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Small Game Hunting

Anthony Sasso, who lives in Tinton Falls, N.J., with his wife, knows he's not Harbor Lights Financial's biggest client. He's 70 and recently retired. Sasso is no millionaire, and, as a result, has to keep a tight rein on his spending. To make a few extra bucks and to keep active, he teaches golf. Sasso's modest net worth doesn't mean the service he gets from his advisor, Rob Tendler at Harbor Lights,

Anthony Sasso, who lives in Tinton Falls, N.J., with his wife, knows he's not Harbor Lights Financial's biggest client. He's 70 and recently retired. Sasso is no millionaire, and, as a result, has to keep a tight rein on his spending. To make a few extra bucks and to keep active, he teaches golf.

Sasso's modest net worth doesn't mean the service he gets from his advisor, Rob Tendler at Harbor Lights, is lacking. Quite the opposite. “He thrives on staying in touch,” Sasso says of his advisor. “We probably speak monthly. If he doesn't call me, I call him.”

There are lots of people in the country like Sasso: About 30 percent of the 22 million U.S. households have somewhere between $100,000 and $500,000 in net worth, including the equity in their homes. Unlike Sasso, though, many of them are feeling neglected by their financial advisors.

That's not surprising since most Wall Street firms are in fact neglecting them, or trying to, by focusing on bagging elephants. Indeed, marketing and training efforts at the largest full-service brokerages are geared towards attracting high-net-worth clients. At Merrill Lynch, for example, FAs can only personally supervise clients with $100,000 and up; the others are handled by Merrill's call center. Merrill officials, in the past, have said their target net worth ranges from $500,000 to $5 million in investable assets; Wachovia puts its just a bit lower, from $300,000 to a few million.

The reason is obvious: The most lucrative accounts are the largest, at least in aggregate dollar terms. The absolute margin may be lower: Advisors typically discount fees for high-net-worth clients, charging 50 basis points on, say, a $5 million account. But, $25,000 a year from one client isn't too shabby.

Still, the high-net-worth market may be overrated. That's because high-net-worth clients often have nettlesome tax and estate-planning issues, that, as one advisor puts it, “are very hairy” and can put time demands on an advisor's practice, dampening the account's profit margins.

In fact, profit margins on smaller clients can actually be higher than those on bigger clients, because advisors have to charge smaller investors a higher fee as a percentage of assets in order to make money, according to Chip Roame of Tiburon Strategic Advisors. Advisors with $1 million in revenue have a 52 percent profit margin, compared with advisors with $250,000 or less in annual revenues, who have a profit margin of about 63 percent, Roame's research shows.

There are other differences, too. Smaller investors are often more receptive to investing ideas and more loyal than their high-net-worth counterparts: 75 percent of investors with less than $1 million want to work with just one advisor, compared with 66 percent of those with more than $1 million, according to Spectrem Research. But, small clients tend to be more dissatisfied because they sometimes feel they are being ignored, according to Spectrem.

Big Is Not Always Better

Tanya McDonald, a director at Spectrem, says recent research suggests that as asset amounts fall, so does satisfaction. Even at the $500,000-to-$1 million asset level, clients feel that they're not receiving the service that richer clients are receiving. About 77 percent of these investors were satisfied with their service, compared with 86 percent of the $1 million-and-up crowd, McDonald says.

Obviously, there's a reason these lower-level investors aren't being served as comprehensively. First, small investors have simpler financial lives and don't need as much help. Second, it's the reality of the so-called 80/20 rule, which posits that most businesses generate about 80 percent of their revenue from about 20 percent of their clients. That holds true in the financial industry too: About three-quarters of industry revenues come from affluent accounts, according to The VIP Forum, a Washington-based consultancy.

That suggests a tremendous opportunity exists for FAs looking to build loyalty among the bulk of the investing public. “This is really the marketplace that we love to work with, because the people there are looking for the advice and are more receptive to the advice we have to offer,” says Tendler, whose Manasquan, N.J.-based firm manages about $250 million in assets.

The opportunity to make money — to build a financial advisory practice on smaller accounts — is not to be underestimated. An advisor may have to charge smaller clients more as a percentage of assets, but it still can be a rewarding experience for both the client and the advisor. The trick to managing small accounts profitably: keeping expenses low and volume high.

“With mass-market clients, the revenue-to-asset figures are ridiculously high,” Roame says. “You could actually speculate that there are some unique players who could clean up with regard to these cost structures.”

Among those are the bank-based brokers. Mike Mortensen, president and CEO of PNC Investments, says his firm aims at the mass market. It's average investment account is $57,000, and investors in the firm's mutual fund wrap product have an average balance of $97,000. “It's a very sophisticated asset-allocation product to the mass market, and it's something that our competitors are aiming at their high-net-worth clients,” he says.

