The trend is to seek out big accounts, but many investment managers and planners continue to value relationships with small clients.
For financial advisory firms looking to grow, the
prevalent theme nowadays is that firms need to move up the wealth
ladder and shed themselves of client accounts that sit on the lower
rungs.
James Hallett finds such talk amusing. In fact, he's
heard colleagues boast so much about high-net-worth clients and their
Rolex watches that he has a prepared comeback. "It's always fun for me
to say we work with low-net-worth people who wear Timex watches," he
says.
Hallett, president of Hallett & Associates in
Port Angeles, Wash., goes against the flow when it comes to moving
upstream in search of the big fish. His firm has no official minimum
account requirement and deals with clients who have an average account
size of about $250,000. Some clients fall much below that.
Yet even with a clientele that falls below what
industry consultants consider the "sweet spot" of profitability-a
recent study suggests the most profitable clients have liquid assets
between $500,000 and $5 million-Hallett says his firm has robust
growth.
The firm has about 330 clients and in the last six
years has seen its assets under management go from $10 million to $80
million. The growth, he says, is due to the firm's open door policy for
both large and small clients. It's a policy partially derived from the
fact that Hallett & Associates sits in a former thriving logging
community that is now grappling with 10% unemployment. But it also is a
policy grounded in what he calls "holistic planning."
"I can understand it from a business standpoint that every relationship
should generate x-dollars to the bottom line, and I truly understand it
and have looked at it," he says. "However, our philosophy and my firm's
philosophy is such that I don't think the bottom line is the true
definition of a healthy practice."
Hallett is among a number of firms that, for various
reasons, have bucked recent trends and adopted a policy that either
includes or focuses entirely on serving Middle America. They are doing
so at a time when many management consultants preach just the opposite.
A recent survey by Rydex Advisor Benchmarking, for example, found that
RIA firms requiring a minimum account size increased the requirement by
an average of 18% in 2005, to $408,000 from $345,000 a year earlier.
The approaches firms use to serve smaller accounts
do vary. Some firms serve small accounts as a niche business and only
in the area of financial planning. Other firms, meanwhile, have managed
to fit small accounts into a business model that includes both
financial planning and investment management.
In either case, no one is suggesting such a strategy
is easy. Advisors who serve small accounts say that the work requires
careful time management and a relatively high number of clients to be
operationally successful. Some firms have been unable to make the model
work.
KLB Financial in Edina, Minn., recently raised its
minimum account requirement to $500,000 and, in the process,
transferred 200 clients to an independent RIA who used to work for the
firm. The firm opened its doors in 1990 with no minimum account
requirement. "It took us three years to embrace the fact that we had to
give them away," co-owner Dana Brewer says of the 200 transferred
clients. "It took a lot of soul searching, and we just couldn't come up
with a way to keep them."
The problem, she says, is that the firm has stuck to
a comprehensive service model as its client rolls grew over the course
of the last 16 years. It got to the point, Brewer said, where the fees
from larger accounts were subsidizing the smaller ones.
The firm instituted its first minimum requirement of
$250,000 a few years ago but even that wasn't high enough, she says.
"It was crazy and busy here and we knew that we would rather be busy
with the profitable clients," Brewer says.
Mallard Advisors LLC of Newark, Del., found itself
dealing with the same issue last year. After launching with an
open-door policy, the firm gradually realized it had outgrown many of
its smaller accounts. What the firm decided to do in this case was
adopt a new tier of service, a "gold" level of investment management
that requires a minimum $1,000 annual fee-equating to an account size
of about $135,000.
The firm's higher "platinum" level of service
requires at least $3,000 in fees a year, equal to about $400,000 in
assets. "We didn't like the idea of shutting the door to smaller
accounts," said Paul Baumbach, the firm's senior wealth manager. "Also,
many of them eventually grow into larger accounts."
Before the adoption of the tiered service, the firm
had a straight $300,000 minimum, but continues to service smaller
accounts that were leftover from the years before it had a minimum
requirement. Those grandfathered accounts have now been moved into the
gold tier, which Baumbach described as a more streamlined and less
costly level of service. Gold tier clients, for example, get their
quarterly reports two months later than other clients. "That helps us
dramatically with work flow," he says.
Another reason for the lower tier: It is a
convenient place to put client referrals with smaller accounts.
"Usually the people who come to us with less are family friends and
word-of-mouth folks, and those people you especially don't want to show
the door," Baumbach says.
Some advisors who started out as accountants say they felt an
obligation to serve small accounts when transitioning to investment
management. "I think it was getting back to being an advocate or
protector of clients," says James Warring, managing member of R&M
Wealth Management Services in Bethesda, Md. "It's ingrained in your DNA
to help clients and put yourself in their shoes."
R&M Wealth Management has an $80,000 account
minimum, but Warring says the firm will try to work out arrangement
with any client. "We don't turn clients away necessarily," he says.
"Our belief is that a small client becomes a big client, and also that
there is a need out there for good advice and good service."
Traphagen Investment Advisors LLC in Oradell, N.J.,
has had a $10,000 account minimum since it was launched by a group of
accountants in 1997. "Working with accounting and tax clients we saw
there was a need to help these people," says V. Peter Traphagen Jr., a
partner at the firm. Traphagen's father founded the accounting firm 30
years ago.
Traphagen says keeping small accounts is also a good
way to build relationships. He notes that the firm, while it makes on
average about $30 to $40 a year on a typical $10,000 account, often
sees those accounts grow. He gives as one example the holder of a
$2,000 Roth IRA who later brought in $2 million from an inheritance.
