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 water.
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:
Year
Firm A
Firm B
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.