Greg Rakozy

This article was triggered by conversations with financial advisors who are spending massive amounts of time talking to clients, both face-to-face and in person. A few questions disclosed they are implementing — or trying to implement — the “Supernova” service model or some variation of it. Now, I am going to show you why I think this much lauded program cannot work as advertised.

I have placed additional resources on my website, www.billgood.com/retention. There you will find an alternate service model as well my calculations on what Supernova can and can’t do.

“The Supernova Advisor,” by Rob Knapp, was published in 2007. To say it has had a profound effect on the industry is an understatement. James Gorman, currently chairman and CEO of Morgan Stanley, gave the book an enthusiastic review as did Robert Mulholland, now head of the wealth manager advisor group at UBS.

The initial work on the Supernova concept of client management was done by Knapp when he was at Merrill Lynch. While I only rarely see anyone trying to implement the entire system, all the major firms, many regionals and some independents are, as far as I can tell, “all in” for a major component of it — “a leaner book as the better way to grow” — as Mr. Knapp put it.

While I do not know the count, I am guessing that thousands of financial advisors at the national firms have adopted some or all of it. Its message of limiting the size of one’s book in order to provide greater service has been echoed by other industry consultants such as Pareto Systems and CEG Worldwide. Undoubtedly tens of thousands or hundreds of thousands of “non-ideal clients” have been sent to call centers. Merrill will not pay an advisor on a client with less than $100,000 and will only pay a reduced payout on clients with $100,000–$250,000 if 80% of the advisor’s clients have more than $250,000. The reduced payout is $20%. Other firms have set different amounts. “Leaner is better” would be the mantra.

The Supernova advisor program, as well as its descendants, is based on two broad principles. One is the 80/20 rule. While Mr. Knapp did not originate the application of the 80/20 rule to this industry, his book has certainly popularized it.

I first ran into grandfather of Supernova around 1983. At the time, Merrill had set up possibly the first call center. Their 80/20 analysis led them to bonus a branch manager who would get 17% of the branch’s clients assigned to the call center. Why 17%? Who knows?

The Pareto Principle had arrived in retail financial services. Knapp wrote that 80/20 “is no rule at all, but an immutable law of business physics. It’s like defying gravity. We can flap our arms all day, but with the weight of our bloated books and collective denial, we were never going to fly.”

Knapp’s second principle was that in an era of bloated books, exceptional service is the key to growth. In a section, “What Drives Exceptional Service,” he lists:

  1. Scheduled contacts and conversations.

  2. Rapid response to problems.

  3. Attention to details.

  4. Anticipating issues before they become urgent.

  5. Depth and breadth of services offered.

I certainly have no problem with items 2–5. The problem, as I’ll explain, is with No. 1, “Scheduled contacts and conversations,” a category that fundamentally belongs to the FA, even though the CA (client associate) assists.

Contact Math

The 80/20 rule and the quest for better service came together in the “12/4/2” contact principle. That’s how Supernova proposed to implement “Scheduled contacts and conversations.”

Knapp explained: twelve scheduled contacts (one a month), with four of the 12 including “quarterly reviews of the full portfolio,” and two of the scheduled reviews being “face-to-face meetings with a broad agenda.” 12/4/2.

The mathematics of this led inevitably to a maximum number of clients you can have. Knapp says 100 is the magic number.

He stated that the telephone updates are 20 minutes, the telephone reviews are 40 minutes, and the one face-to-face meeting is one hour. The advisor who has 100 clients requires roughly 30 appointments a week, or six appointments per day. This works out to three hours and 20 minutes per day.

According to Knapp, this leaves “the other half of your day for planning, prep time and marketing.”

Not exactly. He has not accounted for the time to create and use the “permanent record,” a vital part of the Supernova process.

He wrote: “In a Supernova organization, every client has a permanent record — a folder — and every time that client is on the phone or in the room that folder’s within reach. This folder doesn’t contain every document or agreement. It’s not where the tax returns or stock certificates are housed. But it is a comprehensive picture, on paper, of who that client is.”

