Happy
and loyal clients are good, but profitable clients
are even better.
Would you believe that
in their zeal to keep clients happy some advisors
actually lose money on certain clients? They
become client-obsessed rather than client-focused.
They will do just about anything to keep a client
happy including offering additional services they
either fail to get paid for, or do not receive
prices that cover the costs of performing such
services. How can your firm avoid this situation?
The best way is to start measuring client
profitability, so you can understand the truth
about each client relationship.
One
Firms Discovery
Consider
the situation faced by Freedman Financial of
Peabody, MA. They
had accumulated approximately 450 clients with
revenues approaching $1.3 million. They have been
consistently considered a "top producer" both by
their broker dealer (LPL) and the financial
services industry.
Yet,
when they participated in the FPA's annual
financial performance study, much to their
disbelief, they discovered that their profitability
per client
was just $41. "Prior to
the study we viewed our business as successful
because our clients were happy, our bills were all
being paid and we took home great salaries. But, from
a business perspective $41/client is dismal,"
complained Marc Freedman.
You
probably do not have to look at the FPA study to
know that a profitability of $41 / client is not
very good.
Here is a chart summarizing the profit per
client data from the 2004
study:
|
|
High Profit
Ensembles |
Other
Ensembles |
|
Operating Profit /
Client |
$1,573 |
$293
|
|
|
High Profit
Solos |
Other
Solos |
|
Operating Profit /
Client |
$649 |
$157
|
Source:
FPA 2004 Financial Performance Study (Conducted by
Moss Adams)
How
do you compare? Do you
even know what your profitability per client is?
Confront
the Brutal Facts
Chapter
4 of the best selling business book Good
To Great,
by Jim Collins, is entitled "Confront the Brutal
Facts".
Mr. Collins states, "When you start an
honest and diligent effort to determine the truth
of your situation, the right decision often
becomes self-evident." Now that
he knew the truth about his firms' profitability
metrics, Marc decided he wanted to improve and
move toward the high profit firms. But, how
exactly could they do that.
Most
financial advisors group their clients into "A",
"B", or "C's" usually based on revenues. Since very
few advisors do real cost accounting they rarely
know how much it actually costs to service each
individual client, so they can not determine
profitability per client. How do you
know if your "A's" are more profitable than your
"B's"?
Using
our Marketing
Tune-UpTM
tools, Freedman conducted a detailed marketing
analysis and we were able to pinpoint the root
cause of the low profitability per client. We
discovered they were spending 30% of their staff's
time servicing clients which account for only 1%
of annual revenue - 125 clients, almost 25% of
total client base.
Most
of these 125 clients started with the firm based
on the one time sale of a product and they no
longer reflect who their ideal client has
become.
However, they provided these 125 the exact
same service as their best clients - including
performing annual reviews, newsletters, client
appreciation events, plus the biggest cost,
providing many reactive services like helping with
car purchases, hunting down missing or lost
information or answering questions about 401K's,
refinancing a home, and tax issues.
Communicating
The Change
Getting
rid of your smaller clients is not and should not
be an easy decision and it was not an easy one for
Marc.
Ethically, is it right to fire a client who
depends upon you and helped you build your firm in
the first place? They
decided rather than fire these clients they would
give them the option of paying an annual retainer
fee or refer those who did not want that option to
another firm.
Marc
reluctantly sent a letter to all 125 clients
communicating the direction the firm would be
taking.
He felt to some degree the firm was turning
its back on these clients and it could potentially
damage their reputation in their small
community.
He was also afraid he would have to conduct
125 angry conversations. But he
knew it was best for the
firm.
The
Bottom Line
Eleven
clients agreed to pay the annual retainer, which
now generates more revenue than the total 125
previously generated as a group. There were
two who were angry and questioned the firms'
loyalty to them...a lot less then he had
feared.
Freedman
Financial referred away approximately 25% of their
client base and in the short term their profit per
client increased to $138. But, that
is just the beginning. By
limiting clients to those that are the most
profitable, the firm has more capacity to serve
new clients. They have
been acquiring new clients who already meet their
profitability per client target. Each new
client they add improves their overall
profitability per client.
One
intangible they didn't expect from this work is
that their staff is happier and enjoys work
more.
As it turns out, their staff found many of
the non-profitable clients to be very difficult to
work with.
The staff now has more free time to serve
the clients they like the
most.
You
can profit
from
Marc's experience by looking at each client as a
profit center and start measuring profitability
per client.
________________________________________________________________________
Kevin
Poland is the CEO of The Renaissance Group, a
management consulting firm that specializes
in
delivering E-Myth Mastery Business
Development. Kevin, is
an independent Certified E-Myth Consultant,
specializes in working with financial
advisors.
If you would like more information on our
Marketing Tune-UpTM
Program
you
can contact him at 813-636-9181 or by email at Kevin@RenaissanceConsultants.com.
