Having a large minimum account size is the Holy Grail for many financial advisors. In theory, having fewer but larger clients, thus working less and earning more seems wonderful. In reality however, it can present significant challenges. If a minimum is communicated improperly, existing clients may feel jilted. If exceptions are made, then a minimum can come across as a sales ruse rather than a prudent business practice. If you turn away the wrong client, precious revenue can be lost. How can advisors set and communicate their account minimum in a way that will build up their business rather than tear it down?
Step 1: Choose the Right Minimum Size
Before you select a minimum account size, you need to know what it costs you to support a client. There are a number of formulas you can use to calculate this, but here are two simple ones that should get you close (Use most recent 12-month figures):
Operating Costs minus Marketing Expenses ÷ Number of Clients = Annual Cost Per Client
Total Revenue minus All Expenses = Net Revenue ÷ Hours Worked = Hourly Rate
Once you have these two figures, the rest is simple. To get your final figure, simply multiply the number of hours you expect to work with each client by your hourly rate and add that figure to the annual cost per client to get your total. Here’s a hypothetical example of what the numbers could look like:
$100,000 operating costs minus $25,000 marketing expense ÷ 100 clients = $750 Cost Per Client
$250,000 total revenue minus $100,000 expenses = $150,000 net revenue ÷ 2,000 hours worked = $75 per hour x 5 hours per client = $375 per client. Adding the two totals together, total annual cost per client becomes $1,125.
The idea of this exercise is not to pick a final number, but rather to create awareness around what it actually costs to support a client. Many advisors are shocked to learn that they have been taking on clients who are unprofitable. The advisor in our hypothetical scenario above shouldn’t even consider taking on a client who doesn’t have at least $150,000 to invest.
Of course, knowing what it costs to support a client is only the first step. The next is to consider what your market can bear. Consider your current client base first. If your average client invests $200,000, this may be a good place to start. If you’ve never had a minimum before, it’s usually best to be conservative in the beginning, as you can always raise your minimum later. It’s much harder to lower a minimum that was set too high, as this can appear desperate. Over time you should gradually reassess and raise your minimum. More information on selecting the right minimum for your area was discussed in my last article, Should You Institute a Minimum Account Size, published at FA-Mag.com in July.
Step 2: Communicate Your Minimum
Once you’ve selected your minimum account size, begin making it known at every opportunity – during client meetings, at seminars and client events, and in your advertising. Don’t be afraid to let people know that you ‘specialize in working with accounts of $500,000 and above.’ One major benefit of having a minimum is that, as word spreads, you will earn a reputation for it. Communicated properly, this should lead to gradually acquiring larger accounts.
Granted, some of your smaller clients may become concerned that you are going to forget about them in favor of bigger fish. If you intend to retain these clients, you must do whatever is necessary to relieve their concerns. One solution may be to communicate new service levels at the same time you roll out your minimum account size. In this way, you can show all your clients a “menu of services” outlining the benefits that every client receives. Reassure them that even though your business is growing, you will continue to be loyal to the clients who are loyal to you. Use such conversations as a chance to thank them for their business and remind them that their referrals are still appreciated. If you handle such conversations diplomatically, you may even find that such individuals become better clients than ever, openly bragging about your firm because they like the prestige that goes along with having an advisor who only works with ‘select’ families.
One of the times when how you communicate your minimum matters most is during one-on-one meetings. If you focus strictly on the dollar amount of the minimum, you could come across as self-serving. Clients and potential clients both need to understand how your minimum provides them with extra value. Be prepared to explain how having a minimum allows you to give your clients more face time, highly customized wealth management solutions, decreased fees, enhanced services, or other benefits. In short, don’t have a minimum just for the sake of it; have a minimum because of the extraordinary service you provide.
When explaining your minimum to clients and prospects you might say something like: “It has never been my goal to be all things to all people, but rather, to be all things to a few people. For this reason, I must be selective about the families I choose to work with. Having a minimum account size allows me to work with fewer households, thus providing better service for my clients than many advisors do. I strongly believe this is something my clients deserve.” By framing your minimum this way, you show your clients that you are putting their needs ahead of your own.
Step 3: Stick to Your Minimum (Usually)
In most cases, it is imperative to stick with the minimum you set. If you make frequent exceptions by taking on clients who don’t meet your minimum, you will weaken its effectiveness. This is not to say you can never make exceptions. It’s just that if you do, you need to have a good reason for doing so or your clients may perceive your minimum as a mere sales ploy.
One thing you may want to do is select additional client ‘qualifiers’ besides account size. Such factors could include:
- Short-term revenue
- Long-term revenue
- Influencer in the community
- Ease of management
- Fit with client base
- Close friend or family member of a top client
- Good chemistry
In such cases, feel free to let the individual know that you are going to make an exception to your minimum based on certain factors. If you take off your financial industry hat, it’s easy to see why this strategy makes sense. It’s fairly common for doctors and attorneys to accept smaller cases when they are confident they can help someone, or when the time and effort required is minimal. Shouldn’t financial advisors have the same professional latitude?
In conclusion, if you decide to put a minimum account size in place, don’t do so arbitrarily. Spend adequate time choosing a number that is right for you and figuring out how to effectively communicate it to clients and prospects. If you lay the groundwork properly, instituting a minimum account size may prove to be one of the best business decisions you’ve ever made!