Continuing: “It contains an overall look at the assets under management, and the dreams that are behind those assets. It’s about client anniversaries, favorite movies, and where the grandkids are in school. There’s an intimacy contained in the folder, and it’s a powerful tool for delivering the exceptional client experience.”

Why not use a computer? “Networks crash, data disappears, and even when it’s all up, it’s just too easy to ignore. Folders are physical, not virtual. Clients have real lives and human needs. They deserve a process that’s just as alive.”

If you are going to maintain this kind of data on a client — whether on paper or in a computer — it takes time. You must use the data to prepare for the telephone or face-to-face meeting. After the meeting, you need to update the “permanent record.”

I have estimated that it requires 10 minutes to prepare for the monthly phone call, 15 minutes for the review phone call and 30 minutes for the meeting. Then after the meeting, you have to update the client folder —10 minutes for the phone call, 15 minutes for the telephone review and 30 minutes for the meeting.

To achieve these times, you have to use some form of dictation: Copytalk or Dragon Naturally Speaking. Otherwise, allow double or triple the estimated folder update time.

When you add the prep time, telephone and meeting time and record update time, you get approximately 1,300 hours of advisor time. You want to live the Supernova life? Then budget 1,300 hours a year.

How does that really break down per day?

There are approximately 260 weekdays for a typical year. The market is closed on nine of these except when they fall on a weekend. So let’s say that average, the market is open 252 days a year.

In my experience, the average financial advisor is no more going to conduct intense meetings on Friday afternoon than fly to the moon on a broomstick. So let’s deduct 26 days from the available work time. That takes us down to 226 days. Advisors take between two weeks and four weeks off a year. Let’s split the difference and assume three weeks. So we deduct another 15 days and we have 211 working days per year.

When we divide 1,300 hours by 210 working days, we get 6.16 hours of prep, meeting and update time per day. We also need to allow a little time for people who no-show or reschedule. That means you need 7–8 hours a day to manage 100 clients on the 12/4/2 plan.

Remember, Mr. Knapp promised “the other half of your day for planning, prep time and marketing.”” Where is the time for planning and marketing?

Mathematically, the Supernova strategy cannot work with 100 clients.

Could it work with 50? Undoubtedly. But you need 50 big ones.

The Supernova idea is based on the real thing: before it flairs mightily, it gets smaller. Then it explodes.

Does that explosion happen? I had an FA with one of the major firms tell me, just recently, “To this day, I have not seen an advisor’s book explode by reducing the size of the book.”

Nevertheless, I still see individual FAs breaking themselves to grow by getting smaller.

Certainly a practice devoted to an ultra-high-net-worth clientele cannot maintain those high maintenance clients without extraordinary contact.

But is the Supernova business lifestyle necessary to have a great business?

The “Barron’s 1,200 for 2016” was released March 5. Are these top 1,200 leading a “Supernova life” and following 12/4/2?

The cover article to this year’s list states: “This year’s Top 1,200 serve 521 households on average, compared with 496 for 2015′s crop.”

The very top tier of the industry has more than five times the number of clients recommended by Supernova.

Headcount Declines

The advent of Supernova and the decline of FA headcounts in the national firms are date coincident.

A 2015 Cerulli report found the total number of advisors had dropped for the fifth consecutive year. The only growth was in the RIA and dually registered channels.

In 2009, when Morgan Stanley bought Smith Barney, it had 20,000 financial advisors. As of March 31, headcount had shrunk to 15,915. Wells Fargo, Merrill Lynch and UBS have seen their aggregate head count slip to 52,215. That’s down 11% from 2009.

While there are many factors in play — breakaways, demographics, lower payouts for lower producers, higher minimum account sizes, ever more complicated compliance regulations — the one factor no one has suggested — until now — is the client service model.

Could that be a culprit?

Could the “Leaner is better” strategy have culled the herd?

I don’t know the answer. But I suspect.

— Check out Bill Good: The Science of Client Retention on ThinkAdvisor.