SHIFT FROM SMALLER ACCOUNTS
Brokerages are leading the way in encouraging advisors to drop the smallest clients from their books of business
The increasing costs related to holistic wealth management and the greater regulatory burden are leading financial services firms — led by the brokerages — to encourage or implement policies for advisors to drop their smallest clients from their books of business.
“Y our little clients don’t earn you much, but take a significant amount of work to keep them active”
today, canada’s financial services sector is dealing with the conflicting reality of focusing more on holistic wealth management and building long-term relationships with clients while dealing with the mounting costs of running a compliant business. Clearly, something has to give.
Thus, some firms are beginning to implement cut-offs — the dollar amount of investible assets below which financial advisors cannot serve a new or existing client. To gauge the prevalence of this trend, Investment Executive added a supplementary question to this year’s Report Card series that asked advisors if their firms are encouraging them to drop their smallest clients.
Advisors at some firms reported the implementation of such a cut-off; other advisors reported that their firms encourage them to cease serving small clients without naming a specific asset threshold. Nevertheless, many advisors in all distribution channels, regardless of whether they were affected by this trend, expressed their concern about what they believe will soon be a sectorwide phenomenon.
The results of this year’s Report Card series reveal that, so far, this trend is most prevalent in the brokerage channel — and mainly within the bank-owned brokerages. Notably, 58.4% of advisors at brokerage firms reported that their firms encourage their brokers to drop these clients. However, only 14.6% of advisors at mutual fund and full-service dealers, banks and insurance agencies combined reported that their firms take this approach.
Most advisors whose practice is through brokerages either understood or were thrilled about the myriad reasons firms implement these cut-offs. Profitability is a big reason advisors were quick to cite when they explained their firm’s decision to focus on wealthier clients. With the sheer amount of work required to maintain each client’s account, advisors acknowledged that they could afford to keep only so many clients satisfied.
“The bottom line is your little clients don’t earn you much, but they take a significant amount of work to keep them active and rolling,” says an advisor in Alberta with Toronto-based TD Wealth Private Investment Advice (TD Wealth PIA). “A $4-million client doesn’t take 40 times the work. It’s an efficiency thing.”
“Twenty-five years ago, if you had a $50,000 client, it was OK,” adds an advisor in British Columbia with Toronto-based ScotiaMcLeod Inc. “But now that I have to do the planning and quarterly reviews and things like that, the money has to make sense for my time.”
Advisors also cited the regulatory workload as yet another key factor why dropping the smallest clients from their books of business makes sense.
“Regulatory costs are the same whether your client is big or small,” says an advisor on the Prairies with Montreal-based National Bank Financial Ltd.
In addition, as the needs of high networth clients have become more complex, so have the time constraints that advisors’ face in serving this client segment’s growing needs.
‘“The time and demands of clients don’t allow us to serve a large number of clients,” says an advisor in Atlantic Canada with Toronto-based BMO Nesbitt Burns Inc. “The expectations of high net-worth clients are high, which allows us to serve only a number of them.”
But while most advisors with broker- age firms recognize the rationale for this trend, a vocal contingent were unhappy with the pressure they face to drop their smallest clients — especially as that practice alienates a younger generation of investors. In fact, many advisors vividly recalled the days when some of their largest clients were just starting out.
“Every client who is above the $250,000 threshold once had less than $250,000 [in investible assets],” says an advisor in Ontario with Toronto-based CIBC Wood Gundy. “So, if we’re dropping [clients below that threshold], we’re not giving them a chance to grow.”
“People have to start somewhere,” adds an advisor in Alberta with TD Wealth PIA. “The earlier they’re trained to make proper investments and to do it properly, the better they’ll be in the long run.”
Greg Pollock, CEO of the Financial Advisors Association of Canada (a.k.a. Advocis) echoes this sentiment. Although he recognizes the regulatory and compliance burden behind the decisions, he says Advocis doesn’t endorse advisors dropping small clients from their books.
“At the end of the day, [that practice] is going to lead to fewer clients having access to advice,” Pollock says. “And we all know that the more advice that [clients] receive, the wealthier they’re likely to be. [Dropping small accounts] works against that larger goal of trying to make all Canadians independent in managing their finances.
“In the longer term,” he adds, “[clients who are just starting out] are going to stay with these advisors as long as these advisors are continuing to serve them well. That’s not only going to serve the clients well, but it’ll serve the advisors well.”
There are advisors in the other distribution channels surveyed for the Report Card series who welcome the opportunity to work with clients who no longer qualify to work with advisors in the brokerage channel.
“I get those [clients who have been cut from other firms]” says an advisor in Ontario with Lévis, Que.-based Desjardins Financial Security Independent Network. “I don’t ever want to make someone feel less than adequate because their business is smaller. I think that those people deserve attention.”
“The rich people are fine,” says an advisor in Ontario with Winnipeg-based GreatWest Life Assurance Co.’ s Gold Key distribution network. “The people who are starting out are who really need our help.”
Still, many advisors feel the wind of change — and many worry they’ll face the same reality in a few years’ time because of the regulatory climate, with its emphasis on increased compliance and the potential elimination of embedded commissions.
“It’s coming,” says an advisor in Ontario with Waterloo, Ont.-based Sun Life Financial (Canada) Inc. “A lot of it has to do with if they get rid of embedded trailers. I’ve began taking steps towards that.”
“We’re watching for that,” says an advisor in Ontario with Oakville, Ont.-based Manulife Securities. “This [trend] will be a tipping point for a lot of people.”