How Much Should Advisors Charge Small Accounts?

That would be the professional thing to say.

Sadly, though, many would rather strut around swinging their golf clubs. The most ironic thing is these “AUM peacocks” are the ones who squawk the loudest while the humble advisors who quietly serve their clients with dignity go unnoticed.

So let me get this straight.

You are offering the same exact service as the accounts you charge 1% (or lower), and there is nothing that implies that the smaller account will require more of your time or resources – in fact, these accounts are probably outsourced to a third party that piles on a 1% fee. Yet you need 50% more money to do less?

How is it that value equals or exceed price when it’s a $1 million, but then with a drop in assets (and seemingly less complexity) value becomes higher, hence worthy of commanding 50% higher fees?

Huh?

Value is totally dissociated from price in this scenario because the size of the account alone means a higher price is waged.

Look at what the long-term impact of high fees are for a $750,000 account:

Notes: $750k starting portfolio value, fees debited out at end of year, 8% growth rate before inflation, no transaction costs, no withdrawals or contributions, 20-year time horizon. Projected growth of portfolio is entirely hypothetical; future performance is not guaranteed. This illustration does not include ongoing service, platform, product, and other miscellaneous costs; this may decease potential yearly and accumulated growth and/or fee savings. Actual portfolio growth may vary.

If you’re doing this, you should amend your website to say: “We help our clients put (my) children through college.”

Over 20 years, the portfolio would be a whopping $432,279 lower if you charged a 1.5% AUM fee vs. 0.75%. They may have been better off with you just selling them an A shares mutual fund and leaving them to fester (another popular recommendation for a small account).

Looking on the bright side, however, it is stultifying wrong that advisors who want to come in and steal these clients from the AUM peacocks could do so relatively easily.

Here are some examples of advisors who are doing small accounts right:

1. Say the words “you’re not qualified”

I commend any advisor who point blank tells a prospect, “Look, you’re not big enough for me to treat you right.”

Here’s where you’ll have to be objective, humble, and unselfish. If they’re not going to be your A list, for that amount of money they can be someone else’s. Politely send the client elsewhere, you use the time instead to focus on finding clients you can provide value to commensurate with price charged.

Get a list to refer them and publish it on your website right next to where you state your minimum account size.

2. Charge hourly fees and reduce complexity for client

I recently spoke with Rick Ferri, who is an hourly advisor. Go ahead and roll your eyes all you want about the pitfalls of the hourly model, but from what I gather, he earns a good living (not broke). More importantly, he delivers spectacular value to small accounts – whether they are a radiology resident with $300,000 of debt or a tech entrepreneur with $50 million of wealth.

What makes his approach work is simplicity and low cost. According to Ferri, most advisors engage in what he calls “complexity for the sake of job security.” In a nutshell, if the portfolio is too complex for the client to implement on their own, the advisor has overly complicated matters to lock the client in to working with them.

To quote Ferri from our recent podcast:

They come to me, either they have been self-managing their portfolio their whole life, or maybe they were working with…maybe a money management company…and they have come to the light. They have realized that they’re paying way too much and it’s all about smoke and mirrors in many ways, you know, complexity for the sake of job security…they’ve had their epiphany.

And when they come from another advisor and it’s this complexity-for-the-sake-of-job-security portfolio, this Humpty Dumpty portfolio that the advisor put together, it’s a restructuring. I have to kind of restructure things and make them simpler so that they can manage it.

If they’ve just converted and they have this really messy portfolio, and they always come that way, it’s just an absolute mess of stuff, and you’ve gotta take that and you gotta bring it down to something that they can manage.

No matter how much in assets they have:

• He only provides advice, not investment management services or products.

• He meets with the client for two hours, gathers information, and then provides a 3-5 page analysis of his findings for which he charges $990. If they have questions he answers them over email for no additional fee.
• If they need help implementing the investment portfolio recommendations, he refers them to low-fee money managers who invest in low fee ETFs.
• If they have a change in their life plan a few years down the line, he will provide a maintenance analysis for an hour or two.

I realize for many of you the prospect of converting your practice to an hourly fee model is not realistic. However, I do see many of you with this option and I wish more of you would pursue it more seriously.

3. Fixed fee based upon complexity

Ford Financial Solutions works primarily with New York City couples in their 30s and 40s. They charge a flat fee based upon overall complexity.

The value is in their comprehensive planning, so a smaller investable portfolio is not an issue. For money management, they partner with Betterment for Advisors (with clients paying a small platform fee to Betterment). If they need help setting up accounts or doing a Roth conversion, for example, they can help their client through the Betterment platform. Like Ferri, for the more DIY-minded clients, they provide allocation recommendations for them to implement themselves.

This set up works well because it allows them to spend their time where they are adding value for the client in the nitty gritty of their cash flow and life goals. Also, because they are not taking custody or discretion for many of the accounts, the operational, compliance, and administrative overhead is lower. Almost all their clients pay $2,500 up front and $500 to $700 monthly.

Through the prospect process they get a good sense of what kind of client they’re getting, in terms of both financial complexity and how much hand holding they'll want, and they set the fee accordingly. Every year they reevaluate the monthly fee and adjust as needed. As the firm has grown, they've gotten choosier in who they take on as clients, and at this point they aim to only take on people they genuinely enjoy working with and who value and respect their time.

Let’s tally it up here:

• Financial planning (check)
• Investment management (check)
• Fee that matches value provided and complexity of work (check)
• Advisor not exploited for their time (check)

4. Low monthly subscription fees

Abundo Wealth can provide an individual with initial planning consultation and ongoing guidance for a one-time fee of $379 and ongoing monthly flat fee of $89. During an initial consultation, they build a financial plan with them together using RightCapital and then summarize all of the findings/recommendations in a task list, so they have an action plan.

