It’s a dilemma faced by virtually all independent financial advisors today: squeezing profitability out of small accounts. Advisors often have to spend just as much time and energy working with small clients as they do large ones.
However, given the lower volume of assets under management, the financial return on small accounts is usually much lower than the return on mid-sized and large accounts — if there’s any return at all. And spending time on small clients leaves advisors with less time to spend working with or looking for larger clients.
The value of “small” accounts
Most financial advisors strive to provide the same level of service and attention to every one of their clients, regardless of the size of the account. Not only is this the ethical way to run a financial advisory business, but you can also reap other benefits from this approach, including the following:
• Small accounts often grow into large accounts over time. By taking good care of clients who have relatively small accounts early in a relationship, you can build a solid foundation of trust and loyalty that may pay off through the growth of the account over many years.
• Small clients may provide referrals to other potential new clients, including larger clients. According to a Cerulli study 52% of advisors expect referrals from existing clients to be the top driver of growth for their business in the next five years,1 more than any other factor, so it’s never a bad idea to keep a small account owner happy for the potential for referrals to larger clients.
• Having a roster that includes many small clients can reduce client concentration risk and help insulate a firm from the risk of losing a large client. For example, the financial impact of losing a client who accounts for 2% of your firm’s revenue is much less than the impact of losing a client who accounts for 20% of your firm’s revenue.
Smaller Accounts = Higher RoA
You might be surprised to learn that small accounts can actually yield high Revenue on Assets (RoA). According to a study conducted by PriceMetrix, not only is the average RoA highest for small households — but the average RoA of small households (1.00%) is nearly double the average RoA of large households (0.54%).2
This would seem to indicate that small accounts can be profitable if they’re managed efficiently and cost-effectively. Here are three ways to do this:
1. Establish a minimum account size. Determine what is the smallest account in terms of assets that you can realistically work with. This will differ from one advisor to the next based on such factors as overhead and other administrative costs that are unique to a particular firm. Then hold firm to this minimum — don’t be afraid to say “no” to prospective clients whose assets fall below your cutoff. If you feel a need to say “yes” to a smaller account, you may want to apply a different service model to these accounts than you provide to larger accounts.
At the same time, consider automating trading and rebalancing of small accounts by utilizing online digital investment tools. Also think about whether it might make sense to outsource investment management for small accounts to a third-party money manager to lower your investment-related overhead costs.
2. Move small accounts to an asset-based pricing platform. Consider whether using a custodian that offers an asset-based pricing platform makes more sense for smaller accounts than charging for each trade conducted, since ticket-based pricing tends to erode the value of small accounts even more.
3. Utilize the latest technology. Model-based trading platforms are one example of technology that can boost the efficiency and profitability of servicing and managing small accounts. By making trading and rebalancing decisions for small accounts at the model level, rather than the individual account level, you will free up more of your time to spend working with mid-sized and larger accounts.
As an added bonus, this approach can also result in better pricing since account-level trades are aggregated into a single omnibus trade.
Also use trading platforms that support fractional share technology to make it easier to accommodate lower minimum account balances. This is a cost-effective way for your smaller clients to own a fraction of individual stocks, which can help you further diversify their portfolios.
Meet the Challenge
Learning how to profitably serve small accounts is one of the biggest challenges facing independent financial advisors today. Think about how you can put these and other strategies into practice to serve your small clients more cost-effectively while focusing on potential growth.
1 Cerulli Associates, 2016 Managed Accounts Landscape, June 2016. (https://www.cerulli.com/vapi/public/getcerullifile?filecid=Cerulli-MAQU-2016-Info-Pack)
2 PriceMetrix Insights Special Edition, The State of Retail Wealth Management, March 2014 (https://www.pricemetrix.com/cms/wp-content/uploads/State-of-Retail-Wealth-2016.pdf)