Some financial planning firms require clients to have a certain amount of money before the firm will work with them. Common minimums may range from $250,000 to over $1 million. Generally the reason why firms have minimums is to either attract a certain clientele, provide economies of scale or both. But what do minimums really mean?
To answer that question, think of it this way. Is a minimum really saying “You’re not important until you have a certain amount of money to invest.”? Additionally, is the firm really concerned about their clients if the firm has minimums? It would appear that they are more concerned with money first, clients second.
Granted, I may be being a little hard on firms that have minimums. But what about the folks just starting out? Who is teaching them how to get to their first $250,000? How do they become educated to increase their savings and bring their investments into the six and seven figure range? Once they achieve a certain threshold are they now worthy of the firm’s advice?
Some potential ways to avoid this conflict (yes, it is a conflict of interest) are for individuals to look for fee-only firms that also (or only) charge by the hour. This way the individuals can still receive advice and education on how to grow their nest egg (if that’s the goal) without worrying that they don’t have enough assets to qualify as clients.
Additionally, individuals should inquire as to the value they are getting (this is true even for those clients working with firms that have minimums). If what they’re being charged for only includes investment advice and management, they should consider looking elsewhere. Firms charging for both investment management and financial planning advice are “double dipping” and arguably over-charging their clients – another conflict of interest.
Finally, both individuals and firms should look at the fees they are charging. For investment management anything over 2 percent of assets under management (AUM) is ludicrous. Even pushing 2 percent is high. Generally, firms and clients should be around 1.5 percent at the highest, and lower if possible. Think of it this way, a firm may be fee-only, but a 1.5 percent charge for money management still reduces returns by that amount (not including fund expenses).
Another way to look at it is this: 1.5 percent of $1 million is $15,000 annually. This amount is more on higher amounts invested. The value must justify the cost.
Sterling Raskie, MSFS, CFP®, ChFC®
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Really nice post and interesting topic!!! Yes, I have always viewed these minimums as being a “get lost” to many investors. (I suppose it could be argued, though, that it is one area where many advisory firms are really honest and transparent). In fact, while I won’t quote any statistics, most “wealth management” firms have no interest at all in dealing with lower class or even many middle class investors, who represent the vast majority of people. IMHO, anything above .50 bps for AUM charges is excessive. But maybe that is just me.
Thanks, Mark!