Editor's Note: This is the first of three articles on how an advisory practice can be streamlined by reviewing a client roster and reducing it to those clients who have the best current and future profit potential, improving investment management oversight by cutting back the number of mutual funds and fund families that an advisor manages and deciding whether to adopt a generalist or specialist business model.
With April 15th having come and gone, and the end of the recession in sight, it's a good time for financial advisors to conduct a state-of-the business review. Advisors now know how much they made in 2001, and while some managed to exceed their goals even in the down market, the majority most probably fell short of where they hoped to be. At the same time, advisors need to be prepared for a possible upswing in business as the recession recedes and the stock market inches back to being a safer bet for investors who may have been taking refuge in bonds and money market accounts.
There are no sure answers when it comes to fine-tuning an advisory business, and there's no Dale Carnegie handbook for being successful and influencing clients. But there's always room for reassessment, especially given the changing nature of the advisory business, with more affluent clients than ever, an intense focus from financial services firms on landing those clients, and the shift from a fee-based to a consultative business model.
In this and the next two columns, we're going to consider some ways advisors might recast their businesses. In this article, we'll focus on how advisors can streamline their client rosters. Having too many clients-and having too many less-affluent clients-can fracture an advisor's time and reduce profits. Next month, we'll take on another hot topic, the problem of having too many mutual funds and fund families to manage. When advisors have more than 100 funds to manage, as many do, it can be hard to track performance, style drift and management changes for the many funds. Clients may end up being surprised-and disappointed-by a fund's performance and an advisor's lack of insight about that particular fund. Finally, we'll examine two different advisory business models, the generalist and the specialist. The affluent have a lot of needs-brokerage, investment management, advanced planning-and few independent advisors are able to address them all. That's why it's a worthwhile exercise to consider whether, given an individual advisor's strengths and resources, it makes more sense for that advisor to be a generalist who relies on advisory partners or a specialist who prospers by being one of those advisory partners.
The Most Profitable Clients
In 2000 and 2001, we asked 177 financial planners and 72 RIAs to take a close look at their businesses and see where they made their money. As the chart below illustrates, 80% of those revenues came from about a third of their clients-and the percentage of most-profitable clients fell yearly.
In short, not every client warrants equal time and attention. We've conducted a number of studies over the past few years on both the client and advisor side that have underscored another truism: The more quality time an advisor spends with affluent clients, the more production that advisor can expect. It's also worth keeping in mind the fact that most affluent clients have more than one advisor these days, so each advisor is being measured against the others. The opportunity to win more assets, cross-sell and get referrals depends on the relationship. That relationship, in turn, hinges on how much quality time is put against it.
Combining that need for quality time with the above statistics leads to a conclusion advisors already understand: Most of them have too many clients and not enough time to attend to them. The industry's top advisors are those who have done the best job of delegating the work so that they can get enough client face-time.
No surprises so far. But it's the next steps that are the high hurdles for advisors. Every advisor knows that the plum clients are the ones with enough assets to generate income for advisors even if they don't do much with those assets. The bigger issues are how to decide which other clients have the most potential-which clients are the best ones to spend time with-and how to transition those who don't make the cut.
Total Client Value
One of the most popular ways to rank clients is the ABC system, in which A clients are the ones with the most assets under management and C's are the ones with the fewest assets. That's fine for maintaining the status quo, but it won't help advisors figure out which clients hiding among the B's and C's are the ones with the greatest profit potential-which ones might be the source of more assets to manage, cross-selling opportunities and referrals.
There's no foolproof system for measuring profit potential, of course, but we can get a close enough estimate to rank current clients by plugging numbers into the following total client value formula. What Else Do They Have?
Current AUM is a figure that every advisor obviously has on hand, so it's easy to plug in. When it comes to identifying additional assets-bank accounts, art, land, an inheritance on the way-it's going to call for feel and finesse. Advisors should have a close enough relationship with most of their clients to know about other assets, even if they have just a ballpark estimate. Otherwise, it may be a matter of piecework or using a "straw man" based on a typical client with comparable assets under management. (It's also worth noting that those clients most likely to share information about their assets may be the best prospects anyway because an open relationship already exists.)
What Else Do They Want?
In the process of uncovering other assets, an advisor often will get a better idea of which new revenue opportunities to focus on. In talking to a client, an advisor may find that a client has, for instance, an outdated estate plan, unfulfilled charitable intentions, a bloated money market fund or a daughter thinking of going back to medical school. That knowledge could in turn lead to, respectively, a new life insurance policy, a donor-advised fund, an equity investment or a 529 tuition plan. Other opportunities can be added to the equation based on what an advisor already knows about a client. If the client is a business owner, there's key-man insurance. If she's newly remarried, she may want to review and rewrite her will. Even if the cross-sell is not for a product or service that the lead advisor can offer, he or she can refer the client to another resource, which may lead to having the favor returned somewhere along the line.
Who Else Do They Know?
When gauging the number of potential referrals, it's going to once more be a matter of common sense and informed guesswork rather than hard science. An advisor can measure the average number of referrals from a similarly affluent client and then flesh out the estimate by thinking about the clubs to which the clients belong, where they went to college, how old they are and what they do. Business owners, for instance, know other business owners. Those referrals have to be earned, of course, but by devoting more time to the clients with the greatest total value, the odds of getting them may well improve.
Once the total client value is determined, and current clients are ranked by their potential, advisors have to take the next, the hardest, and the most necessary step of letting some clients go. To do that, each advisor needs to think about how many clients he or she can profitably manage. The magic number will vary dramatically from advisor to advisor, based on the business model used, income goals and resources such as fellow advisors and administrative assistants. Some advisors may want to be the only one who ever talks with their top clients, while others may be comfortable handing off that job on occasion. Whatever the number may be, it's a safe bet that every advisor has some clients who can be transitioned.
Those with the most assets obviously stay-with advisors' renewed awareness that there may not be much more profit in them. After that, an advisor should keep those with the greatest total client value and, to be on the safe side, those who seem to have potential but didn't make the grade because there wasn't enough information to determine their total client value. It's never easy letting a client go, but there are two basic rules: Be direct and have a qualified backup advisor in place. That way, even if there's a raw end to a longstanding client relationship, an advisor will have made sure not to leave a client hanging. The advisor also will have helped a fellow advisor, who later may return the favor by referring a client with more assets that he or she is used to handling.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.