Advisors bypass small households

By Vikram Barhat | March 15, 2013 | Last updated on March 15, 2013
2 min read

There is growing evidence that financial advisors are now skipping over small households to focus on bigger, more productive clients.

Advisors are opening fewer new small household accounts, defined as having less than $250,000 in investable assets, and are instead concentrating on opening larger ones with $1 million or more in assets, according to a PriceMetrix report.

In a 12% increase over 2009, larger household now represent 57% of all new assets added, while industry-wide the percentage of small households in the average advisor’s portfolio has declined from 71% to 65%, the study noted.

“With a reduced number of households, advisors have more capacity to better service their remaining households and accounts, and to focus on adding more of the households and accounts they desire,” said Doug Trott, president and CEO of PriceMetrix.

The study found that average advisor production grew 1% during 2011, reaching $537,000, but the average advisor’s assets under management dropped 7% to $74 million from $79 million in 2010.

Read: Don’t be a pushover

“Despite the fact that revenues, and certainly assets, didn’t improve as much as they did in 2010, the general health of the retail wealth management industry remains strong,” said Trott.

PriceMetrix data shows that average assets are still higher than they were in 2009 and average revenue has increased from $453,000 in 2009 to $537,000 in 2011, he added.

The study also revealed that advisors and firms are increasingly transitioning to fee-based accounts, which increased to 85 accounts for the average advisor; that’s up 10% in 2011, and 35% since 2009.

Fee-based assets, as a percentage of total assets, also rose 13% last year, while fee-based revenue, as a percentage of total revenue, saw 10% growth.

Read: How to tell clients they’re too small

However, despite rising fee-based revenue, average return on assets has declined from 1.23% in 2009 to 1.19% in 2011. The decline is largely attributed to the fact that new accounts are being priced at a rate far below existing fee relationships.

“Advisors have a great opportunity to improve their businesses if they can increase the amount they charge for their new fee-based accounts,” said Trott. “Indeed, there’s some evidence that they’re beginning to do that. In 2009, the average RoA for new accounts was 1.03%, now it’s 1.06%.”

The report notes there are several other opportunities available for advisors and their firms to improve their businesses in 2012.

Thirty percent of the typical advisor’s portfolio is made up of households which produce less than $150 in annual revenue. These can be reviewed and dropped in favour of higher producing clients.

Further, it was found that 44% of households have only one account. Opening additional accounts in existing households could be another way to improve an advisor’s business.

Read: Letting go of lesser clients

New fee-based accounts are being opened at an 11% discount to existing relationships. Advisors should focus on closing that gap.

Another gap that requires narrowing is the 100 basis points that separate premium and discount fee pricers.

Vikram Barhat