Opinion: A bigger book ain't always a better book

Forget what every senior advisor has ever told you, a bigger client base isn't always better one, if you're focused on maximizing net earnings.

Forget what every senior advisor has ever told you, a bigger client base isn't always better one, if you're focused on maximizing net earnings.

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 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 advisor can ever do is to spend some serious effort analyzing 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

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and in time. If you go through the exercise I would venture to say that you will be quietly amazed by your average spending 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.

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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.