lose money on some and make money on some, but we want to make sure it’s profitable for the average client,” he says.

Blain & Co. has about 100 client families with $67 million in assets. Roughly one-third of them have less than $1 million in investable assets. “I think it’s a segment that can be served profitably,” Blain says, adding he believes his system works because the firm’s new clients generally are children of clients or are referrals.

“They understand in advance they’ll have to pay something to come here,” Blain says. “If you try to market this to the mass market and tell someone with $200,000 they have to pay a $1,500 financial planning fee, I can see where that would be a difficult sell.”

ETF Platforms
Wela Strategies was formed specifically to serve the mass affluent and do it profitably. And now it’s offering its services to other advisors.

The firm was created in 2008 from the rib of Capital Investment Advisors (CIA), a roughly $1 billion wealth management firm in Atlanta. Wela’s raison d’être was to serve those mass affluent clients sent to CIA by referrals or attracted to it through the Atlanta media. (One of its principals does a weekly radio show and writes a weekly column/blog for The Atlanta Journal-Constitution.)

Wela targets investors with assets up to $500,000 (although some have assets up to $1 million) and provides ETF-based portfolios based on a client’s risk tolerance, time horizon and return expectations. Wela keeps its costs down by leveraging CIA’s existing operational infrastructure and human capital (several CIA employees do double duty at both firms).

“We’re able to do this because we’re already making strategic decisions for CIA and we don’t have to recreate the wheel, and the decisions made at CIA are spread across a small scalable model with Wela,” says Mitchell Reiner, Wela’s managing partner and CIA’s chief operating officer. “The business model works because we have a unique flow of these types of clients coming into our office, or who are already at CIA and we can turn them over to Wela.”

Wela clients pay fees ranging from 75 to 100 basis points, according to assets under management. That pays for both portfolio management and advice, which is provided by a dedicated staffer who was hired in a financial advisory role last October.

As of December, roughly four-fifths of Wela’s $50 million in assets was held by about 285 clients/households, whose average assets at the firm were approximately $145,000. The rest of Wela’s assets come from its model portfolios found on various separately managed account platforms and other advisor platforms such as Envestnet and Placemark.

Besides getting clients from CIA and its own outreach, Wela is marketing itself as a place where advisors can transition their middle-market clients so they can focus on their more profitable high-net-worth clients.

Under Wela’s Practice Management Partnership (PMP) program, these clients become Wela clients, and advisors who transition them to Wela participate in revenue sharing at a rate of 20% of management fees for two years and 10% afterward. Through December, Reiner says Wela had three advisor partnerships with total client assets of about $6 million.

To help get the word out about the PMP program, Wela in 2011 hired Paul Scudellari as its business development chief. Before joining Wela, he spent 11 years with Charles Schwab Advisor Services consulting with more than 125 RIAs in the Southeast.

“He [Scudellari] knows the biggest firms, and that those are the kind that have more of a drag on their books [from small-asset clients],” Reiner says. “He’s putting our name out there as a solution to their problem.”

Reiner says Wela has had an 88% success rate of clients who are introduced to Wela via the PMP program and who ultimately go with the firm. Wela’s pitch is that it has built a scalable model that provides clients access to a financial advisor who can give appropriate advice and investment management for their situation through Wela’s low-cost, ETF-based portfolios.

Planning Is Extra
When Glenn Kautt was the CEO of the Monitor Group, it created a firm within a firm to serve middle-market clients. After his company merged with Savant Capital Management last year (they kept the Savant name), the same model carried over into a separate unit called Savant Portfolios, which serves clients with assets between $50,000 and $500,000 and, presumably, less complex financial needs that don’t require high level planning work.

Savant Portfolios is focused only on investment management. The fees for this service start at 1.5% and are based on a client’s assets at the firm. Kautt, who is now Savant’s vice chairman, says these clients get similar portfolio management services as Savant’s high-net-worth clients at the main firm. Any additional planning work is done by Savant Portfolios’ staff of a handful of young, CFP-licensed planners who charge between $50 and $150 an hour.

Savant has 2,700 clients and $2.9 billion in assets overall, of which 661 clients and $138 million reside at Savant Portfolios. Kautt says the margins at Savant’s high-net-worth business and Savant Portfolios are roughly similar––the latter’s performance is boosted by an efficient, scalable investment management service run by Savant’s central investment committee.

