Taking a closer look at minimums

The research shows that you should have minimums to be successful, but be careful where you place the bar

The profusion of new clients seeking advisors’ help in the last two years has allowed many RIAs to maintain their firms’ minimum account size requirements, preserving their right to choose the type of investors with whom they prefer to work. AdvisorBenchmarking’s annual study of the RIA marketplace released in July 2003 showed that 73% of firms have account minimums. However, a closer look at these numbers (see chart 1 below) reveals that for one-third of such firms (24% of the total sampling), the minimums are negotiable. Couple this subgroup with the other 27% of firms that do not have minimums to begin with, and we realize that nearly half the universe of advisors has either loose minimums or no minimums at all.

Is it detrimental not to have minimums?

Our research clearly shows that firms with no minimums post lower profit margins and a smaller revenue/client ratio (see chart 2, below). This is partially due to the smaller clients they attract, who in turn generate lower revenues while consuming a comparable amount of expenses as the larger clients.

Many advisors arbitrarily set the minimum account threshold. According to our latest study, the median account size among RIAs is $225,000. Larger firms managing more than $500 million have minimums as high as $705,000. These figures should give you an idea of how you stack up against the rest of the marketplace. But there is a more scientific way to set the minimums at a level that fits your firm’s own profitability goals. It’s simple mathematics–here’s how you do it:

1. Estimate your total yearly expenses, e.g. $490,000

2. Determine current number of clients, e.g. 150

3. Calculate average expenses per client, e.g. $490,000/150=$3,266

4. Determine average AUM fees, e.g. 1.15%

5. Calculate breakeven account size on a per-client basis=

* Breakeven account size= Average expenses per client/Average AUM fees

* $3,266/1.15%=$217,733

6. On average, you will need accounts of at least $217,733 just to break even.

7. Determine your firm’s desired profit margins or look up industry’s profit margins for firms your size using the AdvisorBenchmarking Annual Study, e.g. 25.38%

8. Calculate the profitable account size on a per-client basis by first calculating the projected “average revenues per client”: