Setting proper client minimums is an important practice management issue that every advisor needs to consider. For many advisors, the idea of having “minimums” is an unpopular, as their goal is to be ready and willing to serve any prospective client who needs help. But the truth is that there’s only so much time in the day – which means not everyone can be served – and given the overhead costs to operate an advisory firm, serving clients that are “too small” may well be a money-losing proposition for the business (even if it brings some revenue in the door).
Of course, even for advisors who are ready to set client minimums for their advisory firm, it’s one thing to say “you should have minimums”, and another to figure out how to actually structure the minimum (e.g., a minimum account size, or a minimum advisory fee?), and what level it should be set at!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss best practices in how advisors should actually go about setting client minimums, the benefits and trade-offs in setting minimums based on investment account sizes (e.g., an AUM minimum) versus a minimum fee (e.g., a minimum annual retainer), and how to figure out what the minimum revenue per client should be for the business to be profitable.
Most advisors that have a minimum simply set a minimum AUM requirement (i.e., a minimum household or portfolio account size). The virtue of having an asset minimum to work with a client is the sheer simplicity. If the advisor sets an asset minimum of $250,000, and charges a 1% advisory fee, then the advisor has effectively set a $2,500 minimum fee for clients. Additionally, the advisor has set a minimum without any special billing requirements or complexities.
By contrast, some advisors prefer to set a minimum annual fee instead (regardless of account size), such as $2,500/year, and simply charge all clients that fee at a minimum (either as an annual retainer, or sometimes billed quarterly or even month). The good news of such a retainer-fee minimum structure is that it opens up new markets – for instance, young professionals who have limited assets but high income and good wealth-building potential who can happily afford the fee from their income. The bad news, though, it that it introduces additional billing complexity, as now the advisor needs a way to invoice, track, and process those minimum fees and have a way to actually get paid by the client (especially if there is no investment account to manage and sweep fees from!).
Regardless of the structure, though – an annual $2,500 minimum fee, or a $250,000 account minimum at a 1% rate that adds up to $2,500/year – it’s still necessary to determine what the minimum revenue should be, and whether any particular advisor needs a minimum revenue per client that is higher or lower than $2,500/year.
Ultimately, most advisory firms do this one of two ways. The first option is to set the minimum fee based on the cost to actually service a client in the first place, by adding up the total overhead cost of the business and dividing by the number of clients; for instance, if the firm has 180 clients and the total cost of overhead is $450,000, then the firm must charge $2,500/year just to cover its office rent, staff, and other overhead costs. The second option – especially popular for solo financial advisors – is to price the minimum is based on the value of the advisor’s time (since that is his/her primary constraint as an individual advisor). Thus, if the advisor wants to earn $200,000 per year and can only generate about 1,200 productive client-facing hours, the advisor needs to earn at least $166 per hour when doing client work, which means if a client takes 12 hours per year to serve, the minimum fee must be $166/hour x 12 hours = $2,000/year.
The bottom line, though, is that some minimum level of revenue per client is necessary for an advisory firm to execute well as a business. It can be administered as either a minimum account size, or a minimum retainer fee, though each has its benefits and disadvantages and who the advisor can (or cannot) work with, and it’s especially important to recognize that if the advisor is going to have a non-investment-account retainer minimum, the advisor had better be delivering some real financial planning value outside of the investment account!
source https://www.kitces.com/blog/advisory-fee-client-minimum-account-assets-retainer-fee-best-practices/?utm_source=rss&utm_medium=rss&utm_campaign=advisory-fee-client-minimum-account-assets-retainer-fee-best-practices
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