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Making “Joe The Plumber” Your Best Client

As we all know, the Holy Grail for most advisors is the high-net-worth client. But Stacy Francis has a different idea. While Francis, who runs Francis Financial, a New York-based firm, serves some affluent families, she also focuses on decidedly less well-to-do households, those with $100,000 and less in assets. About 50 percent of her profits come from such accounts, whom she charges $275 an hour.

As we all know, the Holy Grail for most advisors is the high-net-worth client. But Stacy Francis has a different idea. While Francis, who runs Francis Financial, a New York-based firm, serves some affluent families, she also focuses on decidedly less well-to-do households, those with $100,000 and less in assets. About 50 percent of her profits come from such accounts, whom she charges $275 an hour. (Wealthier clients pay a fee on assets under management.)

For Francis, the benefits of this strategy are obvious: For one thing, she figures her lower-net-worth clients, most of whom are in their 30s and early 40s, will someday become more affluent — and she'll be there to advise them. Plus, “It's a lot easier to find these people, since few advisors are competing for their business,” says Francis, who has $15 million in assets. “And, I truly believe they need unbiased financial advice as much as anyone else.”

Be Different, Go Small

Tired of lusting after the same affluent clients as everyone else? Want to avoid the stampede? Maybe you need to do an about-face: Go downscale and target the non-high-net-worth individual. There's no single definition of this client, of course. Ameriprise, for example, targets a “mass affluent” client with more than $100,000, while other advisors use a minimum of $50,000 or even less. But no matter how you define the market, the current environment could be the ideal time to target it. For one thing, as wirehouses pressure their advisors to serve only high-net-worth households, less-affluent investors are increasingly left to fend for themselves. What's more, according to many observers, in the current downturn, panicky consumers who have never sought the guidance of an advisor are now looking to do so. And disgruntled existing clients are thinking about switching to someone new.

Of course, there are reasons why many advisors have avoided this market. Mostly, it requires a great deal of efficiency and smart planning. “If I spend four hours with someone with $100,000 to invest and four hours with another person who has $10,000 to invest, I'm going to make a lot more money with the more-affluent client,” says Ron Palastro, who heads RS Palastro Financial Planning Services in Brooklyn, N.Y. About three-quarters of his business comes from mass affluent clients. Figuring out how, and how much, to charge is another delicate problem. “Profitability is the number one challenge,” says Julie Littlechild, president of Advisor Impact, a New York-based firm specializing in practice management for financial advisors.

In a perfect world, probably the most effective approach would be to use what Littlechild calls a “pure strategy.” That means biting the bullet and targeting only one type of client. As a result, argues Littlechild, you can build an infrastructure and a list of services solely around the needs of the less-affluent client, and you don't have to waste precious resources catering to the wealthy. If you mix the two, you'll need to invest in more costly, expensive and sophisticated systems and, “When you start applying those fixed costs to the smaller client, you start losing money,” she says.

What To Change?

That's the philosophy at Citi Smith Barney. Its new “My Financial Life” service targets accounts with less than $250,000 in investable assets. Smith Barney advisors who have outgrown smaller clients can steer those accounts to the service as an alternative. It features a staff that takes in-bound calls from clients, as well as teams of advisors who schedule portfolio reviews; the frequency of the reviews depends on client account size. Those with $10,000 to $50,000 for example, have a once-a-year review; accounts with $50,000 to $250,000 have two a year. “You have to match the business model to the client segment,” says Andrew Sieg, managing director and head of Citigroup Global Wealth Management's Emerging Affluent Client Segment.

The fact is, however, for most advisors seeking lower-net-worth clients and who lack the resources of a mega firm, that kind of purity isn't tenable. They have to accept at least a limited account size range. For them, the first question to tackle is what form that fee will take. The possibilities range all over the map. One approach is the one used by the 300 advisors in the Garrett Planning Network, based in Shawnee Mission, Kansas. Founded by advisor Sheryl Garrett eight years ago, clients pay an hourly fee for financial planning advice. Palastro, on the other hand, charges a flat fee of $250 to $1,500 for smaller clients and an assets under management fee for larger accounts. Others combine an hourly charge with an assets-under-management fee. Or they simply charge the latter.

