Why Account Minimums Threaten Your Business

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Why Account Minimums Threaten Your Business

September 16, 2014

by Dan Richards

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The disciplined implementation of ever-increasing account minimums has boosted productivity for many advisory practices. Yet those same account minimums threaten the future sustainability of advisor practices, if applied too rigidly. Here’s why.

The rationale for account minimums

Advisors impose account minimums because small accounts almost always generate too little revenue to pay for the time it takes to serve them. Add on growing compliance and Know Your Customer requirements that are fixed regardless of account size, and many advisors have made a systematic push to hive off smaller accounts and raise the dollar threshold for new accounts. Here’s how one successful advisor that I recently met with put it:

My goal is to be an aspirational brand like Tiffany or Mercedes, where clients feel that working with me is a mark of accomplishment. When I meet with prospects and they don’t have $2 million, I tell them that my practice is set up to deal with serious money and that given the level of personal attention that my team and I provide, we can only take on accounts of $2 million or more.

More often than not, one of two things happens. Sometimes they decide they want to work with me and come up with the $2 million by transferring over other accounts. Even if they don’t meet my minimum, if it looks like they have potential I tell prospects that that I’d like to stay in touch and send them my monthly newsletter and invitations to my client lunches … and then I’ll hear from them a couple of years down the road when they’ve sold a business or real estate or gotten a couple of big bonuses.

The underlying concept behind account minimums

While most advisors would not be as explicit as this one, the underlying concept behind this approach is that smaller clients will work with a lesser advisor until their assets grow and they’re ready to graduate to the more sophisticated advice that you can provide. Here’s the first flaw with this thinking: While this may have been true in the past, younger clients today have a much broader range of advice options. There is a real risk that many of these clients will be quite content with the advice they’re getting as assets grow and won’t look to move.

There’s a second flaw to the traditional thinking on account minimums. Ten years ago, most clients were still accumulating assets, and account balances were growing as a result. Today, the natural flow of demographics means that a growing number of clients are reducing assets to fund living expenses in retirement. Also, many of these clients are taking more conservative stances in their portfolios with lower expected returns as a result.

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