Finding another home for clients?

The rationale behind dropping smaller clients is profitability – and the notion that less experienced advisors, new digital channels and advisors at a bank branch can serve the less complex financial needs of clients with fewer investible assets in a more cost-effective manner.

For example, virtually all advisors with Toronto-based bank-owned BMO Nesbitt Burns Inc., CIBC Wood Gundy, RBC Dominion Securities Inc., ScotiaMcLeod Inc. and TD Wealth Private Investment Advice (TD Wealth PIA) answered “yes” to the supplementary question. Specifically, those advisors said their dealers are making the case that retaining these clients doesn’t make sense from a financial perspective.

“[The industry] generally [believes] that the smaller clients are not profitable enough for the firm to carry,” says a Nesbitt advisor in Atlantic Canada. “They use up too much of an advisor’s time.”

“We need to be doing more for all of our clients. We can’t just have hundreds of smaller clients,” adds a ScotiaMcLeod advisor in Ontario. “Every client has the same workload, no matter the size. The firm recognizes that. It’s a profitability issue.”

The sentiment among these bank-owned firms and their advisors is that smaller clients can be better served through alternative advice channels, such as at the bank branch level.

“Clients are better served with financial planners at the TD Bank branch when they’re at lower asset levels,” says a TD Wealth PIA advisor in Atlantic Canada.

Moreover, two of the Big Five banks, Bank of Montreal (BMO) and Royal Bank of Canada (RBC), have introduced digital platforms to cater to the needs of clients who require less sophisticated advice.

After research for this Report Card was completed, RBC introduced its MyAdvisor hybrid platform, which allows clients to interact with advisors at the bank in real time through an online platform. Meanwhile, BMO offers a more traditional robo-advisor service through SmartFolio, which was launched in early 2016.

However, some advisors don’t agree that smaller clients should be cast off into another advice channel. Instead, these advisors see the potential for revenue in smaller clients and say their firm’s stance could affect long-standing client relationships.

“It’s a terrible mistake,” says a Wood Gundy advisor in British Columbia. “There are clients out there who generate good revenue and are good clients. We are in a position that we should be helping everyone.”

“Strategically it makes sense, but I feel like I’m betraying those clients who supported me all those years,” adds a TD Wealth PIA advisor in Ontario.

For these reasons, among others, advisors with Mississauga, Ont.-based Edward Jones, Calgary-based Leede Jones Gable Inc., Toronto-based Raymond James Ltd. and Vancouver-based Canaccord Genuity Wealth Management (Canada) said overwhelmingly that their firms are not encouraging advisors to drop their smallest clients.

“Not all decisions here are made on profit,” says a Leede advisor in B.C. “We have the freedom to take on clients as we wish.”

Advisor independence is a hallmark of these independent firms: advisors make their own decisions regarding the clients they serve.

“We serve accounts of all sizes,” says David Gunn, principal, financial advisor talent acquisition, with Edward Jones. “We place our emphasis on the relationship and building a client experience. So, regardless of the account size, our advisors are paid.”

Meanwhile, there was no clear consensus among advisors with Montreal-based National Bank Financial Ltd. (NBF), Toronto-based Richardson GMP Ltd. or Vancouver-based Odlum Brown Ltd. regarding whether advisors are encouraged to drop their smallest clients.

Although the answers varied, advisors at these three firms reported that their firm makes them very well aware of the costs involved in serving small clients.

“Through using services such as [analytics software] PriceMetrix, we’re being encouraged to look at our books more closely,” says an advisor at Odlum Brown in B.C.

“They’re trying to explain the benefits [of not serving smaller clients, but] they’re not pushing us not to,” says an NBF advisor in B.C.

Part of this education revolves around helping advisors acknowledge the costs of doing business in the brokerage industry.

“Nobody would ever say, ‘Don’t take on a client below a certain [asset] level,’ but the reality of it is you want to manage costs,” says a Richardson GMP advisor in Ontario. “My personal cut-off is $500,000 because I don’t want to dilute my services.”

“We have policies in place that protect key aspects of profitability that ensures best practices are followed,” says Andrew Marsh, Richardson GMP’s president and CEO, “but then allow our advisors to make appropriate business decisions for their practices within this environment.”

Adds Kim Abbott, vice president and director of sales and business development with Odlum Brown: “We’d rather educate [advisors] that taking on small accounts isn’t necessarily what we’re trying to get away from. But we always want to make sure we’re taking on profitable relationships.”

Furthermore, the industry has changed over the years. Most firms no longer need to encourage advisors to drop their smallest clients because many advisors are doing so already.

“The reality is,” adds Abbott, “in today’s business, not many [advisors] are looking to add a $50,000 account. The problem is taking care of itself.”

© 2017 Investment Executive. All rights reserved.