Flat fee or minimum assets — that is the question

When I left my position at one of the banks to set up my own practice many years ago, I ran some numbers to determine the true cost of keeping and servicing a client. I had always envisioned a practice as described by the master, Nick Murray: working with just 100-200 households that want financial planning, understand the value of it and can afford and benefit from our service. I immediately determined that to build this type of practice, I needed to set a minimum asset level to attract the clientele that I could work with and make a living. But over the long term, was this the best way to do it?

The Pros of a minimum asset level Once I instituted a minimum asset level that I was comfortable with, I began to display this in all my marketing literature. This paid off as I certainly pre-qualified those who would attend a workshop or seminar by my materials. Almost all of the clients that attended met the minimum asset level. This acted as a great tool and even provided a feeling of exclusivity for those that met the minimum.

One new client told me she had kept my ad on her fridge for three years as she saved up the minimum asset base. I was both stunned and flattered that somebody would keep an ad for that long and use it as a goal.

The Cons of a minimum asset level I built about 80% of my business by using a minimum asset level, but was having difficulties with certain cases where clients referred a family friend or sister that did not meet our minimum. In many (but certainly not all) cases, I would accept the new client because of my relationship with my existing client who referred them.

But the stream of referrals was not as strong as it could have been. Our client surveys told us that 100% of clients would refer friends and family to us, but when I asked clients about referrals, they would have a few issues with referring, none to do with the service or their satisfaction.

The first issue they had was that their colleague might not have the minimum — at the time, $200,000. They said they were uncomfortable advising them about minimums. Second, by knowing what our minimum was, their colleague would know that they had at least $200,000 in assets.

I decided the minimum asset route was not the best route for me, as I wanted to help others as long as I could continue to earn a living.

The Minimum Fee Revelation Let’s face it, the reason I had a minimum asset level was that I determined I needed to earn $2,000 per household in order to generate my desired profit. I decided to drop the minimum asset level and begin implementing a minimum fee policy, which was much easier to explain to a client or prospect. The only minimum was the revenue we earned for the year. Clients could now refer friends and not worry about them being turned away due to insufficient assets.

I was now able to help any client, as long as they could afford to pay the minimum annual fee. Since instituting this policy, we still attract the larger clients, averaging $350,000 in assets, but we have also been pleased to bring on a few smaller accounts that have between $50,000 and $100,000. They receive the same service as our more affluent clients and we invoice them at the end of the year. Any trailers we received during the year are deducted from the $2,000, and we invoice for the balance. For a couple who has $50,000, we would earn $500 in trailers and then invoice them an additional $1,500 for our financial planning services. I’m happy, the client is happy and we are completely transparent with our fees.

One of the few clients that did join on with about $80,000 did such a great job of saving and inherited a lump sum, boosting their portfolio to over $300,000. I was pleased to send them a note saying that they are longer required to pay any additional fees, because we were now earning well above the minimum fee. The client was thrilled and so was I.

People who don’t have a large asset base yet are still in dire need of financial planning services, and once committed to a plan, may be able to implement that plan better than those who already have the base.

Of course we all want the clients that have $1 million of investable assets, but many households that earn in excess of $200,000 haven’t reached that level. They may have difference priorities, such as debt repayment, or may not know how to allocate their income properly.

As an example, we have a client who is a recent dental school graduate. He is currently earning $200,000/year as a dentist, but is busy paying down student loans, so he has no excess to build a portfolio. We are helping him with his cash flow planning and debt repayment strategies. He is about to become an associate at his office, and will be earning approximately $500,000.

Do you really want to turn this client down because they don’t have the minimum assets yet? Helping such a client through their lean years builds loyalty, and with a minimum fee model, you can still take on these clients. These potential clients need our help the most and establishing a relationship early can be both beneficial for the client and the advisor.

Robert Abboud, CFP, PFP, is the co-founder of AdvisorPractice.com, which offers advisors practical solutions to help transition to a financial planning practice and offers a 12 week training program. He is also the author of ‘No Regrets, A Common Sense Guide to Achieving and Affording Your Life Goals’. He has been offering life goals financial plans for over 15 years through his firm Wealth Strategies. Robert is available to speak at conferences and educational days. You can contact him at rob@wealthstrategies.com.