Financial advisors who retained 95 percent of their clients increased total assets under management by 25 percent over a four-year period, versus a 12 percent increase in AUM for advisors who retained 80 percent of their clients, says a recent PriceMetrix study.
The practice management software and data services company analyzed its database of 7 million investors and nearly 40,000 financial advisors over the 2010-2013 time period and found the most critical period in a client relationship is year two through year four.
During the first year of a new relationship, advisors enjoy a "honeymoon" period during which they retain most of their clients, says the firm. However, retention drops between years two and four as clients determine whether the advisor relationship meets their needs.
“In working to retain clients, advisors should keep these different stages of a client relationship in mind,” noted Doug Trott, president and CEO of PriceMetrix, “and redouble their efforts to demonstrate their value to clients during the critical second through fourth years of their relationships.”
Pricing plays a role in client retention, says PriceMetrix. Advisors who price relatively low or relatively high are less likely to keep clients. The study found the optimal price range lies between 1 percent and 1.5 percent of revenue on assets.
“These results suggest that advisors who price their services too low may be undercutting the perception of their value among their clients,” said Trott, “while those who price too high may be creating insurmountable service expectations.”
Fee-based accounts are slightly more likely to stay (91 percent) than transactional accounts (89 percent). However, households which have both fee-based and transactional accounts are significantly more likely to stay with a 95 percent retention probability, according to the study.
“From the standpoint of client retention, a strategy of moving to a hybrid model, encompassing both fee-based and transactional business, may be better for advisors than one type of account over the other,” said Trott.
Advisors who manage multiple retirement accounts within a household are also much more likely to retain the relationship. While the retention probability for clients with one retirement account or none at all is virtually the same (85 percent versus 86 percent), the probability jumps to 94 percent when the advisor manages two or more retirement accounts, says PriceMetrix.
PriceMetrix also found that advisors with larger client households do significantly better than those managing households with $250,000 or less in assets; a household with $100,000 in assets has a retention probability of 87 percent compared with a household with $500,000 in assets which has a retention probability of 94 percent.