Small accounts are a drag: PriceMetrix

You probably preach the virtues of portfolio diversification to your clients, but do you practice the same strategy in your book of clients? A study by PriceMetrix suggests that a diversified client base of large, medium and small households significantly improves advisor productivity and revenue.

PriceMetrix found small households account for 52% of the average book of business, but generated just 9.3% of total revenue. The average small account generated just $350 in annual compensation.

“Advisors need to realize that a high concentration of small accounts in portfolios drags down their production and overall profitability,” said Doug Trott, president and CEO of PriceMetrix.

Many advisors believe that their stewardship can help smaller accounts to become larger, more valuable accounts, but the study found this rarely occurred. Between 2005 and 2010, just 10% of small accounts grew to a “medium” size, and only 1% “graduated” to $1 million in assets.

To make matters worse, there is higher turnover among smaller accounts, which were 108 times more likely to leave their advisor than a large account.

Advisors who reduced the number of small households by at least 5% generated about $43,000 more in production and increased assets, despite the decline in the number of clients. Advisors who increased the number of small accounts by 5% or more generated just $11,335 in new production and actually lost assets.

Of the advisors who had more than 70% of their portfolio concentrated in smaller clients, only 2% managed to produce $1 million in revenues. Sixty percent of advisors with 30% or higher concentration in large accounts generated $1 million.

On average, million-dollar producers had just 34% concentration in smaller households.

“Advisors should not wait for their book to evolve from small households to large ones. They need to take more aggressive action,” said Trott.

“Truly savvy advisors should proactively build their business and navigate away from small household concentrations by avoiding them where possible, growing them through cross-sell or share of wallet improvement or by transitioning them out of their portfolios.”

(09/03/10)