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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Taking a closer look at minimums

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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”:

* Revenues per client= Expenses per client/(1-Desired profit margin)

* $3,266/(1-25.38%)=$4,377

9. Use the resulting figure to determine the profitable account size threshold (using 25.38% as the desired profit margin)

* Account size at desired profit margin= Revenues per client /Average AUM Fees

* $4,377/1.15%=$380,595

10. On average, you will need accounts of at least $380,595 to maintain your firm’s desired profit margin of 25.38%.

11. To be on the safe side, you should set the minimum even higher than the one from step 10 by rounding it up to the nearest $50,000

12. Therefore, the minimum account size for the practice in the example should be $400,000.

The calculations above will help you establish minimums that are in line with your firm’s desired profitability range. If you already have a minimum, make sure to use the calculations above to determine whether it’s appropriate. Remember, you do not need more clients to be profitable; you just need larger clients. Having minimums is the first step to acquire those larger clients.

To receive a copy of AdvisorBenchmarking’s 2003 Comprehensive Analysis of the RIA Marketplace study, e-mail Ramy Shaalan at [email protected].

To receive a customized benchmarking analysis report of your practice, visit the free online tool is an online resource of research and analysis on the RIA marketplace. The service is aimed at helping advisors grow and enhance their practices. By participating in the online surveys, advisors can see how their businesses fare against other advisors, as well as learn best practices based on the most successful advisors in the business. The instant analysis they receive offers valuable insight that can help them take their practices to the next level and weather the challenging market conditions.

Ramy Shaalan is Vice President of, an affiliate of Rydex Global Advisors. He can be reached at [email protected]