And, Kautt notes, Savant Portfolios lets young planners learn the ropes of the business. “It creates a logical and attractive career training path,” he says.

Going Down Market . . . But Not Too Deep
Grant Rawdin, CEO of Wescott Financial Advisory Group LLC in Philadelphia, knew his firm needed to expand its client base, even if that meant serving folks who don’t meet its $2 million minimum. But he also didn’t want to get carried away with the notion. “Creating a platform to serve the mass affluent would be very difficult for us,” he says. “We didn’t want to create two tiers of clients. We want to remain focused on our core clientele.”

The typical Wescott client is a senior executive, doctor, lawyer, accountant or business owner who receives guidance on various financial planning topics ranging from portfolio allocation to structuring partnership agreements. A number of its 370 clients have grown up with the firm in a financial sense, and some of them now have adult children that Wescott naturally wants as customers.

In January 2011, Wescott rolled out its “Entrada” program. This provides investment management and some associated financial planning services to people who don’t meet the firm’s investment minimum. (“Entrada” is Spanish for “entrance.”)
“It was about looking at how to serve and build relationships with those who could become significant clients within 10 years or sooner,” Rawdin says. Entrada works with second-generation clients and referrals, but also people beyond that who approach Wescott and appear to be in acceleration mode both professionally and financially.

Wescott has been a financial planning firm since it started in 1987, Rawdin says, so Entrada isn’t about chasing after investment management. “We are not building Entrada to widely market to the mass affluent,” he says. “Rather, it is a caretaker and incubator for strategically important clients.”

Entrada has an asset minimum of $250,000 and a $2 million maximum, and its investment portfolio fees are 1.25% on the first $2 million (whereupon clients go into Wescott’s higher-end wealth management program). Financial planning is provided at an additional consulting fee.

Rawdin says only about 30 of Wescott’s total base of 370 clients are part of Entrada, though he expects that it will expand at a gradual pace. “We’re not looking to build it,” he says. “It’ll grow naturally.”

Keeping Planning At A Minimum
Albion Financial Group in Salt Lake City is an RIA that offers investment management and comprehensive financial planning to clients with an investment minimum of $1 million. A few years ago, the firm realized its investment management service was scalable on a much larger scale than its financial planning service, and decided to take clients with lower minimums and offer them more of an investment management platform without the full-scale financial planning.

“The expectations are set in the initial meeting, and our goal is to help the client feel privileged that they are able to use our service that was previously only available to $1 million-plus clients,” says John Bergerson, Albion’s vice president. “We don’t have the ability to talk about financial planning issues though, but address them more as a cash flow discussion instead of financial planning.”

If they discuss retirement planning, Bergerson says, it might be along the lines of hashing out the advantages and disadvantages of Roth IRAs versus traditional IRAs. He notes that Albion’s bifurcated system enables it to serve people it couldn’t previously serve, whether they are referrals from existing clients or strangers coming in off the street. “If someone found us through a Google search and asked about us, we don’t want to send them to our competitors because today’s $100,000 client can become tomorrow’s $1 million client.”

Albion has roughly 250 clients with aggregate assets of about $700 million. Of those, Bergerson says, around 50 clients have less than $1 million in investable assets. He notes that some of them come from attorneys and CPAs who haven’t worked with Albion before and who may be hesitant to refer a million dollar client to the firm.

“This program also allows them to try us out with a smaller client, and when that experience goes well, they invariably refer larger clients to us,” Bergerson says.

Trying To Make It Work
Jennifer Cray, the advisor with Investor’s Capital Management, says she’s in the process of culling her client roster from 66 to 50 to make it more manageable. She expects 20 of those remaining 50 to be hourly clients, who pay rates of $240 to $280 an hour. Her new non-hourly clients pay a flat fee that starts at $10,000––which equates to 1% on $1 million––for comprehensive planning and asset management.

Even though Cray says the high overhead costs of doing business in the Bay Area make doing hourly planning less cost effective with less-affluent clients, she doesn’t want to quit doing that work. “If I just focused mostly on investments, my job would be easy,” Cray says. “But that’s not what I want to do because I’m good at financial planning and I do a lot of it. I love what I do, and I love my clients and want to have a close relationship with them.”

At least for the immediate future, Cray’s search for the Holy Grail of profitably serving her middle-market clients continues.