• Matt Morizio

Is Wall Street insulting you with investment minimums?


I haven’t been in the industry a long time, and I don’t pretend to know everything, but I’ve been in it long enough to recognize there is a lot perceived expertise floating around Wall Street firms. And I’ve talked with veteran after veteran in the industry who echoes my sentiment. Firms set investment minimums to give the perception of exclusivity, but rarely do they deliver.

I’m going to let you in on a little secret about assets under management (AUM) minimums: The investment minimums most advisors require are completely self-serving and have no bearing on the level of service, expertise, or attention you receive. “In order to work with me, you need to have $X million dollars of investable assets,” can also be rephrased more clearly like this:

“You aren’t worth my time unless you have $1,000,000 or more.”

And what’s worse is that we, as individual investors, actually believe we aren’t worth their time!

Earlier this week, I had coffee with a good friend of mine and a man I respect the heck out of. He runs a non profit that changes lives. Over the past 7 years he has dumped his blood, sweat, and tears into his organization. That didn’t leave him much extra money for an investment account. That level of sacrifice and selflessness is incredibly admirable, but guess what, he isn’t worth a lot of advisors’ time because he won’t meet their minimum threshold. And when I asked him if that bothered him, he didn’t think twice and agreed he wasn’t worth their time.

I also know a CFO who has worked hard her whole life, put her children through college, and saved when she could. She has managed to save about $700,000 to date, and she said to me, “I know it’s not a lot of money, but it’s all I’ve been able to save so far.”

Huh? Who is to say it isn’t a lot? You’ve worked your life to this point to save it, so no doubt it’s a lot to you. Her perception, as a CFO who rubs shoulders with others in “high finance,” was that her measly $700,000 was nothing compared to the Goldman Sachs of the world who require a minimum of $10,000,000 to invest with them.

Now, before you get a hair across your you know what and tell me pricing is a major determinant in how you position yourself in the marketplace, don’t confuse “pricing” with “investment minimum.” I agree, your price, as long as you deliver on it, reflects the quality of your product or service and how you stack up against competition. It can also intentionally exclude a certain demographic. For example:

- A Mercedes G650 Landaulet will cost you $660,000. That intentionally high pricing eliminates most buyers, but at the end of the day, if you have over $660,000 to spend on a car, you can buy it, regardless of your net worth.

- Country clubs can carry a hefty price tag and require a minimum annual spending at the club to maintain your membership, but as long as you keep paying, you aren’t kicked out.

In the advisory world, the “price” you pay is either: 1) a percentage taken out of your account based off the total assets under management, or 2) it is a fee for service, or both. There are very few advisors out there who can actually justify charging a higher price. Instead, advisors get around that by setting an investment minimum to guarantee a certain amount of revenue per new client.

Let me illustrate my issue with investment minimums in a very typical hypothetical situation:

Let’s say you are looking to work with one of three different advisors. Advisor A has $100,000 minimums. Advisor B has $500,000 minimums. And advisor C has $1,000,000 minimums. You meet all required minimums and initiate the process with all three. You are asked a series of risk-profiling questions - how many kids? How many years to retirement? Investment history? Aggressive or conservative by nature? What’s your plan with the investment? Etc.

After your answers are recorded, all advisors determine a similar asset allocation of stocks, bonds, and cash. Each advisor has “proprietary” funds you’ll be invested in. Going forward, your portfolio gets rebalanced annually, maybe. Sometimes, NOTHING will happen in 12 months if the advisor doesn’t see a need for a change. (Side note - that’s as dumb as it sounds. You’re paying somebody for an entire year to do nothing…Ummmm, at least you met the minimum requirement to work with that exclusive advisor?)

You take that information back home and look it over. It’s nearly impossible for you to tell what differentiates the $100k, $500k, and $1M advisors. All have “proprietary” funds. All will meet with you annually. All have put you in a similar risk-tolerance bucket. All are operating under a “set it and forget it” approach. All can introduce you to estate attorneys and insurance providers. All have a “robust network” of professionals for all your financial needs. All have the backing of a large institution.

Why, then, is it justifiable to set a minimum? Because you get put into “exclusive funds?” I hate to break it to you, but those “exclusive” funds are made up of the same exact stocks, bonds, and alternatives the rest of the investing world has access to. The reason these funds are so “exclusive” is because they, too, have an investment minimum. “Exclusive” is often synonymous with “expensive” in the investing world.

I have no problem with mandating an investment minimum if you can deliver on the level of service your clients receive for meeting your minimum. Unfortunately, the reality is most investor-advisor relationships look eerily similar to the hypothetical scenario I created.

Here’s the truth: A minimum is set because an advisor wants to be sure each new client can earn him/her a minimum amount of money after charging an AUM fee.

We at Beck Bode don’t have a minimum because we know we can help anyone who both wants and needs the help. Instead of an investment minimum, we qualify clients based on fit. If we are a good fit for them, and they are a good fit for us, we engage, and because of that up front due diligence on both ends, the relationship usually works well.

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#Fees #Minimims #FinancialAdvisor

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Investment advice offered through Beck Bode, LLC, a fee-only Registered Investment Advisor in the Greater Boston area.