The paradox is that keeping clients will invariably result in more new clients for two obvious reasons.
When we purchased our first boat, other boaters
advised us that we would experience two things for sure. First, the
boat would need lots of maintenance to correct problems, both major and
minor. The adage we heard most often was, "After all, it is a boat."
Second, we would find it very difficult to have someone service it in a
timely fashion, so expect downtime when you would rather be enjoying
The first was true, but fortunately, our boat dealer had an excellent and very responsive service department. Often, we would call first thing in the morning and the problem (if it was minor) would be corrected that same morning in time for us to use the boat. We called the owner of the dealership to compliment him on the courtesy, competence and responsiveness of Carl, his service manager. He thanked us and said, "Our sales people sell the first boat our customers buy from us. Carl sells all the others."
The Importance Of Client Retention
It puzzles me that many financial advisors place more emphasis on obtaining new clients than they do on retaining existing ones. The answer to the following question may be a gauge for whom you value the most. You return from lunch and have two messages. One is from a client you have had for five years and the other from a prospect you have been trying to convert to a client.
What call do you return first? The decision we make at our firm is based on one irrefutable fact: The pain we suffer when a client is lost cannot be made up by the joy we may experience when we establish a relationship with a new client. That is why clients' calls are the first ones returned.
Moreover, the paradox is that keeping clients will invariably result in more new clients for two obvious reasons. First, it will increase your referral base. Ex-clients don't refer people to you. In addition, high retention will be evidence that your clients are pleased with your service and much more likely to refer new clients to your firm. How many of us have considered the measurable value of keeping clients? The following illustrates this value for two hypothetical firms and is based on the following assumptions:
The average annual revenue per client in the first year illustrated is a modest $5,000, and increases at the rate of 5% per year.
Each firm has 100 clients and gross revenue of $500,000 in the first year.
Each firm brings in 12 new clients each year at an average annual fee of $5,000 (also increasing at the rate of 5% per year).
Firm A retains 85% of its clients each year. Firm B retains 95%.
By the end of the ten-year period illustrated, the average fee per client has increased to $8,150 for each firm.
The following are the gross revenue results for each firm:
5 $567,945 $899,799
10 $84,600 $1,328,450
During the ten-year period illustrated, Firm A has
increased its revenue by only 37% and Firm B by 166%. If similar
increases were to occur over another ten years, Firm A would gross
about $777,000, while Firm B's gross would be over $3.5 million!
Moreover, none of the above takes into consideration the highly likely scenario that Firm B will be attracting many more clients because its referral base of clients has increased from 100 to 163 in the ten-year period while Firm A's has actually fallen to 84! I suggest that you do a similar exercise for your firm, if you have not already done so. Client retention-not marketing-is the key to growth. And that being the case, we need to provide service in such a manner as to make us almost indispensable to our clients.
Ongoing Service-Think With The End In Mind
When prospective clients ask us about continuing service, we jokingly tell them that we will do anything they need, but "we will not cut your lawn!" In reality, we want them to look to us to help them through all of their financial issues. And since our fee structure includes all services, they are encouraged to call us.
To paraphrase Stephen Covey, to provide quality service we must "think with the end in mind." While the "end" for money managers may be portfolio performance, for financial life planners it is much broader than that. While helping our clients with their investments is important, we need to assure them that it is always done in the context of reaching their unique goals.
If we limit our continuing service to managing their assets, we are not fulfilling the purpose of financial life planning, which is to provide financial peace of mind for our clients. Actually, our stated firm purpose is "To improve the quality of our clients' lives." Of course, that includes many areas that are not investment-related. To list all of the services we have provided for clients over the years would be impractical. However, it is important to note that we will do whatever we need, always mindful of the end.
Providing service is not the goal. Helping our clients improve the quality of their lives by facilitating financial peace of mind is the goal, and we do not limit what we will do to achieve it. My boat dealer's goal was not to provide prompt service. That was merely a tactic to achieve his more important goal-satisfied clients who would purchase their next boat from him. A subtle difference, but an enormous one when one is developing plans for servicing and retaining existing clients.
You have all probably experienced the frustration of taking a car in for service for a problem, getting the car back and discovering the problem still exists. You complain to the service manager, who tells you that he replaced a part because it was defective. Perhaps he did, but that is not why you brought the car in for service. Yet he saw that as a perfectly legitimate response to your complaint. He defined his job as providing a service (replacing a defective part).