They’ve found over the years that this method creates more buy-in and accountability for the client since they feel more ownership over the plan versus a big book of charts or PowerPoint deck.

Heck yeah on that one!

The task list may include:

Asset allocation strategies
Budgeting & cashflow analysis
Career planning & salary negotiation
Cash reserve targets
Credit card selection
Credit score factors & advice
Debt management
Employee benefits
Estate planning
Goal planning & prioritization
Home purchase decisions
Inheritance planning
Insurance analysis & recommendations
Lifestyle planning
Pension decisions
Professional referrals
Rebalancing investments
Retirement projections & planning
Risk tolerance
Student loan repayment
Tax saving strategies
Travel advice including flight deals and points strategies

Abundo does not take discretion over assets and instead provides the client with the investment recommendations to carry out on their own, which reduces its operational costs. They’ve found that most clients are tech savvy and prefer to do it themselves. They provide support through email, virtual meetings, and text if clients have questions.

Thank you, Eric Simonson, for what you are doing to support middle class America. I’m proud to stand behind you.

5. Low AUM fee

One day it hit me that the only systems in America other than AUM where you pay more for making more are alimony, child support, and the IRS. Good for all the lobbyists who made that happens, and I know you love your AUM fees – but can we loosen the grip just a leeeetle tiny bit for the sake of humanity?

I had a conversation last week with an advisor who bought a book of business. Upon reviewing many of the accounts in the transition, she found the small accounts were charged much higher fees for management that was outsourced to a third party! She immediately lowered their fees.

And then, strangely and perhaps coincidentally, her AUM rose by $20 million in one month, mostly due to referrals.

I can’t guarantee this would happen for anyone else, and I also can’t connect her fee cutting with the influx of new leads. But you don’t think it at least made a phenomenal impression on her new clients that she immediately cut their fees unsolicited.

Maybe that led the phone to ring?

There is the idea that charging lower-than-norm AUM fees is a formula for winding up poverty-stricken. I could be wrong, but it doesn’t seem like One Day in July is hurting for dollars. They charge 0.50% on accounts up to $2.1 million. As of January 2022, they had over $500 million in AUM serving clients across the board, with as little as $25,000 in assets. He tried to do it at 30 basis points at first, but found it was too low a margin to hire and retain talented staff. They write all their own software which creates tremendous efficiency within the system.

How’s that for a low fee flex?

According to Dan Cunningham, the firm’s founder, “I cannot see for the life of me why people would say an account with $500k is not profitable.”

What do they do if a small client tries to demand a disproportionately high amount of their time? Dan simply says they have a conversation about focusing on the important things that matter, helping them dial in on the things that are meaningful to them.

Here’s where it gets even more unusual.

The core inspiration to the firm is not money, profitability, or gathering assets.

It came out of a genuine desire to change the profession without caring if the company was that profitable or not. Dan realized that getting the extra 10 to 20 basis points of return per year for people isn’t the real problem preventing them from successfully accumulating wealth; it was asset allocation, fees, and behavioral bias.

Their vision is to create a different view of the financial world completely. You can see it in their mission; look at the people and what they’re saying on their bio pages.

They’re not talking about how they are the best or smartest and by the way we love to travel and cook. The brand is conceptualized here through their values as reflected in their words and even more in their actions. Plus, look at their pictures, you can see it in their eyes – there is a natural, unassuming vibe. Notice how the founder comes last on the list of employees.

Humble, mission-driven, unselfish, wholesome like whole grains. Plus they’re making me want to pull out the L.L. Bean catalogue and go skiing in Vermont.

No AUM peacocks here!

Sara’s upshot

There are some common threads in the question of how the planning profession can better service a small account.

• A “light model” which allows the DIY or smaller AUM client to carry out administrative tasks that wouldn’t be your highest value anyways (trading, etc.) and that focuses on what is of highest value to the client – sound, unbiased advice, rather than making up “stuff” and then charging them for it

• Low cost of investment (ETFs, passive, etc.)
• Communicating in a way that contains the relationship
• Advice only – rendering advice without charging an AUM fee

Look, I’m not trying to win a debate here. I want every person reading this to take away something from it that can elevate their practice.

Can we move forward – maybe just a tiny bit?

How about we all start to think about things in a different way – shifting our belief to “higher value is better” rather than “more is better”?

Less of this: You need higher AUM, more clients, more investment products, more employees, more marketing, and a bigger office.

More of this: You need a better value proposition (one you actually deliver to clients), a more focused target market, deeper relationships with clients, and a highly adaptive business model that delivers more value by fully maximizing the resources you already have.

Eric Clarke of Orion Advisor Services, in a podcast we recorded, said:

If we can do a better job of raising the amount of confidence, faith, and trust that the general public has in doing business with financial service companies, we’re all better off and everybody will benefit as a result.

What about if we focused on getting into the heads to the hundreds of millions of people out there who desperately need us, instead of getting our hands on the hundreds of millions of AUM of theirs?

(Exclamation point)

Who’s up for changing the narrative?

Join us for a webinar on May 3rd entitled, “How to rock as an Advice-Only, Hourly, or Flat Fee financial advisor.” Sign up here (scroll to #6).

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Sara Grillo, CFA, is a marketing consultant who helps investment management, financial planning, and RIA firms fight the tendency to scatter meaningless clichés on their prospects and bore them as a result. Prior to launching her own firm, she was a financial advisor.

Read more articles by Sara Grillo