For many RIAs, the question of client profitability ultimately boils down to a simple equation: Do the overhead costs of meeting a client exceed the amount of money generated by a fee on their assets under management (AUM)? So what happens when that math doesn’t add up?
For some advisors, the easiest solution is to keep the client. Michael Kitces, co-founder of XY Planning Network, argued that an advisor doesn’t need all that many clients to achieve plenty of take-home income.
By charging a 1% fee on AUM, an advisor would need to serve just 100 clients with investable assets of $180,000 each to reach a cumulative revenue of $180,000 and a take-home pay of $150,000. That’s the same level of revenue that an advisor could expect to reach from 18 clients with AUM of $1 million each.
And these are not crazy numbers. For RIAs managing at least $250 million, the average total assets per client is more than $2 million, according to a recent survey from Charles Schwab.
So what does this mean for RIAs with smaller, less wealthy clients? In short, many firms can simply afford to keep them and still be perfectly profitable.
Doug Custer, an advisor at $509 million RIA Viridian Advisors, agreed that there is no reason to cut ties with a client just because the math doesn’t add up. For example, Bellevue, Washington-based Viridian specializes in households with assets between $500,000 and $1 million.
‘If it’s just a matter of numbers, we would probably never end it,’ Custer said. ‘We would continue to serve them and that would be that, because it’s the right thing to do. Chances are, we would have gotten to know them as people and would feel a sense of responsibility in taking care of them.’
Maintaining those relationships even if they are unprofitable on the balance sheet could also pay dividends down the line through referrals, Custer added.
‘Not that this would be the end objective, but things do happen,’ he said. ‘They have friends and family members. We wouldn’t be overly forthright in asking for those introductions. We invite them, but we don’t ask for them.’
Questioning the old variables
Another option for advisors dealing with unprofitable clients has traditionally been to find a way to end the relationship gracefully, perhaps referring the client to another RIA or a brokerage platform such as Vanguard or TD Ameritrade. However, there are now some new options too, such as RIA start-up Facet Wealth, which buys up unprofitable clients from RIAs and places them into its own low-cost ETF model portfolios. So far, it has gathered assets worth a total of $33 million.
‘It’s very difficult to try to be all things to all people. If you have a $2 million client who sends you a referral for a $200,000 client, you can’t give that $200,000 client the same level of service you give to their friend,’ said Anders Jones, Facet Wealth chief executive. ‘What ends up happening is that the $200,000 client has a bad experience, they complain to the $2 million client, and now all of a sudden you have two unhappy clients.’
Facet minimizes its fixed costs by matching its clients to its network of human advisors, eschewing brick-and-mortar branch offices. The firm says that its tech stack has cut the average amount of time that an advisor has to spend on a one-hour client meeting (inclusive of preparations and wrap-up time) from three hours to about 90 minutes.
Facet charges an annual subscription fee instead of a fee on assets. The firm says that it typically generates around $1,600 in fees from its roster of ‘several hundred’ clients, who have an average net worth of $350,000. It sends clients back to their original RIAs when they hit the $1 million mark.
This unusual business model has attracted the attention of several prominent investors.
In September, Facet Wealth garnered a $33 million investment from a consortium of investors led by private equity firm Warburg Pincus, who joined venture capital firm Slow Ventures as a key backer of the company.
‘You basically have three options [if your clients are unprofitable],’ said Jones, who estimated that there are around 8 million people in unprofitable advisor-client relationships. ‘First, you could do nothing and toil along and ignore the problem, which is what a number of advisors are doing. That is becoming harder and harder. Second, you could fire them and send them to the likes of Vanguard or Betterment. That’s not the most fiduciary-friendly option. Or finally, you could partner with us. We’ll buy those clients and give them a great experience with all the planning they need.’
Reworking the business model
However, some larger RIAs have found another way around this problem. Many have started to offer subscription services of their own. In Las Vegas, $1.3 billion RIA Wealth Consulting Group is experimenting with a pilot program that allows clients to receive financial advice for a monthly fee, with the chance to opt in for an investment management service. The program, which is initially being rolled out to 12 clients, is targeted toward those with at least $100,000 in assets, particularly young high-earners.
‘To me, the investing part of what we do for our clients is a commodity,’ said Jimmy Lee, Wealth Consulting Group chief executive. ‘I believe that the planning relationship, the advice relationship and the service that a client gets in that type of environment are really where advisors can add alpha.’
The Wealth Consulting Group is currently charging $199 a month for the service. If it goes according to Lee’s plans, the program could soon be operating at scale.
‘What I think will happen is that for every certified financial planner working for us with these types of individuals, we think that they can service at least 200 clients, guaranteeing that clients receive a formal financial plan that gets updated every single year,’ he said.
Models like Lee’s could ultimately lead to a change in how RIAs think about their business models, Kitces suggested. He argued that RIAs focus too much on the AUM-fee model as a measure of profitability.
‘We’re so product-focused that we literally don’t even measure whether clients are profitable by whether they can pay us. We measure whether clients are profitable by whether they can buy enough of our products to be profitable,’ he said.
‘The mere fact that most firms set their minimums based on assets rather than on what it actually takes to be profitable is the very definition of framing your value proposition and your clients in terms of products rather than in terms of their advice needs.’