If you're a financial advisor, you've probably asked yourself more than once, how can I build the perfect book of clients? You might think that getting there is as simple as eliminating all but your highest-net-worth clients. But not all advisors want to take this step — or should.
Ultra-wealthy clients can be difficult to find, challenging and costly to keep happy, and financially devastating to lose. Meanwhile, some of your middle-market clients may be great sources of referrals, have children or other relatives who will make excellent clients later or pay enough for services to make them lucrative to your business. So it's very important to determine which of your clients are, or can become, truly profitable for you, and figure out how to eliminate those who aren't — or may even be costing you money.
“For starters, sit down and really analyze your book — that's something most reps simply don't do,” says Kevin Poland, president of The Renaissance Group, a Tampa, Fla.-based consulting and coaching firm that helps advisors and other entrepreneurs implement strategies to grow their businesses. Almost any rep can tell you how much in total revenues his business generates, Poland says, but ask him how much he's making on an individual client and he'll likely just shrug his shoulders. “Most advisors don't have a mechanism to determine who's actually costing them time and money, which is why a thorough analysis is so important,” he says.
Such an analysis helped Marc Freedman, president of Freedman Financial in Peabody, Mass., make some tough but lucrative decisions. In 1990, Freedman joined the firm his father had begun in the late 1960s. By 2002, the firm had 450 clients, many of whom had come on board in the early days when the firm was more transaction-driven. But the group now focuses on investment-advisory services and has been moving new clients in that direction for over a decade. “I realized we needed to really define our target market and move out some customers who were no longer profitable,” Freedman says. He hired Poland to help him do it.
Poland and Freedman realized the client base fell into three categories: Sixty percent were advisory clients with significant assets who had a financial plan prepared by the firm; 15 percent were the children or other relatives of those advisory clients; and 25 percent were clients with a strictly transactional relationship.
For two months, Freedman had his staff monitor the amount of time spent with and the number of calls taken from clients in each group. It was the last category — just 125 clients — that not only took up 40 percent of the firm's time but also brought in the least amount of revenue and clashed with the firm's new business model. Yet many of these people had been with the firm for decades.
The findings, Freedman admits, were startling. “In your heart you say, ‘I can't get rid of these people.’ But, when you analyze it, you realize you have to make some tough decisions,” he says. Considering their loyalty to and tenure with the firm, Freedman didn't want to just fire these clients or sell their names to other advisors. “I work within a 10 mile radius of most of my clients, and didn't want the reputation of turning my back on the people who helped us build this business,” he says.
Under Poland's guidance, he carefully crafted a year-in-review letter explaining that, going forward, he wanted to provide a full spectrum of financial services and that the firm was offering existing clients a discounted annual fee of $750 — while new clients would be charged $1,500. If the client wasn't interested, Freedman said he would either close the account or introduce them to a more appropriate advisor.
In the end, just 11 clients sent in the $750 check, which was more than Freedman expected. Only two clients were actually angry, he says, and many expressed genuine surprise that they weren't profitable. “They just assumed I was making money on their accounts somehow,” he says.
“I did feel a bit sick to my stomach, dropping those letters in the mailbox,” he admits. But, in the end, he says it was well worth it. Ninety percent of the revenue the firm generates from the 350 remaining clients now comes from asset-management fees — “stable, predictable income.” And, the firm generates more revenue from the fees charged to those 11 remaining transactional clients than it did on the entire group of 125.
As Freedman's story indicates, sometimes you can turn unprofitable accounts into profitable ones. In this manner, you can also avoid turning your back on longtime clients who may have helped you build your business.
“I never felt very good about firing clients who helped me get to where I am,” says one 24-year wirehouse rep who asked not to be identified. “That said, I still want every client to be profitable,” he adds. While he doesn't require older clients to meet his recently implemented minimum of $300,000 in assets, he charges higher fees for the few whose assets fall in the $100,000 to $150,000 range. Accounts below $250,000 pay a 1.5 percent fee, he explains, while those valued at $3 million or more pay just 0.5 percent.
Another means of improving client profitability is to implement different levels of service, just as airlines do with their passengers, Poland says. “Someone who doesn't generate much revenue, for example, will be someone you see less often and offer less service. It's the equivalent of economy class, versus business or first class in the airline industry.”
Dr. Dorene Lehavi, founder of Next Level Business and Professional Coaching in Los Angeles, where she works with Wall Street executives, business owners and attorneys, suggests reps also try encouraging their less profitable clients to do more business. “Call them in and say, ‘I see you haven't done anything with your account in quite awhile. Perhaps I can help you find a more comfortable solution for what you're looking to accomplish’.”
Ask if there's something they want that you're not providing. “A simple conversation like this can move them into active status and be worth a lot of money in the end.”
Sometimes even those clients who seem “unprofitable” at first glance are worth keeping. For instance, Lehavi says profitability can also be measured in terms of loyalty or referrals — not just revenue. “A good referral source for other clients is always better than one active client,” Lehavi notes.
Gregory Powell, who heads Birmingham, Ala.-based Fi-Plan Partners and has 350-plus accounts, says he keeps a sharp eye out for family members who could become potential clients. “I think you have to take a legacy-planning approach when measuring their profitability,” he says, “and not just look at how much revenue someone can generate for you today.”
In the end, there may be some clients it's just not prudent to keep. “It's legitimate to tell these folks your business model is changing and that, going forward, you may have to give them less time,” Lehavi says. But, be upfront about it, she says. And remember, they could be great clients for someone else. “If they're costing you time or money by doing nothing, asking for attention and not offering referrals,” she says, it's OK to say, “I don't think we're the right place for you.”