The Negative Impact to Clients Due to Increasing Asset Minimums

Jun 04

One of the principals that sets TAMMA apart from other investment advisory firms was my decision to work with clients of all asset levels.  The WSJ had two articles here and here that chronicles how large organizations such as UBS and Bank of America’s Merrill Lynch are indicating to their advisors that they want $1 million and above in assets per client and not the previous standard of $250k.   Merrill Lynch wants its advisers to move accounts smaller than $250,000 to Merrill Edge, its online and telephone-based advice service.

This move that firms are making to shift clients to more of a “robo advisor” role as opposed to the ability to meet and talk with an advisor one on one is a choice that is largely bottom line related.  With other revenue streams down for these big financial institutions, they need to find other sources of income to boost their bottom lines.

In choosing to go this route, institutions are likely doing so at the expense of people who do need sound financial advice no matter what their asset levels may be especially those who do fall under the $250k threshold.  I would argue that people with lower levels of assets are in need of greater financial advice because they are probably dealing with an assortment of financial issues such as saving for retirement and college, repayment of student loan debt, or an overextension of credit card debt.

Because I am a Registered Investment Advisor, I have a fiduciary responsibility which legally obligates me to act always for the sole benefit and interest of my clients.  Yes, investment advisory firms do have a for-profit business to run, but that should never come at the expense of the client.  Regardless of whom you may work with, your advisor should always be a Registered Investment Advisor.  Other designations such as a Certified Financial Planner and Chartered Financial Consultant are helpful but not required.

Recently I started working with the daughter of a long time client who just graduated from college.  She fits perfectly into the scenario that I previously described because although she didn’t need someone to manage her assets (which would automatically disqualify her from most if not all firms), what she wanted and needed was some guidance on basic financial planning principles.  I don’t see how a robo advisor would be able to provide this type of service at a level that is valuable for the client?

According to this Financial Advisor article, Vanguard states that advisors can add as much as 3% to a client’s portfolio.  In a recent paper, Vanguard says advisors can generate returns through a framework focused on five wealth management principles.  But Vanguard notes that while it’s possible all of these principles could add up to 3% in net returns for clients, it’s more likely to be an intermittent number than an annual one.

It is likely that an advisor truly helps their client in times of absolute panic vs. trying to time the markets.  You can see from the chart below (hat tip to Josh Brown @ The Reformed Broker) that discipline has paid off through the ups and downs of the equity markets.  I believe (and am probably biased here) that the real value an advisor provides is the ability to help clients maintain a long-term perspective and a disciplined approach to planning and investing.  This is also the hardest aspect of an advisor’s job.