When it comes to client portfolios, bigger may not be better

When it comes to client portfolios, bigger may not be better

Fri, Mar 28 2014

By Ed McCarthy

(Reuters) – Wealth managers routinely specify minimum sizes for new accounts, but far fewer advisers set maximums. Maybe they think “the bigger the better,” but that is not necessarily true.

High-net-worth clients, especially those with $30 million or more, are different from garden-variety millionaires. They do not sweat the small stuff, like planning for their kids’ education or retiring comfortably, so they do not value basic financial planning services as much as less-affluent clients.

Very wealthy clients often expect investment services and products beyond those offered by smaller wealth managers. They may require income- and estate-tax strategies that are more complex than the adviser can deliver.

This mismatch of client expectations and adviser services can actually hurt a wealth management practice that is not set up to manage all that money.

STICKING WITH MASS AFFLUENT

Marc Freedman, president of Freedman Financial in Peabody, Massachusetts, sets an informal ceiling of $7 million in investable assets on the accounts he accepts.

He works primarily with baby boomers whose net worth ranges from $1 million to $3 million. These so-called mass affluent clients want a financial plan and are mainly interested in ensuring retirement security and passing some wealth to their heirs.

“Mass affluent baby boomers don’t need to participate in private equity deals, complicated alternative strategies, options trading, stock swaps and more,” Freedman says.

Several years ago, he started working with a couple with a net worth of $10 million, of which more than $8 million was in shares of the husband’s employer. The wife wanted investment diversification and a plan for the family’s long-term financial security, so Freedman developed strategies to accomplish those goals.

The husband vetoed the approach. He decided instead to hold the shares, then trading around $35, until they doubled or tripled. In the interim, his plan was to use rapid-turnover options strategies to profit from the stock’s volatility.

Things did not work out as either party hoped.

“After about one year, this client became a point of exhaustion for our entire staff,” says Freedman. “His needs were intimidating, and his willingness to respond to our calls was based on how volatile his stock was during the day or week.

“In the end, to the wife’s disappointment, we agreed to terminate the relationship.”

Going solo did not solve the ex-client’s problems. He never sold a share as the stock fell to $6, the marriage is strained, and his wife continues to email Freedman for financial advice. Freedman says he offers “sparse, yet supportive” counseling.

CHANGING BALANCE OF POWER

Mark Willoughby, principal with Modera Wealth Management in Westwood, New Jersey, says most of his clients’ portfolios are in the $2 million to $10 million range. The firm has an informal maximum of $20 million.

He would waive that limit for clients who want a traditional portfolio that is not too heavy on alternative investments and whose financial needs do not exceed the firm’s capacities.

But he notes that there may be a business risk to chasing the wealthiest clients because they can squeeze an adviser’s hourly rates.

“Once you start going after the elephants, their leverage to negotiate on fees is much stronger than the person who has a $2 million portfolio,” Willoughby cautions.

OFF BUDGET

An ultra-wealthy client may also disrupt your cash flow and leave you vulnerable to a defection. When one client accounts for 5 percent or more of your total assets under management, for instance, you really have to worry about losing him or her.

San Francisco-based advisory firm Yeske Buie manages about $500 million of assets, and the average client account is $2 million. It will not turn down the big client, though, and recently landed a $50 million portfolio.

If an account generates more than 5 percent of the firm’s total revenue, that income gets carved out from the ongoing budget and spending decisions and is earmarked for one-time expenses, says Chief Executive Officer Elissa Buie.

That approach keeps the firm from depending too much on fees from any one client, she says.

So rather than using what it earns from the new mega-client to run the office, the firm is hoping the money will pay for larger wall monitors in conference rooms and replacing employees’ dual desk monitors with upgraded equipment.