4 Numbers You Need to Know
by Commonwealth Financial Network
There is something blissful about surrounding yourself with the right clients—especially if it means freeing you from activities that take up too much time. Do you have a client who calls early in the morning and often? Are there clients you continue to service even though they do not meet your minimum? Do you have smaller clients who are difficult to contact? Perhaps you have a client who does not contribute regularly to his own retirement, although you still spend time sending statements.
Some advisors try to establish a service model that limits the time spent with these types of clients. In the end, though, a majority will put valuable time into clients who cost more than they contribute. That’s why it’s so important to think about the big picture: without a client minimum, A and B clients subsidize the extra services to C and D clients like those mentioned above. But for many of you, there may be very little difference between B and C client services, although their respective revenue generation is vastly different.
So, to help you work smarter and not harder, I'm going to talk about four numbers you need to know in terms of increasing profitability and productivity: 80, 20, 50, and 10. The idea is to create a service model that works for you—and not the other way around.
This is probably not news to most folks. It means that 80 percent of your revenue is likely generated by your A clients and a few of your larger B clients. When it comes to 80/20, I encourage you to think about the following:
- Do you and your staff spend 80 percent of your time with these clients?
- How is your service model organized to ensure that these clients see exceptional timeliness, accuracy, and quality in the services you deliver?
- How do you market yourself to replicate these clients?
If any of these questions is giving you heart palpitations, it may be time to review your client service model and your firm’s marketing materials.
In terms of assets under management, there might be a few large B clients in this mix as well. In our research, however, 80 percent of revenue actually comes from 30 percent of clients (on average). This isn’t because advisors are breaking new ground in physics to defy the Pareto principle. Instead, it means the average advisor requires more households to accumulate the same amount of production as his or her top-performing peers.
Ultimately, the goal is to see 80 percent of your revenue come from 20 percent of your clients. That would mean you are optimizing your time with fewer client households. If you’re not seeing this, it is likely that you are taking on too many less-than-ideal households. The average advisor who is working at 80/30 is falling victim to this same pitfall. At the very least, there is safety in numbers; nonetheless, you should be looking to maximize revenue from as few clients as possible.
The other half are C and D clients. Plan accordingly! Just think, your average to smallest client is half of your book and, in turn, half of your service model. Leveraging technology, developing scalable processes, having a lean approach to meetings, and outsourcing activities (e.g., investment management) can help keep these clients profitable. Here, it’s important to note that advisors spend most of their time in client meetings. As such, looking at ways to efficiently prepare, host, and follow up for these meetings can have a big impact on profitability.
The key to making this ratio work for you is having a client minimum. Even better? Having a pricing model that attracts ideal clients and suggests that smaller clients opt out. It is much better to have 10 percent of your revenue come from clients who meet minimums and are profitable than the other way around. The name of the game is “average household revenue.” The stronger that average, the more likely you are to find a service model that ensures that you are spending your time wisely.
The whole idea about service models can be whittled down to one old adage: less is more. How can you have fewer clients and garner similar production while keeping healthy profit margins? It all starts with developing a process for vetting clients. Who are the clients you truly want to work with? How can you attract clients who meet your minimum? And what happens when clients are no longer contributing as much as they used to?
Advisors often get cold feet when approaching clients who are less than ideal. But nudging a client in a different direction through raising fees or referring to another advisor is a proven solution. Beyond that, there are many ways to diplomatically approach a client about his or her fit within your business. Most advisors I speak with are pleasantly surprised to find that clients understand when advisors make a business decision that is distinguishable from a personal one.
As you think of the relationship between profitability and productivity, I'll leave you with this: the bliss of having an optimal service model is just on the other side of the fear of change.
How much time do you spend with your A and B clients? Do you have a process for vetting clients? Please share your thoughts with us below!
Commonwealth Financial Network is the nation’s largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firm’s corporate blog.
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