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To Know Your Clients Is to Keep Your Clients

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You work hard to attract new clients. Yet many marketing and business books say that keeping clients should be job number one for a healthy business. Perhaps this is a sentiment best summed up by author and consultant Richard Buckingham when he said, “Why search for new clients when you have plenty of clients right in front of you?”

And according to the latest AdvisorBenchmarking survey, many RIAs agree. The survey ranked a number of financial measures that advisors use to evaluate the health of their businesses, and 34% indicated ‘client retention’ as their second most important measurement to evaluate the performance of their business–coming in right behind asset under management growth (39%).

The Secret Sauce of Client Retention

Client retention is a tough formula to quantify, but “service” and “meeting client needs” are two of the basic elements. Serving clients well basically means delivering what you promise. While identifying and meeting your clients’ expectations is an absolute must for satisfying them. This includes, but is not limited to, ensuring the timely delivery of financial plans, money management services, advice about insurance, budgeting, cash management, etc. If clients feel their expectations are being met, they will have increased confidence and trust in you. But knowing your clients well isn’t limited to just knowing their investment goals. It’s also essential to identify their investment outlook and knowledge level. Investing the time early on to understand these client expectations will go a long way to building long-term and strong client relationships.

Three things you can do right now to know your clients better and enhance client retention:

1. Understand Your Clients’ Expectations of Current Events

Do you know what your clients’ perceptions are of current market events? You should. Understanding your clients’ thoughts on market events provides you with two opportunities: (1) a glimpse inside their mindset and (2) the opportunity to educate them, if necessary, and realign their expectations with your own. Consider the latest AdvisorBenchmarking survey finding which revealed that there’s a huge disconnect between what clients and advisors think the post-Greenspan interest environment will look like. While only one in four (23%) advisors expect that interest rates will increase dramatically after Federal Reserve Chairman Alan Greenspan’s departure on February 1, nearly twice as many (44%) of their clients expect higher interest rates. The point is that if your clients think that interest rates may climb substantially, they may expect you to make adjustments to their portfolio, and the disconnect between the two of you may be disconcerting for them.

2. Identify Your Clients’ Expectations of Their Portfolio Performance

Most advisors do a good job of discussing portfolio expectation with their clients, but it’s a takeaway that bears repeating. In mid-2005, Rydex surveyed individual investors* and found that more than 70% expect returns of more than 8% for the next ten years, with 18% expecting portfolio returns of 11% to14%, 10% expecting returns of 15% to 19% and 7% expecting returns of 20% or more in the coming 10 years. You might be thinking, “Those investors must not have an advisor.” Wrong. More than half (55%) of them had an advisor. Why is this important? If your clients’ expectations are unreasonable, then they can’t help but be disappointed with your firm’s performance.

3. Know What Your Clients’ Know About More Specialized Investment Products

In a more challenging market environment, advisors are increasingly using alternative investment products to enhance returns and mitigate risks. Exchange traded funds (ETFs) and hedge funds are some of the most popular, with 40% of advisors saying that ETFs are the product they’ve increased their use of the most in the last five years. However, surprisingly, many investors are not familiar with these investment products. As shown in chart 3 below, 29% of investors have never heard of ETFs, 42% of investors have never heard of inverse mutual funds, 26% have never heard of sector funds, and 17% don’t know what a hedge fund is. What does this mean for you? Opportunity. You have the opportunity to educate your clients on these investment options and their benefits. By educating your clients, you’re providing them with information to better understand your investment approach and be more aligned with you.

If you want to increase client retention, you need to get closer to your clients. Take the time to understand their knowledge, their expectations and check in often to identify if these expectations change. Your business depends on it.

*The Rydex investor survey, conducted by Neuwirth Research, Inc. in June 2005, included interviews with 500 investors. Seventy-seven percent of those interviewed had investable assets of $50,000 to $499,000 and 23% had investable assets of more than $500,000. On average, the investors held more than half of their assets in domestic and stock mutual funds and expected their money to be invested for 15 years. The average age of the survey respondent was 56 years.


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