Turning accounts over to a junior partner is ideal for the broker who wants to concentrate on a specialty niche.
Everyone's got a small account that turned to gold. Joe Blow brought in $10,000 in commissions in 10 years, then got a big inheritance. Jane Doe kept her $5,000 mutual fund portfolio on the books a few years, then turned out to have a killer referral network.
The reality is most small accounts never glitter. They're just another database entry you have to update, another dividend you have to track, another stamp you have to lick.
Some brokers and financial advisers are happy to do just that. Jeffery Waranch, a 37-year veteran with PaineWebber in Baltimore, says small accounts add stability to his business. I think of business like a triangle, the base made up of small accounts and the tip made up of large accounts, he says. Over time some small accounts grow to the top. In a bad market, someone in the small account base will always be doing business. Your business becomes a rock.
Try these strategies to mine for gold among small accounts while keeping your A list happy.
Streamline Operations
One way to service small accounts is to cut down on paperwork and phone time. Nowhere is it written that you have to give all clients the same service, says Miles Zitmore, an A.G. Edwards broker in Dallas. You don't have to chase every piece of paper or talk endlessly about every stock idea your client comes up with. Decide the service level each client needs and what you're capable of giving, then make rules.
Zitmore tells people with small accounts in the first meeting they can meet with him once a year to talk about anything and he'll call if an investment has a problem. I explain I don't need to call often to explain how their funds are doing, and they don't need to call every day to ask, he says.
A 20-year veteran, Zitmore has more than $100 million under management and works with more than 750 clients. The only people I'll turn away are those disrespectful of me and my time.
Sheryl Garrett has developed a service model for referrals who need immediate help with a financial situation, but not a long-term relationship. Instead of filling out forms for clients, handling asset transfers and calling with frequent updates, Garrett sets herself up as a coach.
When we meet I tell them that to keep the relationship mutually beneficial, I'm passing the ball back to their court, says Garrett, who runs a fee-only investment advisory firm in Overland Park, Kan. I say I'll give them advice, but they need to be responsible for implementing it.
Garrett gives small clients the task of collecting relevant documents before the annual in-person review. It's a lot like getting their taxes done, she says. Once a year, they know they have to gather all their information and sit down with their CPA. Much the same way, I have them fax copies of their performance statements right before our meeting. I don't have to keep files of all the paperwork.
Robert Frakes, a broker with Legg Mason in Harrisonburg, Va., has his marketing coordinator, Christopher Fuller, send referral letters twice a year to small accounts and schedule annual in-person account reviews. We think of a small account as a family unit, not a client, Frakes says.
In addition, a number of Frakes' small clients refer him to high-net-worth clients every quarter. One client only has a $1,000 IRA with Frakes that he hasn't added to in 10 years, but he has made 20 to 30 good referrals.
Use Wholesalers
Most brokers have a lot of small account assets with a certain mutual fund or annuity company. Wholesalers for those companies are eager to take over some servicing tasks.
To show appreciation to Frakes' smaller clients, Fuller sets up several dinners for investors with assets in a certain fund or annuity. Instead of planning the event and committing Frakes to speak, Fuller asks the company wholesaler to arrange everything. All clients with investments in the company's products are invited, but most of the 80 to 100 people who attend have small accounts.
The events make smaller clients feel special, Frakes says, especially when he publicly recognizes those who gave him a referral during the year with small gift certificates arranged by the wholesaler.
Paul Hrisko wants to educate a number of young investor clients, but he can't afford the time. Hrisko is an affiliate with RIA firm Independence Capital in Cleveland Heights, Ohio. So he turns to mutual fund wholesalers. They'll do an educational mailing to Hrisko's clients invested in their funds.
Clients may get a piece that details their fund's performance and walks them through evaluating the performance compared with other funds and the market. The wholesaler includes a second piece, with a note asking them to pass it on to a friend.
Convert to Fees
Another way to streamline small account service is to charge them fees instead of commissions. Consolidating small accounts in a wrap program keeps clients on the books, but out of brokers' hair.
Twice a year we go through all our accounts and ask if a low-production account could be put in a wrap account.
John Desenberg, Merrill Lynch
Partners John Desenberg and Matt West of Merrill Lynch in Houston say their business has had out of control growth in the past two years. They produced $3 million last year. While they've sent some unprofitable accounts out to Merrill's Investment Services Group, they've also held on to some.
Twice a year we go through all our accounts and ask if a low-production account could be put in a wrap account of some type, Desenberg says. We have one person who gave us $10,000 in commissions upfront, but that's it. His investments have done poorly, and he has $320,000. He's perfect for the firm's Consults program, and we would no longer have to track his account separately. They plan to suggest the idea to him shortly.
Independent brokers and advisers can consider an hourly fee structure for small accounts. Garrett left a high-net-worth advisory firm three years ago to set up a firm more accessible to mom-and-pop investors.
If a client needs nothing more than help with refinancing a mortgage or getting credit straightened out, Garrett doesn't have to turn them away. She settled on $150 an hour, a price roughly in the middle of the range that experienced estate planning attorneys charge in her area. To research an appropriate rate, Garrett suggests advisers check ADVs of other advisers nearby.
The hourly rate cuts down on time spent with small accounts. In between annual meetings, these clients may send quick e-mails, Garrett says, but they only call for important reasons. They've done the math and know they pay $2.50 for every minute of her time.
Bring on a Junior Partner
Turning accounts over to a junior partner is ideal for the broker who wants to concentrate on a specialty niche. Joe Lukacs, head of broker coaching firm International Performance Group in Melbourne, Fla., calls it client leasing.
With the branch manager's blessing, look for a newer broker in the office who's a great technician, but struggles with marketing, Lukacs says. Offer a 60-40 commission split, and put the rep in charge of looking for hidden assets and getting referrals from the small accounts.
I've had brokers turn over the bottom 50% of their book and only a year later derive more net revenue from those accounts, Lukacs says.
For years, small accounts were sent elsewhere by Stewart Welch III, who has operated a Birmingham, Ala., investment advisory firm catering to physicians since 1984. He routinely referred accounts under his $1 million minimum to outside fee-only planners, but grew dissatisfied with the service.
In frustration I decided to turn our business model upside down, Welch says. Smaller accounts didn't need his $275-an-hour expertise in wealth management, creating an overall plan and designing a portfolio to manage for a lifetime. So two years ago he started Fee Only Financial Professionals in the same building, hiring Diana Simpson to handle only his referrals.
The firm charges $125 an hour for any financial planning need. Should a client require investment management, Simpson hires Welch's firm to handle the investment decisions, but she remains the point person for the client. Her computer is networked with Welch's for investment research, freeing her to do only planning.
Whenever Welch receives a referral he asks to review the person's financial statements before an initial meeting. If he sees the referral doesn't meet his model, he invites Simpson to attend the meeting.
I tell the client we have two sister companies, and we match each investor to the best company with the least amount of cost, Welch says. Then I introduce Diana and leave.
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