"Another way to look at it is it's almost like a marketing expense," he
says.
Middle America As A Specialty
Two powerful trends-the aging of the baby boomers
and the growing realization that Americans aren't doing enough to
prepare for retirement-are leading to a growth in the number of
advisors who focus on middle-income clients, according to advisors
involved in the specialty.
Sheryl Garrett started the Garrett Planning Network
six years ago to help advisors set up and operate practices focused on
delivering affordable financial advisory services that are billed by
the hour. Two years after the network started, the network drew 115
advisors. It now has about 260.
She notes that the trend is working two ways. More advisors are
gravitating to clients that have traditionally been ignored by
professionals, while more middle-income families are waking up to the
fact they need professional planning advice.
"The guys on the factory line are talking about the
stock their company is putting in the (retirement) plan," she says.
"There's a lot more interest and recognition by the average Joe that we
have to be more involved in our personal finances."
Garrett says the most difficult transition for
advisors going into this market is time management. Most advisors, she
says, are not used to billing by the hour or setting a time allotment
for specific projects.
That may be one reason that only 30% of the advisors
in her network provide investment management in addition to financial
planning services. "As-needed investment advice is a very different
animal than portfolio management," she says. "We don't see that
happening with an individual practice very often.
At Cambridge Advisors, a network of advisors geared
toward serving those with annual salaries of between $40,000 and
$100,000, advisors include investment management with the help of
planning tools provided by Cambridge, network founder Bert Whitehead
says.
Among the approaches used by Cambridge Advisors is
to include a client's home when managing assets, and striving for tax
efficiencies, he says.
Cambridge advisors are all certified tax specialists who typically do
their clients' taxes each year, he says. "I don't know how you would
serve Middle America without doing their taxes," Whitehead says.
Roger Kruse, who with his brother Ron has been
providing fee-only financial planning and investment management to
middle-class clients with less than $1 million in assets since 1997,
says many of his clients came to him after working with commissioned
agents and brokers. The sales-oriented nature of those relationships is
what usually gets them to seek out a fee-only advisor, he says. "They
have low confidence that their current person can meet their retirement
needs," he says.
Rebecca Pace, owner and founder of Pace Advisors LLC
in Cincinnati, has chosen to focus her practice strictly on providing
financial planning to those who need it. In many cases, it's people who
have no more than a 401(k) account to work with. "I think there is a
huge need for the service in the middle market," she says.
Most of her clients fall into the $300,000 to $1.5
million range of assets, and typically are do-it-yourselfers looking
for a second opinion on their retirement accounts and portfolios. "I
define middle market as anyone who does not have estate-tax issues,"
she says.
Pace would be fully capable of expanding the breadth
of her business. She is both a CPA and an RIA, and has previous
experience in the life insurance industry and as a financial planner
dealing specifically with Fortune 500 senior executives. Now, however,
she is a strong advocate of the "hourly-as-needed" model of financial
planning, which in her practice amounts to a $400 fee for a two-hour
consultation and $2,500 to $3,000 for a comprehensive financial plan.
Her typical engagement consists of a meeting with
clients near retirement, with accounts they've been running themselves
for a number of years. When it comes to baby boomers getting ready for
retirement, Pace is on the front lines. "Most of them, knowing they are
retiring, are getting nervous and so they want some reassurance they
are on the right track," she says.
Pace provides either validation, new strategies or
both for most of her clients. She recommends annual checkups and
rebalancing, and will send out e-mails and newsletters as reminders,
but doesn't push the issue beyond that. It's a business model, she
admits, that doesn't maximize the potential for repeat business. "From
a business perspective, it is scary," she says. "It means I have to be
continually out in the public and continually marketing and making my
message fresh."
She has largely been depending on RIAs sending her
clients who don't meet their minimums, as well as referrals from CPAs
and existing clients. The other source of business has been people
finding her name on the Internet-mainly through planner search tools on
the Web sites of the Financial Planning Association and the CFP Board
of Standards. "One thing working in my favor is that every day someone
has a birthday and is getting ready to retire," Pace says.
For Diane Maloney, owner and founder of Beacon
Financial Planning Services Ltd. In Plainfield, Ill., the focus on
serving middle- to upper-middle-class clients evolved as she set up her
practice. Maloney decided to become a financial advisor in 1988 after
spending 20 years as a high school teacher-the latter years as an
instructor of financial planning. Soon after making the switch, the
state board of education asked her to participate in a two-day seminar
for teachers who were approaching retirement. "They told me they had a
terrible time finding planners who understood the teacher retirement
system," she says.
Maloney agreed to participate in the seminar and, at
the suggestion of board officials, left her business card and promised
a free hour consultation for any attendees who wanted to meet with her.
That one event, it turned out, became the foundation for her firm. "I
got 50 full-time planning clients in a matter of months," she said.
Building her firm mainly through client referrals,
Maloney now serves 275 families in 15 states across the country and in
Europe and has $50 million under management. She considers her ideal
client to have between $300,000 and $1.5 million in liquid assets, but
with no minimum account requirement she has many clients with less.
The firm gets the majority of its income from
investment accounts, but Maloney considers the financial planning end
of her business crucial to the relationship she has with clients. She
has, for example, accompanied clients to inspect assisted living
communities to provide an objection voice in their decision-making.
While some firms at similar stages of growth are
firing clients, Maloney continues to embrace client relationships that
bring little or no return to the bottom line. "We are just client
focused here. I just like to know them and what their needs are," says
Maloney, who has brought in two staff assistants and another CFP
practitioner since starting the firm. "For some of them, I've held
their hand through some of the saddest tragedies in the world."