Financial adviser Jim Harris, president and founder of Financial Practice Management, doubles as a coach helping financial planners increase their productivity by arranging better time management, setting up marketing and branding campaigns, and designing fee structures for a profitable advisory business.
InvestmentNews: Advisers increasingly hear that they should segment their clients based on asset size. Why?
Mr. Harris: Asset size or net worth can help them understand the profitability of their clients. I usually get advisers to take a look a couple times a year at how they have their clients segmented, looking at assets under management, the number of accounts that the particular household has with you, reoccurring revenue per household and then their revenue growth potential. I recommend looking at all four of these areas and scoring them out so you have a good feel for them. Then use your best judgment to try and segment them into some sort of service tiers.
InvestmentNews: Is the goal also to weed out those clients who are taking too much time to serve?
Mr. Harris: I don't like the wording “weeding out.” What I recommend to folks is more of a service tier. So, depending on the size of the book of business and the amount of households they are trying to service, the adviser may offer different service levels. Somebody who is a top-tier or ideal client will vary depending on the size of the practice.
Let's say there's somebody that you're earning more than $5,000 a year from — that may be a platinum client. You have to figure out what your time is worth for this platinum client and back into the amount of face-to-face time spent, how many phone calls you should be making to platinum clients and so on. Then you do the same with clients that you may only be earning $1,000 a year off of and figure out the number of meetings, etc. Look at the revenue clients are generating, along with their potential, and then set a service level. I try to get most reps to have at least three different service levels, and with a larger book, maybe up to five.
InvestmentNews: Can advisers make exceptions to the service levels for certain clients or does this become a slippery slope?
Mr. Harris: I am an advocate for exceptions in certain circumstances, such as if you are one of my ideal clients and you refer to me maybe your best friend or tennis partner. They may not be the client you want, but you may want additional referrals from the platinum client or you may want to strengthen the bond with the platinum client. Also, if that person is running around in the same circle as you, it's highly likely that person may have a friend that would fit my ideal client. But it is a little bit of a slippery slope, because if we make too many of those exceptions, you run the risk of not being prioritized in your allocation of time, energy and effort.
InvestmentNews: How should advisers explain these fees to clients, and what should they expect in reaction?
Mr. Harris: Be straightforward. Let clients know what their time is worth. One of the biggest things I find — especially with new advisers or advisers trying to transition away from the commission side of the business over to the fee-based side of the business — is that they are shy or do not have the conviction of their own self-worth. Figure out what your time is worth, be straightforward with the client and let them understand what you are going to be providing. I recommend advisers list out all the services that they provide, put together what those services are worth on an a-la-carte basis, and then, when you are figuring out what your service models are, you also are including those.
So a platinum service level may include five face-to-face meetings a year, three conference calls, certain reports that are in greater detail than you would do for a bronze client, and then whatever value-added services. Those are the type of things that if you can articulate the value of the services you're going to provide. And if you feel conviction about that, it shouldn't be a problem saying, “Hey, I'm going to be worth 1%,” or whatever it happens to be for that client.
InvestmentNews: If the goal is to base fees on the amount of firm time demanded, why not charge for individual services or even by the hour?
Mr. Harris: I work with some advisers that do that. A lot of advisers are going to a retainer-based service, where they say they will provide all these particular services, and this is what it will cost for the year. However, with most advisers in the middle of the road in terms of the annual revenues they are able to generate, it's very difficult in the first five to seven years to go to that type of model where every client is only paying for their time. In a transitional period, what some of the advisers will do is charge on assets under management as one revenue source and then put a fee-based charge on a-la-carte services they are providing, such as a full-blown estate plan or a full-blown research plan for a client who may have a special-needs child. Then they can charge for those particular services without giving up the [assets under management] fees at the same time.