In building an investment advisory business, providing the right advice for each client is the best foundation. But the foundation cement is likely to be marketing and client relations—the sometimes arduous effort to win and keep clients. Clients may remain loyal during poorly performing markets. But a shoddy approach to gathering or serving clients is often the reason clients become dissatisfied and consider taking their assets elsewhere, regardless of how markets are doing.
In the past several years, there have been large and rapid shifts in how advisors gain new clients, according to data collected by AdvisorBenchmarking. In the depths of the economic downturn, the old business model of passive referrals proved inefficient. Now, as a mild recovery has taken hold in the industry—in terms of asset, revenue and profit increases—advisors have returned to the approach of passive referrals in a significant way (see chart 1 below). Other active channels—e.g., seminars and internal referrals—have declined. The active channel that has seen a relatively strong increase is advisors’ referral networks, often called Center of Influence (COI) marketing, and entails gaining new clients from attorneys, accountants and other specialized professionals.
Targeting the right clients is a key to building a successful practice. The term “ideal client” is discussed quite often in the advisory business, which can range from someone who is in the advisor’s age bracket to a client who shares a particular investment philosophy, lifestyle or even a hobby with the advisor. But regardless of how many clients are courted for these reasons, in reality, most advisors target clients mainly based on wealth—the basis of financial advisory fees.
According to data collected by AdvisorBenchmarking (see chart 2, left), wealth range is the largest factor cited by advisors in selecting potential clients, at 62%, compared with only 34% for the next highest-rated criterion—lifestyle situation. Moreover, the data suggest that wealth range has remained the largest factor in client focus for several years. Only about a third of advisors target clients based on lifecycle, age or career. And the focus on specialized needs has been steadily falling. Even the percentage of advisors not focusing on any target segment has been slowly rising.
The RIA practice is an individual relationship-based business, with about half of clients in the moderate (26%) to sub-moderate (22%) high-net-worth market, and about a third (35%) in the high-net-worth market. Taken together, the data (see chart 3, below) indicate that the vast majority of RIA business (83%) is conducted in some segment of the individual high net-worth market—and those numbers have remained consistent over the past five years. Choosing clients based on assets alone may not be enough, however, as age, career and lifestyle can have significantly different impacts on investors—and thus their financial needs—within the same wealth range.
There has been little year-over-year change in marketing methods cited by advisors. Among the top three strategies, “events marketing” categories (seminars, client appreciation events) appear to be holding firm, while newsletter marketing is down. And there appears to be a slight increase in electronic initiatives such as online searches, webinars, email marketing and conference calls. It is not surprising to see these numbers holding steady given the lack of focus on marketing from a planning standpoint. Just over half of firms report that they have no marketing plan at all. And a quarter of firms don’t target specific types of clients, which is an essential first step in building a plan—knowing whom you are targeting and how to reach them.