Investment minimums are an old-school way for advisors to filter out prospective clients. Advisory firms and their advisors set investment minimums as a way to target growth of assets under management (AUM) and revenue per client. In fact, advisors at conferences and networking meetings will often measure each other up by asking questions like, “what’s your AUM?”
From a business management perspective, tracking and managing to KPIs makes complete sense.
But, from a perspective of barriers to access, investment minimums lock a lot of really good people out of receiving qualify financial advice.
On the flip side, high net worth individuals have been trained to see investment minimums as an indicator of advisor expertise. Clients who can meet higher minimums are led to believe they will be served at a higher level and have access to a wider range of wealth strategies.
In some cases, especially with ultra-high net worth, this can be true. But, for most people with a net worth of less than $10 million, the allure of the big firm minimums is more fluff than substance.
In the absence of access to direct financial advice, some people are relegated to what they can find. Social media financial “experts” who are usually life insurance salespersons. Mutual fund representatives. Annuity advisors. Index fund bloggers. Day traders. Gold bugs. Neighbors, friends, and families. Syndicated radio show hosts.
The challenge is most these sources offer “advice” that lead to product sales, stock tips, or direction that’s not relevant to where you are in life. Where’s the real financial advice?
In my opinion, the financial services industry has created a large gap in access to advice by sticking to the AUM model, which qualifies who gets access based on the amount they have to invest.
Admittedly, people with a higher net worth have vastly different wealth management needs than others. Some people are not ready to work with a financial advisor, and therefore also have vastly different financial advice needs than others.
The advice gap is one of the reasons I launched Life Moves Wealth. Because financial literacy is not widely taught and building wealth is a difficult journey, more access to qualify financial advice is needed more than ever.
Many of our clients receive ongoing financial planning and investment advice on a flat fee for services model. This approach appeals greatly to younger professionals and entrepreneurs who are starting on their wealth journey. These folks may benefit most from pushing as much investment as possible to a company sponsored retirement plan, meaning no investments for the typical advisor to manage.
It’s also a beneficial approach for business owners who have much of their wealth tied up in their business(es). These folks may be funding their expenses through the business (a.k.a. living out of the business), intentionally taking low salaries and distributions so there is cash to invest in business growth, pay down debt, and recruit and retain key employees.
Short of an inheritance or rapid business success, it takes many people many years to build up enough money to clear industry-standard investment minimums. There are numerous important financial questions, fears, and celebrations along the path of building wealth. Access to quality financial advice through each stage can save time and increase efficiencies in the areas such as taxes, market cycles, business formation and expansion, to name a few.
Because I directly understand the process of building wealth and business ownership, it makes sense to be a partner along your wealth journey rather than waiting for your train to finally arrive at the station.
Fee-only independent advisors have a large advantage over the big firms, largely because the motivations for how clients are served are vastly different. Independent advisors have a lot more flexibility in how clients are served, how clients are billed for services and what amounts, and the technology and tools that will be used to deliver the best advisory client experience.
By way of being a fee-only independent advisor, certain conflicts of interest related to advisor compensation and incentives have been removed. Hence, the advice you receive for certain investment strategies or financial products do not pay commissions to the advisor or their firm. This is an important distinction between an advisor who is fee-based vs. fee-only.
What’s left is the incentive of providing a pathway to increase your financial success first, not the advisors. While there’s nothing wrong with making money, the fiduciary standard ensures the client’s bets interest is first and foremost.
Want more on this topic? Check out the recent Financial Purpose Podcast on how to choose the right advisor for you.
I recently met a business owner at an event. During the conversation, he mentioned talking to other advisors in the past but none could really help him because most of his wealth is concentrated in his business.
"One advisor tried to sell me insurance on my employees, but wasn't right for me. If only there were an advisor who can help me with financial planning and business exit planning without requiring an investment minimum..."
The old ways of providing wealth management are rapidly going out of style. The capital markets and the economy move faster and differently than they did even 10 years ago. Advisors who offer only investment advice, knowing nothing of their clients' cash flow, tax concerns, estate planning, risk exposure, business valuation drivers, etc., will become less attractive providers.
With everyone having complete access to investing platforms and research, the value advisors provide must shift to guiding clients through broader parts of their financial life. This also means shifting away from charging a percentage of AUM in favor of establishing fees for ongoing advice.
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Author: Dale Shafer II, CFP®, APMA®, CDFA®
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