So by now most of you know how a financial advisor gets paid. 100% fees and commission. That is what is so alluring to many aspiring advisors. While there is a level of stress and volatility that accompanies such an arrangement, there is also no up-side cap. The more money you manage as a financial advisor, the more you make (all things being equal). This arrangement, managed well, can make for a very profitable career for financial advisors but managed poorly the pursuit of such an arrangement can get in the way of itself.

If you look at the simple distribution of wealth we know that there are more people with less wealth than people with significant wealth. This results in most financial advisors having to substitute less clients with more money, for more clients with less money. There are two ways (really more, but for illustration sake) to build a 100 million dollar practice. You can have 10 clients with 10 million dollars each, or you can have 200 clients with 500k each. Most financial advisors have built the latter. Not because there are different work loads associated with different wealth levels, but because there are more clients with 500k than 10 million available to most financial advisors. This brings up a very important point that both financial advisors and clients should consider. How many clients is too many?

Most advisors run a model that looks something like this. Let' say they have 250 clients. What they likely have concluded is what Pareto concluded some 80+ years ago through what is known as the Pareto Principle. 80% of the financial advisors revenue is associated with 20% of his clients. In this case 80% of the revenue comes from 50 clients. From experience I know that firms will train you that spending your time on these 50 people is the best bang for the buck. By the numbers they are correct but lets dig a little deeper because there are a couple of ways an advisor will implement this time/attention allocation recommendation.

1. Concentrate on the 50 best clients and get rid of the rest.
2. Concentrate on the 50 best clients and create systems/processes/partnerships that manage the other 200 so that they still receive a high level of service.
3. Concentrate on the 50 best clients and represent to the other 200 that you are concentrating on them as well. (eeeewwww...slimy huh).

Most financial advisors can't bring themselves to do number one. I know...I tried for a long time. There are two reasons why a financial advisor has trouble doing this. 1) they made a lot of promises to people along the way and the idea of "handing them off" doesn't sit well with the financial advisor, kudos, and my problem exactly . More commonly though (in my opinion) the math scares them. Let's say that the financial advisor in this case has a ROA (return on assets) of .65% which would be somewhere around the industry average and the average account size for this financial advisor is 500k giving them a practice of $125,000,000 in AUM (assets under management). That would mean that the financial advisor is earning his or her firm (or their individual practice) around $812,000 in gross commissions and fees. From here it get a little more complicated depending on if the financial advisor is independent and manages their own expenses or if they work for a firm and give away a larger percentage. For illustration sake let's say that the net payout, after all considered, is around 50%. That means that the financial advisor is bringing home about 406k before taxes. We'll stop there as drilling down to tax bracket analysis is not a good use of time. Let's now say that that the advisor realizes that they are spending all there time on those 50 top clients that represent 80% of the 406k and they decide to get rid of the other 80% of their clients. By the way this is what any financial advisor consultant will tell the advisor to do at this stage. That means that they advisor has to go home and tell their family that they just took a pay-cut of about 82k gross of taxes. That is a large enough number to make a financial advisor pause. This pause usually lasts years, and in those years the financial advisor spends time evaluating number two, creating systems/processes/partnerships to address this 200 clients.

The common practice here is to find a new financial advisor and partner with them. The senior advisor can "feed" the accounts to the new financial advisor to make sure they hit their hurdles, put food on the table etc. This can create problems because as mentioned in previous posts there is not a high barrier to entry to being a financial advisor. This new advisor may have no experience at all. The idea here is that the senior advisor can remain involved but in reality they don't. They were already concentrating all of their time on 50 and this move makes the senior advisor feel a bit better about their lack of attention to the other 200 while keeping a portion, if not all, of the revenue. Is it really the best solution for the client though? So what generally results (in my experience) is number three.

The scenario that most financial advisors find themselves in is where the client views the relationship differently than what is reality. This is where clients need to ask good questions to determine where they fall into a financial advisors priority list. Questions like what is your average account size? What is the median account size? Where do I fall in your AUM distribution? Am I in the top 20% of your clients in terms of investable assets under management? This also brings us to answering the question posed in the title of this post.

Each financial advisor has a defined utility and often it is less than they think. An advisors total utility is based on a number of clients not an "assets under management" number. Here is why. No matter what the account size, people are people, and each life is full of a set of needs and expectations. A financial advisors day is filled with a number of activities both related and unrelated to actual financial advising. Putting together retirement plans, returning calls, putting in trades, running hypotheticals, issuing checks, helping with rollovers, educating clients, and overall providing good service, are areas that a financial advisor needs to concentrate on throughout the day and they only have so much bandwidth to address these. A misconception is that smaller accounts require less work but ask and financial advisor and they will tell you the opposite. Popular knowledge is that one financial advisor and .5 of an assistant can handle about 100 relationships. This is echoed in Eric Bradlow's work and also Dave Mullen's book. The .5 assistant is because most financial advisor don't have a one on one relationship with an assistant. The advisors quest is to fill those 100 spots with the most profitable relationships and to develop a mix where Pareto's principal doesn't exist.

Your job as the client is to determine where your financial advisor is in this pursuit, and consequently how you fit in. By understanding this you can appropriately set expectations for yourself and for your financial advisor.