My client base is bigger than yours... so what?

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Financial adviser coach Tony Vidler explains why bigger isn't always better when it comes to adviser client bases:

Let’s begin by challenging a big myth pervading professional service firms – Big is good.  Big is not necessarily good when it comes to an ideal-sized client base. A big client base can simply be an anchor.

While it is true that many fixed costs inside a professional service firm are reasonably static, or not proportionately related to the number of clients one has, there is usually some sneaky, overhead-creep that goes along with increasing the size of the client base being serviced.  The variable costs directly related to marketing & servicing naturally go up with increasing client base size.

One of the more interesting and worthwhile things an adviser can ever do is to spend some serious effort analysing the business they have. Work out what your servicing costs per client are each year for example. Work out what the overheads per client are. Understand what your clients cost you – and not just in hard cash, but in support personnel time and in adviser time. If you go through the exercise I would venture that you will be quietly amazed at what you are spending on average per client. And we haven’t discussed the lost opportunity costs….

A quick example to make the point.  Let’s say you send:

  • A greeting card once a year
  • A couple of newsletters a year
  • Review letters and reports mailed once a year
  • Disclosure twice a year
  • Maybe a seminar for clients, and
  • Perhaps one invitation to a function each year

These things are pretty typical and can easily add up to a cost per client of $150-200 in direct servicing costs. Apportion out your fixed costs among the clients….often another $150/head fairly easily. Staff time dealing with a couple of calls and emails a year?  Another $50-75.  Adviser time?  Another 2 hours a year – call that a minimum $300.

So, the client is costing you perhaps $800 a year to keep.  (Can you AFFORD to bring on more?)

The really interesting part though is when you begin the process of segmenting your client base and working out what each segment brings in revenue each year.  Your very top end clients that follow your advice and think about their affairs will be presenting you with average revenue of $1,200-$2,000 p.a. on a reasonably consistent basis.  Every 2-3 years there will be a big bit of work done with them that provides a lot more.  And they will, if the relationship is nurtured well, provide you with more clients of that type.  The lifetime value of these clients can be immense.

However, at the other end of the scale I regularly witness advisers holding on to smaller clients.  Perhaps they purchased something from the firm 9 years ago, or sought some advice and paid for their plan 4 years ago, or were handled as a bit of a pro-bono exercise.  When you drill down and look at the on-going value these “clients” present the numbers are startling.  It is not uncommon to see an average revenue per client below $100 p.a. at this end of the client base.

If you do nothing else in your professional service firm this year about your back office, do this one thing.  Analyse your client base.  Segment it, and decide logically what each segment represents in terms of current and future value to your business.  Understand what each segment costs you to maintain.  Understand the risks of continuing to be seen as the possible professional adviser to apportion responsibility to, for people who do not actually value the advice or the adviser, and who are a drain on the firm’s resources.

It may be that providing different service or support offerings for different classes of customers is the way forward.  Perhaps some simply need to be culled.  Some will undoubtedly benefit from your increased attention and move up the value chain…but not everyone.

Working out who to drop is often the best way forward.  It is not a quick process, but it will be one of the most beneficial things you can do for your firms future. Drop the anchors, and get going.

Read the full original article here.

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  • Innocent Observer on 14/06/2013 9:58:00 AM

    Who are these advisers chasing clients with $100 p.a. RR?

    I know there are many (I'd say most) businesses that have odds and ends of legacy trails on their books, yielding $10 or $50 p.a., and in this case it makes no business sense to service them at all, as leaving them to plod along can - in most cases - be done without mucking around with FoFA disclosure notices etc...

    It's not (in my opinion) an ideal situation for the client. And in many cases neither is it for the adviser. But that's what happens when more govt. red tape is thrown at these advisers who are trying to service their perhaps less well resourced clients (and in most cases those who most need advice).

    My proposal for a more straight-forward and transparent approach: have a section on every client investment/super statement that lists in bold type the adviser service fees paid to the adviser, with a notice informing the client that they can have this fee removed/cancelled should they no longer wish to retain the services of their adviser. This would cost the investment platforms $0, the adviser $0, and the client would know in no uncertain terms what they are paying. Then it's up to us as advisers to justify our worth. Simple.

  • GAB on 14/06/2013 8:46:53 AM

    I notice that word "cull" in the article. FoFA (parts of it) ensure culling will become the norm on both sides...culling of smaller clients and culling of advisers.

    More than ever the focus will be on retaining the bigger profitable client rather than pursuing growth and servicing more of the population.

    I now call myself a wealth adviser...I only look after people that have wealth.

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