Nickels And Dimes

Nickels And Dimes

Helping small savers plan their financial futures, without going broke.

Clarksdale is a quiet rural town, easy to miss, on the banks of the Sunflower River in the heart of the Mississippi Delta. Lonely country roads, often deserted, stretch endlessly for miles, through seductive plains that have produced plenty of cotton, and not much else. Population 20,000, Clarksdale is famous for the blues — and a high rate of poverty. It is so far removed from the major money centers of New York, Chicago, San Francisco and London, you'd never think this unpretentious country locale would be fertile ground for financial services business.

But Dudley Barnes, an independent financial advisor, is living proof that financial services are more than just an afterthought here. He caters to a substantial pool of investors with modest incomes in Clarksdale and the surrounding hinterlands — and yet he still runs a profitable practice.

In fact, Barnes, affiliated with Raymond James, and himself managing about $250 million in assets at Barnes-Petty Financial Advisors (total AUM $550 million), is rightly pleased with his track record. During his two decades-plus at Barnes-Betty, 80 percent of his clients have increased their net worth.

Barnes estimates that about 10 percent of his 250 clients, and about a quarter of his potential or prospective clients, are officially “poor,” as defined by the U.S. Census Bureau. By this standard, annual household income for a family of four does not exceed $22,025. Barnes says many of his poorest clients barely earn $15,000 to $20,000 per year. As many as 50 percent of the population in his geographic market live at or below the national poverty level, he calculates.

To be sure, his book of business also includes plenty of heavy hitters who have fared well in the economically challenged Mississippi Delta, among them farmers, agricultural machinery suppliers, accountants, well-off retirees, doctors and other professionals.

“We manage money for a large segment of clients who have $300,000 or less in assets and, on the other end, we have plenty of clients who have $500,000 to $5 million in assets,” Barnes explains in a telephone interview, as he drives 90 miles to meet with some far-flung clients. (Rule of thumb: If a road trip to see a client is going to take four or more hours, Barnes hops aboard a private aircraft.) Despite the heavy-hitters in his book, Barnes does not like to turn away lower income clients: “If I am referred a prospective $5,000 IRA client, a poor customer, I am going to do my best so that person gets the level of service he or she deserves.”

Catering to the Little Guy

The poor, Barnes says, are essential to his business model. And he takes great pride in catering to their needs. He acknowledges that some of his peers are absolutely dumbfounded by the economics of his decision. “If I went to a professional coach he would say, ‘You can't work with these people. They are dragging you down.’ And I would just turn around and say to the coach, ‘You don't understand. I live in a small town. I go to church with these people. I grew up with them. When they come in and ask me for my help, what do I say, ‘You are not big enough for me?’”

Barnes is not alone. He's among a troop of often socially conscious and business-savvy advisors and wealth managers serving poor investors — individuals with as little as $5,000 to $10,000 to invest.

Of course, the tailored services these advisors offer often include practical financial planning basics, like teaching clients with heavy debt loads and punitive interest the benefits of paying down debt first. Typically, they recommend low-cost diversified mutual funds, or advise on how to properly allocate assets and maximize investment and retirement opportunities. The pay models such advisors use vary: some charge fees; some charge commissions; some use a mix.

“What's kind of fascinating is how we charge fees in this industry that have nothing to do with how much of our time and energy the client takes,” says Scott Hanson, financial advisor and founder of Hanson McClain in Sacramento, California, with $1.2 billion in assets under management. “Any advisor will tell you that a $5 million account does not take ten times as much work as a $500,000 account. In some cases the $5 million account may take less work.”

Hanson McClain recently set up a “junior division” with an account minimum of $50,000, as he noticed investors with small sums being turned away. Those minimums are well below the firm's traditional threshold, which starts at $250,000. Hanson would love to bring the minimums down even further, to allow him to serve poorer investors. But he hasn't yet figured out an affordable way to do that. “I just don't know how you would do it for those with assets less than that,” he says, regretfully.

Bing Waldert, an industry analyst at Cerulli Associates, sees a cost-effective opening for wealth management providers who are prepared to accept the smaller accounts shunned by the large wirehouses — those with $30,000 to $50,000 in investable assets. “That's one of the things we're watching,” he says.

But when you start accepting clients with under $30,000 in assets, it's a bit of a gamble, says Waldert. There may eventually be a pay off, but the odds are long. One advisor he knows had one client who was a practically penniless hairdresser working in a blue-collar neighborhood. When the hairdresser won the lottery, the advisor suddenly found himself with a new high-net-worth client. That's not obviously a business model to count on.