The PNC Example

PNC can deliver this service profitably in part because it doesn't have free-standing brokerage branches. PNC has 226 investment advisors in bank branches, who make money through referrals and walk-ins. As a result, the payout, like some other banks, is lower than at the average full-service broker/dealer, although Mortensen wouldn't discuss specific figures. He did say, however, that although the firm makes more money on richer clients, internal research shows that banking clients who open investment accounts at the firm are seven times less likely to leave the firm.

“We have found that we get many people when they're mass-market clients and establish a good relationship with them, and we keep them as they become affluent and higher value to us,” Mortensen says.

Indeed, a big reason to cheerfully pursue small accounts is that small clients sometimes evolve into big clients. And when they do, presumably you've already established a strong relationship and the client will stay with you.

The grow-with-your-clients strategy works for many advisors. Geri Pell, a certified financial planner with Pell, Santucci & Assoc., an affiliate of American Express Financial Advisors in Harrison, N.Y., says that while about one-quarter of her clients have $100,000 to $500,000 in assets, her business now concentrates on those with $1 million-plus in assets. “Almost all of our new clients have over $1 million,” she says. “That's how it's grown in terms of the trajectory.”

Know Your Limitations

Having those high-net-worth clients around is important because servicing a large number of small clients, by nature, forces an advisor to impose some limitations on service. For an advisor focusing the bulk of his time on small accounts, something has to give. Tom Swift, who runs a San Francisco-based advisory called Financial Avengers, says this is something he explains upfront.

“You have to make sure you're not overpromising on the service side as you accumulate assets and client relationships,” he says. Swift has no account minimums and currently has about 440 clients with about $25 million in assets under management. He says clients are told at the beginning that they will hear from him a lot in the first few months, after which he'll stay in touch through email blasts and phone calls. Meetings are infrequent.

“We want to be proactive in telling people that not hearing from us does not mean we're not working,” Swift says. “That's become a more adamant conversation.”

There are other ways to automate services. Linsco/Private Ledger, the San Diego-based independent b/d with 5,000 affiliated advisors, has a program that advisors can sign up for that will send out monthly newsletters, in the advisors' name, about investing, saving and retirement planning. The newsletter costs clients $40, says Kandis Bates, senior vice president in corporate marketing at LPL, and helps maintain a high-touch relationship with clients, which analysts have found goes a long way toward maintaining loyalty.

Other companies try to provide one type of service extremely well and leave the rest to someone else. Adam Bold, founder of the Mutual Fund Store, an independent RIA based in Overland Park, Kan., provides fee-based asset allocation using mostly no-load mutual funds. (Load funds are sometimes used, but the load is waived, he says.) His firm doesn't sell securities, offer tax advice, estate planning or other ancillary businesses that high-net-worth advisors are increasingly focusing on because it would take too much time. Currently, it manages about $960 million for clients, with a $50,000 minimum and an average account size of $200,000.

Bold recognizes his company, which has about 30 affiliated advisors, has limitations as well. “We don't have the time to sit down with each client every quarter,” Bold says. “We do contact our clients on a regular basis, but do it by telephone.” He maintains, that his service is better than those of full-service call centers, because each client has one dedicated advisor. Working on a discretionary basis for accounts with smaller balances has meant high loyalty from his customers, he says.

Customers get at least one face-to-face meeting a year, but Bold says he has to train his clients so they know that non-investment questions are answered by assistants. “I'm not saying this is for everybody,” he says. “There's a lot of ways to have a successful investment advisory practice.”

Advisors have to be ruthless with their time. “It's more the broker who gets hurt if the clients are inefficient,” says Andrew Tasnady, a compensation consultant based in Port Washington, N.Y. He points out that small, low-maintenance accounts aren't a problem — but “high-maintenance small accounts can crush somebody.”

That's one reason Bold does things on a discretionary basis — because he knows he can't call everybody. Still, the attention to investments he gives inspired significant loyalty throughout the bear market, simply because nobody else was interested in the assets of such clients. “There's not a lot of alternatives to go to get fee-based investment advice with smaller accounts,” he says. “When you're dealing with the superwealthy, there's always somebody gunning for your clients.”

Swift of Financial Avengers agrees with that sentiment. And for anyone who thinks an advisor can't run a successful business on small accounts, well, get out of his way. “It's an enormous opportunity, and it's being missed,” Swift says. “I know there's a way of actually providing higher-touch, fee-based asset management at increasingly lower amounts of assets under management — and I'll prove it or die trying.”

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