This is the first in a three-part series on client profitability. In Part One below, we look at the challenges of growth and dispel three major myths about client segmentation. In Part Two, we present a case study of an advisory firm’s experiences with client segmentation.
Generally, independent registered investment advisors (RIAs) began as a small business. They focus on executing their value proposition, delivering a superior client experience and acquiring new clients.
Over time, as these small businesses typically grow larger and more complex, here’s what inevitably tends to happen. The firm has acquired a whole range of clients with varying needs and, yes, different levels of assets to manage. The principles have a multitude of competing demands on their time—after all, they are running a business. And their overriding concern—justifiably—is to give each and every client the highest possible level of service.
Challenges of Growth
While growth is good, it can lead to constraints in several areas of an advisor’s business. All too often, a firm’s most valued advisors may find themselves having to juggle multiple demands.
Trying to provide the same high level of service to everyone can make it difficult to focus on the more complex clients. There may be less time for business development. If the firm’s performance and growth begin to suffer, these conscientious advisors typically respond by redoubling their efforts and devoting more time to the challenge.
Advisors who confront this inevitable roadblock to growth with a more rigorous, strategic approach are finding that it can pay off by enabling them to:
- Return to their core offering
- Improve the client experience for all clients
- Free up time for key firm staff and
- Create a more profitable and growing business
Know Your Clients and the Cost to Serve Them
The 2008-2009 market downturn exposed what many advisors understood intuitively: The Pareto principle is alive and well in the advisory business. The idea that a small portion of an advisor’s clients typically accounts for a disproportionate amount of a firm’s profitability was confirmed by the 2011 RIA Benchmarking Study from Charles Schwab which found that 7% of a firm’s clients typically account for about 36% of revenue.
Yet as I worked with our RIA clients through this challenging period, many couldn’t tell me how much it cost to serve a particular client and which of their clients were truly profitable.
Most advisors try to provide the same level of service to their entire—but varied—client base. Too often, this allows the more demanding clients to consume the firm’s time, while the most important clients may receive minimal attention.
This highlights the tension advisors often feel between their desire to deliver the highest level of customer service to each and every client and the need to consistently improve the firm’s financial performance.
Rather than giving the same fundamental service level to all clients, advisors need to decide how to allocate their valuable, yet scarce, resources and structure their firm accordingly.
The Lessons From Looking at Client Profitability
By taking a close look at the makeup of a firm’s client base, advisors can begin to segment clients into sub-groups with similar needs. The goal is to deliver the appropriate level and type of service to each client instead of providing the same level of service to everyone.
Many advisors have discovered that segmenting their client base allows them to deliver the ideal client experience more profitably. However, we find that some hesitate to use this strategic approach because of concerns they have about segmentation.
Let me address the most common prevailing myths.
Myth No. 1: Segmentation is more about profits than clients.
“Not so!” say RIAs who have adopted segmentation. Advisors are generally attracted to the concept because they want to improve customer service for all clients.
The ability to view clients as groups with different needs and priorities provides advisors with a powerful tool. It can help prevent “squeaky wheel clients” from taking up too much of an advisor’s time and keep a firm’s smaller clients from “falling through the cracks”—not receiving regular attention simply because the partners are too busy with other relationships.
Advisors who segment want to deliver the ultimate experience to all clients. When implemented successfully, advisors report improvement in client satisfaction and retention.
Myth No. 2: Segmentation means taking services away from clients.
Advisors may fear that delivering services based on segments will result in some clients getting more attention than others.
The goal of segmentation is not to limit services to certain clients, but to deliver a a superior customer experience to all. Firms using segmentation assess the needs of specific client groups and then bundle essential services into targeted offerings developed specifically with a particular type of client in mind.
For example, younger clients who are in the accumulation stage typically have different needs than older clients who are nearing, or in, retirement. Smaller clients may want help managing a portfolio and not yet be ready for extensive financial planning. Large clients may not need as many face-to-face meetings but desire more thorough tax and estate planning guidance.
Segmentation helps RIAs create a scalable platform that can be adjusted to fit a wide range of clients with differing needs. This scalability allows for better resource allocation and the ability to implement repeatable processes, which are key to reliably delivering the right services to the right client segment.
Myth No. 3: Advisors who segment will lose clients.
With customized offers created for groups of clients, advisors actually report increases in client satisfaction, and retention becomes less of an issue. Aligning the right level of advisor support to the client’s specific needs may even result in more client referrals.
In fact, advisors often discover that they can actually expand some client segments, when they know specifically what costs they will need to put against projected revenues.
Instead of potentially causing a client to leave the firm, segmentation can aid client retention, while also allowing a firm to grow thoughtfully and in the most profitable way. After introducing segmentation, some firms develop new, expanded offers that allow them to actually serve a broader swath of clients.
It’s a Marathon, Not a Sprint
Virtually every growing advisory firm confronts this evolutionary stage; advisors are busy, capacity is strained, and growth slows. By stepping back and applying a more strategic approach, advisors find they can implement a discipline of profitability at the client level. They can make far better use of their resources and create a platform to achieve the next stage of sustainable growth for the business.
This will become clearer in my next blog when I tell you the story of one client’s journey into client profitability. You’ll hear why the advisor decided to take the leap, how certain business practices changed and what the results have been so far.
For informational purposes only.
The Schwab Advisor Services Client Profitability Modeling Tool (“Model”) is confidential and proprietary and includes the intellectual property of Schwab. It is inherently limited and intended for general informational purposes only. The outcomes simulated by the Model do not reflect, and are not guarantees of, actual or future results. Schwab makes no warranty of the accuracy or completeness of the Model or the simulated outcomes. Experiences reflected are not a guarantee of future performance or success and may not be representative of your experience. (0911-5964)
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