For advisors charging an hourly or flat fee, it can be difficult to figure out how much your advice is worth. “You have to make sure you bill for all your time,” says Garrett. “In the beginning, I was terrible at that.” She recalls several clients, on hearing what the charge was, asking her whether her practice was healthy. They figured that such a low fee could only be an indication that business was bad. In fact, according to Garrett, it's common for advisors to underestimate their value initially. She advises surveying other advisors in the area, as well as CPAs — making sure to charge more than the accountants, since advisors tend not to bill out as many hours. One useful rule of thumb is to use as a guideline the typical fees of mid-range estate planning attorneys.

A Longer List

No matter how you charge, however, you may need a client roster that's considerably larger than the 150 or so usually recommended by practice management experts. And you may require a bigger staff to help them out. Take Ric Edelman, chairman of Edelman Financial Services, a Fairfax, Va., firm with $3.5 billion in assets, about 20 employees and 40 advisors. Each advisor is supported by a team of one to four people who take care of everything from marketing and IT to compliance and operations. The reason: Edelman charges a fee on assets under management. (However, he doesn't include any other fees in addition.) But, for smaller accounts, the only way advisors can make money is to have a large client roster — typically 300 to 500 clients. And the only way to serve that many accounts efficiently is to do nothing but offer client advice, something made possible by the firm's large support staff.

It's also important to keep track of your time. Martin Hopkins, head of ML Hopkins & Co., an Annapolis firm with $30 million in assets, for example, recently installed a program that helps him track how much time he spends with each client, so he can measure his profitability per account. He's considering cutting less-profitable clients' portfolio reviews to an hour or so, down from two hours.

Of course, one way to keep costs down is to offer a simpler array of services, since your clients' needs will be simpler than those of wealthier clients. Garrett, for example, keeps to what she calls the “core subjects,” such as retirement planning and basic investing strategies. For more advanced planning issues, she'll refer clients to another advisor. In many cases, advisors also use low-cost underlying investments. Hopkins offers what he calls “a turnkey type of operation,” with four model portfolios ranging from conservative to aggressive, and nothing else. “I can operate almost like a general practitioner, without going into more sophisticated levels of service,” he says.

Or you can create more efficiencies by narrowing your market. Rick Kent, chairman of Merit Retirement Advantage in Alpharetta, Ga., for example, focuses on employees near retirement age with 401(k)s. For an annual fee of $299, he provides advice four times a year on their retirement portfolios. But the real goal is to establish long-term relationships with clients, most of whom have no other financial advisor, so that they will turn their savings over to him when they retire. The average amount in their accounts is $400,000. “That $299 fee bonds them to you,” says Kent. “In their minds, you're their guy.” Since 1995, about 450 clients have retired and rolled their money over to the firm, which has about $160 million in assets. In addition, Merit now works with other advisors, charging them a fee of $2,995 for access to marketing materials, portfolio analysis and other support.

Similarly, Robert Beckett, an advisor with the Private Client Group, a New York practice with $160 million in assets, has fine-tuned his niche even more narrowly. He focuses on small-business owners, handling disability insurance, buy-sell agreements, 401(k)s and the like. But, he also specializes in French companies setting up shop in this country.

Ultimately, many advisors who work with lower net-worth clients also report an added dividend: an appreciative client. Often, these clients have had no experience working with an advisor. Or, if they have used one before, they probably haven't received particularly attentive service or, perhaps, have been treated as an after-thought. Garrett recalls a client who called her the next best thing to sliced bread. “When I worked with higher-net-worth clients, I felt like somebody's employee,” she says. “Now I know what it's like to truly be a trusted advisor.”

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