On one hand, accepting smaller accounts can help a firm gather assets as well as avoid the awkward scenario of rejecting prospects as clients. One the other hand, smaller accounts typically are not profitable.
With that in mind, advisors should consider a variety of factors when assessing if they should establish policies for account minimums. After evaluating the matter, many advisors may find that the best policy is one which provides flexibility when determining if prospects with modest wealth would be appropriate as clients.
Many advisors maintain that account minimums are important. Some advisors market themselves as providing highly customized advice. Without account minimums, such advisors may not be able to profitably provide such services. That is especially true with advisors who have highly compensated lawyers, tax specialists and financial planners on their staff who are needed to provide advice on complex issues such as estate planning, tax management and executive compensation plans.
By not having account minimums, furthermore, an advisor may generate a reputation for being willing to work with clients with minimal wealth. Once that reputation is established, an advisor may become frustrated with receiving a large number of inquiries from prospects who are unlikely to be profitable as clients.
Advocates of having small account minimums or even no minimums maintain that some clients who aren’t wealthy may have substantial potential to grow their wealth. Establishing relationships with such clients can be an investment in the future, they maintain. For example, young doctors who are straddled with tuition debt have substantial earnings potential and therefore are likely to grow their wealth over time.
Other clients may be likely to inherit substantial assets from their elderly parents. Some clients, furthermore, may hold off on having a new advisor manage all of their assets until a strong relationship is established. Those clients may initially appear to have minimal assets, but once a relationship is established, they may move additional assets to an advisor’s care.
Relatives of existing clients may also be appropriate as new clients, even if the prospects lack substantial wealth. The idea is to strengthen existing relationships by helping established clients’ relatives. For advisors, a flexible approach to account minimums may be the best strategy. When initially meeting with prospects, advisors may want to explain that they seek to provide high quality and individualized advice to clients.
In order to provide a high level of service, they need to ensure that clients’ accounts are large enough to generate sufficient revenues. Advisors should then explain, however, that their policies are flexible regarding account sizes. At that point, advisors should explain that they provide prospects with an initial consultation that requires fact finding to establish net worth, investable assets, investment goals, risk tolerance and other important factors.
The fact finding will allow advisors to assess the amount of investable assets that prospects may have. When prospects have modest wealth, advisors can then assess if the individuals have potential for growing their assets and, if so, whether the prospects may be appropriate as clients.
Once the fact finding is complete, advisors can then provide an initial overview of a prospect’s financial health and then decide if the prospect is a potential client. If the prospect is not appropriate as a client, an advisor should refer the individual to other financial planners that are willing to work with smaller cases.
For other prospects, the advisor may want to talk about having the individual become a client. Determining which prospects are appropriate, of course, will be based on the capabilities of each advisor. An advisor with no employees will need to focus on profitable accounts and will probably be less likely to accept smaller accounts.
Larger firms, however, may be able to delegate the handling of smaller accounts to administrative workers or paraplanners, which can make accepting clients with modest assets more manageable. The ability to automate client services may also make managing smaller accounts more manageable.