An Obsession With Size Is Costing Advisors

RIA Intel illustration, Bigstock

RIA Intel illustration, Bigstock

“There’s a blue ocean opportunity out there to appeal to the mass affluent. And most people aren’t going after it.”

A November 2019 Cerulli Associates study of the RIA market revealed the truth about the niche market that most RIAs specialize in: the extremely affluent. Perhaps not the uppermost 1% of wage earners, but likely the top 10%. The study revealed that nearly half of all RIAs concentrate on the “affluent investor who can invest $500,000 to $2 million.”

Even though a Spectrem Group study reported that there were 10.2 million millionaires in the U.S., thousands of RIAs are competing in a crowded field for the same niche audience.

So most financial advisors operate like high-end eateries that cater to the sliver of an audience that can afford haute cuisine of $200 or more a person. But dining out at first-class eateries is discretionary whereas saving for the future is mandatory and essential, except for do-it-yourselfers who often fall into traps.

Some RIAs go against the grain and target a wider net, including clients who have $100,000 or less. And mass sellers like Fidelity and Vanguard appeal to a wide audience so that nearly everyone can partake of their services.

But some say that firms targeting those with $500,000+ are wearing blinders given that many with $100,000 will eventually double or quadruple their portfolios.

For most firms, attracting clients with $500,000 in savings or more is “business-efficient,” explains Randy Thurman, CEO of Oklahoma City, OK.-based fee-advisory only firm, Retirement Investment Advisors, and author of The Worry-Free Retirement Guide to Finding a Trustworthy Financial Advisor.

“There’s just as much paperwork dealing with a half a million dollar client as there is with a $100K client,” he says. “It makes their business more profitable.”

Thurman’s firm aligns with clients who can invest $125,000 and admits that he struggles with setting that high a minimum. Thursday afternoons are devoted to assisting people who want financial advice for a fee, without any preconceived minimums.

Most of the assistance that financial advisors offer clients revolves around establishing financial goals and risk tolerance, Thurman suggests. Much of what advisors do is helping clients with “behavioral aspects, so when markets go down, we make sure they stick with the plan and stay disciplined.”

Thurman says that too many investors with modest savings have unrealistic expectations. “They want major returns with no risk,” he says. His firm often sets them straight, explaining that they should expect two to three negative years out of ten. “We want to build a potential lifetime client.”

But Thurman contends that most firms targeting the crème de la crème are “overlooking the future. The $100K saver will be the $500K client of tomorrow. If they didn’t build a relationship with them at an early point, I doubt they’ll get them when their portfolio gets bigger.”

Michael Kitces, who is a partner and the Director of Wealth Management for Columbia, Md.-based Pinnacle Advisory Group, an RIA that oversees about $2 billion of client assets, has railed against the myopia of most financial advisors in his Nerd’s Eye View blog and elsewhere. He has noted that most Americans don’t have $100K in savings, let alone half a million, so most firms are ignoring the vast majority of investors.

Most RIAs, Kitces noted, claim that the business model isn’t viable to handle $100K investors. He counters that the “real reason is simply because it’s so hard to get a sufficient volume of clientele, due to the sad reality that the value of financial planning hasn’t been clearly defined to the public at large.”

Ironically, Kitces’ Pinnacle Advisory Group, like so many others, targets the same audience with a $500K minimum as many of the others. Yet he says, “This isn’t a bad thing if the core target is to focus on those more affluent clientele, and have a high-quality, differentiated solution for them. BMW and Mercedes have a more affluent target market as well and simply let other car manufacturers target other types of clientele.”

Most firms, he says, won’t wait 10 years, or 20 years, or 30 years, for their client to either win the lottery, sell a business, or gain an inheritance and move up the economic ladder and build a much larger investment portfolio. Hence, most advisors focus on the market they’re best at, the highly affluent, just as Mercedes and BMW do.

A friend, who is a talented 30-year-old financial advisor with an investment firm that was recently acquired by a larger firm, tried to persuade her bosses to broaden their market beyond the $500K limit. She suggested a fee-only subscription for younger investors that would bring them into the firm and help it develop relationships with a new, but growing market. Her boss’ response: We’re targeting the about-to retire and retired, and they don’t fit in. Her suggestion was rebuffed.

But at Facet Wealth, a Baltimore, Md.-based firm with 34 financial planners that oversees $173 million assets under management, co-founder Brent Weiss targets an altogether different market than the usual $500K+ crowd. It offers a subscription model for investment and financial planning in which clients pay $600 to $6000 annually to gain access to three to six videoconferences and phone and email access with advisors, no matter how much they’ve saved.

Weiss acknowledges that “A $6,000 client will have greater complexity and require more time with a CFP than a $600 client.”

“We’re seeing a lot of growth in the millennial segment and a lot of these investors have less than $100K. We can offer financial planning for a flat fee, and our goal is access,” Weiss states.

By partnering with them at the outset of their investing, Facet Wealth aims to build their wealth and keep them as long-term clients. Advising may start with paring down debt, but could soon lead to investing in an IRA or Roth, and over time that wealth will proliferate, Weiss suggests.

Having previously run a wealth management firm that only attracted $500K investors, Weiss has learned that “there’s a blue-ocean opportunity out there to appeal to the mass affluent. And most people aren’t going after it.”

Furthermore, Weiss cited a study indicating that in the next 25 years $68 trillion of assets will be transferred to the next generation, which is often overlooked because it currently doesn’t have enough to invest with most demanding firms.

Furthermore, Facet Wealth has developed proprietary technology to keep the cost of delivering these financial services down. Most advisors work from home, and videoconferencing saves on time spent with clients.

Digital financial platforms are increasingly connecting RIAs with $100K clients. AJ Smith, vice-president of Financial Education at SmartAsset, based in New York, says that about a third of its independent RIAs are seeking clients with $100K or more to invest.

Of course, many variables must be considered. Is the client 25-years-old and just starting to save? Is the client a year from retirement? At SmartAsset, clients complete a 22-question form about what they’re seeking in an advisor, then talk by phone with a concierge to determine which advisor is best.

Smith says that 67% of its clients have never worked with a financial advisor and most focus on long-term financial goals.

But the issues for most clients are the same, Smith suggests. “Whether they have $100K or $250K, they want to grow their money.”

Monique Morrissey, an economist with the non-profit Economic Policy Institute, based in Washington, D.C., understands why most advisory firms ignore the masses. “The problem with 50% of the population is that they have no assets to speak of, except for home equity in some cases.”

Many of the fintech websites, Morrissey notes, have entered this space and are selling services that reach a wider audience than the usual highly affluent niche. “They can pay attention to the lower income people,” she says.

Kitces cautions that RIAs only focusing on $500K+ clients have their own blind spots. That niche audience “eventually creates growth challenges.”