Jim Fulp, an executive vice president at Raymond James, also knows FAs who have books of business that include poor customers. “Do they make money doing it?” asks Fulp, an industry veteran. “I would tell you it is difficult to do so today.”

In part, that is because commission rates are so low today that it's hard to make any money on small accounts. Fulp notes that the retail commissions charged in the 1960s and 1970s were “horrendous” by today's standards. But they weren't considered so horrendous back then. “They were charged to compensate advisors for helping investors with modest amounts of money,” Fulp explains. Of course, advances in technology have made managing smaller client accounts a lot less expensive, too.

Hanson acknowledges the huge challenge in profitably operating a practice for low-income investors with small accounts when fee income is declining as a percent of revenues. (Fee-based revenue, Fulp notes, has declined from 2 percent of client assets two decades ago, and to between 70 to 85 basis points today.) “Years ago nobody blinked an eye at the higher fees and rates charged. Today, I don't know if it is politically feasible, and maybe even ethically correct, to go back in that direction,” Fulp says.

The decline in fees and commissions is good for the consumer in theory, but some advisors argue that it ultimately prevents the little guy from getting advisor services. “There's some floor, some minimum percentage, at which advisors won't want to stay in the business,” Hanson says. “I guess we are all trying to figure out where that floor is.”

Barnes says his cost structure is what allows him to profitably serve poor investors. He and his team operate four offices. But Mississippi offers much lower overhead compared with big urban centers like Manhattan or Chicago. Salaries and real estate are vastly less expensive.

“We can buy a nice-sized building here for between $70,000 and $100,000, so we are then rent free. Salaries of a financial planner might work out at $50,000 to $60,000 versus $75,000 to $85,000 in New York,” Barnes explains. “The general rule of thumb is that a firm like ours should be able to operate on a 30 percent to 35 percent expense ratio, and we are able to do that.”

Barnes says, “All of this is predicated on the fact that we are managing $550 million in assets. The profitability of a firm like ours increases incrementally as assets under management grow.”

Trailer Park Clients

Charlie Andriole, a senior vice president and financial advisor at Merrill Lynch in Madison, Conn., also argues that serving low-income investors has its place in wealth management. Madison, on Long Island Sound, is a wealthy community, but there are plenty of down-at-the-heels investors in the area who need financial advice. Indeed, about five miles from his team's office in Madison, there is a trailer park. It is home to some “very, very low-income households,” as Andriole gingerly describes it. The park is about a quarter of a mile from a YMCA under construction. Andriole, a community activist, is chairman of the board at the YMCA, which attracts a cross-section of the community. “I come into contact with lots of people who aren't carrying briefcases of money around,” Andriole says.

Andriole meets them too, at his local Country Club. “It could be the chef or the dishwasher coming up to me saying, ‘I have $3,000 to invest, what can I do?’” he explains. “And I will go through the exact same process as I do for our wealthy clients.”

Then there is the 22-year-old college graduate who needed advice on a $10,000 gift he received from his family. The gift came with strings attached: He had to invest it. Andriole's office provided five hours of professional advice. (College grads and young professionals are, of course, a special class of transient poor, who typically see their economic status improve as they age, often dramatically.)

Andriole's clients are mostly wealthy investors. But he estimates that up to 10 percent of his revenues are generated from investors who are not rich. He says his intention is to help the less fortunate, not to recoup money for time spent. “It is part of our business model, although it is more of a philosophy than something we are actually pursuing,” says Andriole. “If our minimum assets under management [per client] is a million dollars — and that is pretty standard for a high functioning team like ours — we're open to helping people who have nowhere near that much money, or practically no money at all.”

Indeed, investors with modest incomes — the working poor — have done well with sympathetic financial advisors. One advisor at a major wirehouse, who did not want to be named, told Registered Rep. how he steered investors on low incomes towards enrollment in IRAs and 401(k) plans that offer a “saver's credit” — so called after the legislation that created it — of $1,000 ($2,000 per couples), depending on income and tax filing status.

According to IRS Form 8880, to receive a saver's credit, couples filing jointly must have income below $55,500, and “household head” income below $41,625. For other tax filers, income must be below $27,750. “It is, in effect, free money, for these poor clients,” the advisor explains.

As he drives along on a peaceful Mississippi highway on a bright winter morning, Barnes says sometimes advisors in certain communities — small towns, poor neighborhoods — have obligations that will influence their business. “I am not saying our business plan is the best you can have,” he explains. “But if you live in small town USA is it about the only business plan you can have.”

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