Making small accounts profitable
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.
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.
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. ■