Mak­ing small ac­counts prof­itable

Financial Planning - - Ria Iq - 1 Cerulli As­so­ci­ates, 2016 Man­aged Ac­counts Con­sumer Land­scape, June 2016 © 2018 E*TRADE Sav­ings Bank, do­ing busi­ness as “TCA by E*TRADE.” Mem­ber FDIC. All rights re­served. In­vest­ment Prod­ucts: Not FDIC In­sured - No Bank Guar­an­tee - May Lose Value.

Many ad­vi­sors strug­gle with the chal­lenge of how to man­age small ac­counts, since they of­ten re­quire the same amount of time and re­sources as larger ac­counts, but may not de­liver the profit mar­gins ad­vi­sors need or de­sire. Na­tion­wide, small ac­counts are un­der­served. Ac­cord­ing to a study by Cerulli As­so­ci­ates, even though more than 70% of all Amer­i­can house­holds have less than $100,000 in in­vestable as­sets, only 8% of ad­vi­sors fo­cus on serv­ing these ac­counts.1

Why are so few ad­vi­sors ser­vic­ing small ac­counts? In ad­di­tion to the time re­quired to man­age them, which can di­vert re­sources from more prof­itable ac­counts, small ac­counts may have op­er­a­tional in­ef­fi­cien­cies that make them un­prof­itable.

How­ever, there can be real down­sides to turn­ing away this busi­ness. For ex­am­ple, smaller ac­counts may en­com­pass the as­sets of highly val­ued clients’ friends and rel­a­tives, or could rep­re­sent a source of fu­ture re­fer­rals. More im­por­tant, small ac­counts may hold sig­nif­i­cant growth po­ten­tial.

Even when ad­vi­sors re­al­ize the long-term po­ten­tial of smaller ac­counts, though, they may still strug­gle to man­age them ef­fi­ciently.

Po­ten­tial op­por­tu­ni­ties with small ac­counts

For­tu­nately for ad­vi­sors, new tech­nol­ogy is mak­ing it pos­si­ble to over­come the small-ac­count chal­lenge. Ac­count man­age­ment plat­forms de­signed specif­i­cally for ad­vi­sors are au­tomat­ing rou­tine ad­min­is­tra­tive tasks while pro­vid­ing ac­cess to more ef­fi­cient in­vest­ment strate­gies.

Us­ing this ad­vi­sor-fo­cused tech­nol­ogy can have a num­ber of ben­e­fits, in­clud­ing:

Sim­pli­fied in­vest­ment man­age­ment.

Few ad­vi­sors have time to act as port­fo­lio man­agers for each ac­count they hold. By plug­ging smaller ac­counts into ded­i­cated mod­els over­seen by third-party as­set man­agers, ad­vi­sors can lever­age the ex­per­tise of trained in­vest­ment pro­fes­sion­als while us­ing tech­nol­ogy to au­to­mate time­con­sum­ing back-of­fice tasks.

Model-based tech­nol­ogy.

Mod­ern tech­nol­ogy al­lows ad­vi­sors to use model-based trad­ing, which re­moves the be­hav­ioral bi­ases and guess-work from in­vest­ing. Model­based sys­tems use pre-de­ter­mined rules for buy­ing, sell­ing, and port­fo­lio re­bal­anc­ing. And be­cause these de­ci­sions are made at the model level, they elim­i­nate time spent per­form­ing the same tasks at the ac­count level.

Frac­tional shares. In to­day’s era of rich eq­uity val­u­a­tions, in­vest­ing in whole shares of even a few growth stocks can re­quire hun­dreds of dol­lars. This kind of fi­nan­cial com­mit­ment can quickly ab­sorb a small ac­count’s as­sets and limit an ad­vi­sor’s ef­forts to diver­sify client port­fo­lios. Us­ing a plat­form that sup­ports frac­tional-share tech­nol­ogy en­ables in­vestors to own pieces of stock and ETF shares, elim­i­nat­ing tra­di­tional fi­nan­cial bar­ri­ers and al­low­ing for broader port­fo­lio di­ver­si­fi­ca­tion.

As­set-based pric­ing.

Buy­ing and sell­ing ei­ther frac­tional or whole shares of se­cu­ri­ties can be ex­pen­sive when a cus­tomer is charged on a per-trade ba­sis. By con­trast, as­set-based cus­tody fees are based on the to­tal value of the as­sets in an ac­count, which can re­duce trad­ing costs— par­tic­u­larly within ac­tively traded port­fo­lios.

The im­por­tance of se­lect­ing the right tech­nol­ogy.

Not all ac­count man­age­ment plat­forms are the same. Look for tech­nol­ogy de­signed specif­i­cally for ad­vi­sors, with so­phis­ti­cated mod­el­ing, trad­ing, re­bal­anc­ing, re­port­ing, and prac­tice man­age­ment ca­pa­bil­i­ties. And con­sider the cus­to­dian be­hind the tech­nol­ogy as well. Cus­to­di­ans can be an in­te­gral part of the ad­vi­sor/client re­la­tion­ship and should be trusted to pro­vide day-to-day cus­tody of your client’s as­sets, as well as tech­nol­ogy ser­vice and sup­port. Small ac­counts may some­times seem like a bur­den, but they can be­come prof­itable. Us­ing the right tech­nol­ogy can help ad­vi­sors bet­ter man­age the chal­lenges of smaller ac­counts and un­lock their long-term po­ten­tial. ■

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