The response would have been much different if his "end" was solving a problem. Likewise, some financial advisors may judge their ongoing service by how much they do. Clients, however, judge us on the results we achieve. If our end goal for clients is to help them achieve financial peace of mind, we need to do whatever we believe is necessary to get to that end. An unhappy client will not be consoled by a proclamation that we devoted lots of time to servicing his account. Moreover, the very fact that our clients know we are available to help them sort out issues and make intelligent financial decisions is an important element in providing that peace of mind.
Remember to "think with the end in mind." What is the "end" for your clients? We believe it is reaching their goals and living their lives free of anxiety about money. As discussed above, we provide a wide range of services for our clients because we want them to know that we are there for them when they need us. In order for that to happen, you need to create a service culture in your firm in which everyone from planners to part-time clerical staffers understand and participate.
A Culture Of Service
Excellent, client-satisfying service that retains virtually all of your clients does not happen in a firm because the owner wills it. A culture needs to be created where everyone in the organization not only does what they are told, but buys into the service culture. They need to care and be proud of their jobs and be rewarded for the things that they do for clients and prospects.
A securities analyst once told me that he can tell more about a company by sitting in its reception area for one day than he could from interviews with management or financial statements. He believes that a company can only be as good as its training program for its employees. If the receptionist understands the service culture of the firm, he asserts, all of its other employees certainly will.
A service culture reflects the values of a firm's owners and planners. In his book "Discovering the Soul of Service" (The Free Press, 1999), Leonard Barry writes, "Strong institutional values enabling human beings to realize their full potential as individuals and as members of a community contribute to the creation of compelling value inside and outside the company. The company survives as a success because it is fully alive. ... Values reflect what the leader holds worthy, what the organization assigns worth. They are the ideals, principles and philosophy at the center of the enterprise. They are protected and revered. They reveal the company's heart and soul. They energize the covenant." The people at our firm do not provide outstanding service because they have to. They do it because they want to.
Through their actions, all of the professionals at our firm set examples for everyone that they value service and relationships. As a result, our employees emulate them. One of the ways this is communicated is in the way we behave toward our employees. A stated core value of our firm is that we treat our employees with dignity. We deliver on all promises made, and we reward outstanding service. They are regarded as very important to our success, they are respected and they know to treat clients similarly. They also understand that no one is more important than a client is.
As the analyst said, it begins with the impression people get when they call or visit. We recognize the importance of the person who answers the phone and greets our guests. Her job is to welcome everyone in such a way as to make them feel special, and in our firm she is successful at doing just that. We get lots of feedback from clients, as well as others, about how wonderful they feel when they call or visit.
If you want this reaction in your firm, it will not happen just because you tell someone to do it. You need to create a service culture. One of the exercises we periodically practice at our firm is to have meetings about service, which are attended by all firm personnel. We ask for any examples they may have had recently of a poor service experience. Unfortunately, in the environment in which we live today, they are not difficult to find. We then ask them what the person responsible for the misstep could have done to make the situation better. We also ask for good experiences.
These meetings are just another way of reinforcing our service culture. We always tell them that mistakes will occur. We all make them. The difference between the firms that give good service and those that do not, however, is what they do after the miscue. If they handle it poorly, the client will probably remember the slipup. If handled well, the client will remember it as a good-not bad-experience.
Recently, we discovered an error we made with a client's bonds. We had inadvertently put taxable bonds in his IRA and tax-frees in his taxable account. When we discovered the error, we researched what the differences would have been in taxes and income if we had got it right the first time. I called to tell him about the error and credited his next fee by about 20% more than the actual loss. This turned what could have been a disaster (particularly if I had done nothing) into a positive. He thanked us for the professional manner in which we handled the situation and has referred two clients to us since that time.
I don't believe that there are any business owners who make conscious decisions that they want to provide poor service. But why is it that so many companies fall short? I recently needed to call the owner of a company to complain that I did not get very good service from one of his employees. He corrected the problem and apologized for the way the employee treated me. There is one major problem with firms like this and their owners. They may want their companies to provide good service (and some even delude themselves into thinking that they do), but they have failed to do something very fundamental to accomplishing good service. They failed to create a culture of service in their firms.
Advisors should not make the mistake of making marketing and service two separate functions in their firms. They are inextricably related. As Maister, Green and Galford write in "The Trusted Advisor" (The Free Press, 2000), "The truth is, sales and service, when thought of properly, converge. The two are flip sides of the same coin."
Our boat dealer understands that and has built a successful business with loyal customers and a steady stream of referrals. Isn't that what we all want?
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.