The kind of practice you operate will determine the type of client you seek.

    Determining how many new clients a financial advisor may wish to bring into a practice requires a certain amount of knowledge about who your typical client is and what you are trying to do with your financial practice. Some advisors would argue that the safest course of action in developing a marketing plan that identifies the "ideal" client involves discovering who your natural market is for clients.
    Defining a natural market might be thought of as the logical result of your current marketing efforts, such as referrals from existing clients and the probable appeal of your age, specialization, personality and other traits that are deemed attractive to a potential client. The concept of a natural market is important in setting client acquisition goals, as it helps to define realistic expectations on the financial character of a probable new client. Such elements as net worth, income, investable assets, insurance needs, etc., form this financial character. And, from this, we can construct a financial model that determines a net profit number.
    Consider a recent consulting case in which an in-depth analysis of a primarily commission-based financial advisor's practice revealed some interesting observations. The advisor has 304 clients, with 234 of those identified as active. Total assets under management (AUM) are $35,575,979. Gross commissions, fees and/or other compensation totaled $177,995, with expense deductions totaling $131,769. This leaves a net, pre-tax income for the advisor of $44,005. Digging a little deeper into the practice, we discovered that 64 of the 304 clients represent 86% of the AUM and closer to 90% of net revenue. The top 29 clients (by size of assets) represent 70% of AUM.
    This advisor has chosen not to differentiate between clients based on invested asset size. Therefore, the amount of service work that must be accomplished is spread equally across the entire 304-client group. As 240 of those clients are largely either marginally profitable or not profitable at all, it is safe to assume that this advisor is spending a majority of service-related time on unprofitable activities.
    In fact, should the decision be based solely on trimming down the practice to only profitable clients, this example shows that the advisor could give up more than 90% of the clients and still retain 70% of net revenue. And, this is without taking into account any size-related efficiencies (i.e. staff time, office size, etc.)
    What the above example shows us is a marked difference between practice efficiency goals and the reality of how a practice is actually managed. The example is also based on the assumption that the highest AUM client is also the most profitable. This may or may not be true in all cases. It could be true in real dollars but not true by percent.
    For instance, you may have a client with a long-term care policy that pays an annual commission with a client that requires little or no attention. The lower amount of service-related time compared with the profitability of the client by percent could conceivably be higher than that of the high-AUM client who requires frequent meetings, phone calls, e-mails, service-related activities and other time demanders.
    However, if the goal of the practice is to gradually increase the average amount of client AUM while reducing the actual number of clients, and at the same time increasing profit, the above example stands as a case in point of one way a practice can be analyzed. If client service and profit efficiency is deemed desirable, then pursuing action resulting in fewer clients with greater average assets under management would ultimately mean less service work for the amount of assets being managed.
    But, how do you get there if you continue to acquire new clients that have lower net worth or investable asset numbers? If your current client base is similar to our example, then soliciting those top clients for referrals would probably produce potential clients in higher-net-worth or -investable-asset categories. That doesn't necessarily mean you must ignore your lower-net-worth clients. It is simply a shift in thinking on acquiring new clients. Many advisors who follow this model gradually wean away the lower-net-worth clients or bring on a paraplanner or other licensed support person to take over servicing requirements.
    However, another model can be followed: the fee-only, or fee-for-service, model. In this model, the service-pricing structure is based on your time. Presumably, you would establish an hourly rate or fixed fees based on the amount of time to complete specific tasks.
    With this model, it is less important what your clients are worth, so long as they are willing to pay your fee. In this way, marketing to middle- and lower-net--worth clients can be affordable for the advisor who can establish such fees (some broker-dealers may not permit this). Sheryl Garrett has developed a model for capturing the middle market that uses a similar model ( Sheryl's book, Garrett's Guide to Financial Planning, National Underwriter 2002, is an excellent resource for those considering this approach.
    Yet, another approach is more of a hybrid between the pure commission model and the pure fee-only model. Commonly known as fee-based, these advisors have established a model that tries to be all things to all clients. From a client acquisition standpoint, the fee-based advisor may find it easy to acquire new clients, but the trick is identifying which of those potential clients will actually be profitable.
    Establishing some benchmarks, such as minimum fees, might make sense for this advisor. To determine them it is helpful to establish work standards, such as a list of time requirements to complete certain tasks. For example, if it takes you and/or your staff 18 hours of combined time to present a finished product, and you calculate your average cost per hour at around $100 (your time might be higher, but averaged in with staff time it could be a lower figure), yet you are charging $350 for the plan, then you are probably taking a loss on this service.
    The old school of thought was that this is OK so long as the possibility of bringing in substantial other fee or commissionable transactions made up the difference. However, recent thinking on this is more in line with making every aspect of your practice profitable. Thus, producing a financial plan should be priced to generate a reasonable profit for the firm and asset management fees should reflect the time, effort and experience necessary to do a quality job.
    Remember that what you charge for your services and the quality of services provided to your clients drives the perception of value. And it's this value that they communicate to other, potential future clients. Developing an efficient pricing model is a key to building a profitable practice.

David Lawrence is a practice efficiency consultant and is president of David Lawrence and Associates, a practice consulting firm based in Lutz, Fla.