Defining the right — and wrong — clients

Apr 24, 2014 @ 1:59 pm

There are quantitative and qualitative ways to define the “right” client for your firm. Every adviser should consider both when working with existing and new clients.

Quantitatively, advisers often focus on their firm's overall revenues and profitability. For those advisers who are truly approaching their businesses with a “CEO state of mind”, however, every individual client should be viewed as having its own, independent profit-and-loss statement to help evaluate the viability and potential of each relationship.

Having even just a handful of unprofitable, or barely profitable, client relationships can distort a firm's rate of growth and impede its ability to generate new business. If clients are a firm's lifeline, bad clients can be its downfall, eroding current levels of profitability in the short-term and handicapping its ability to add new streams of revenue over the long-term.

For established independent advisers, defining and finding the right clients will not simply be a forward-looking exercise. This white paper will provide benchmarks and processes for evaluating the quality of new and current client relationships. It is equally as important to address and correct problems within an existing client base as it is to avoid adding problematic relationships in the future. The same process and criterion for grading clients should be applied, universally, across all of a firm's relationships.

+ Zoom

Understanding and employing benchmarks

Using industry benchmarks, advisers should first measure the baseline “cost” of each client. On an individual level, the typical client at an independent practice carries an expense of $5,847 to support per year, according to the 2013 InvestmentNews/Moss Adams Staffing & Compensation Study. This expense includes the cost of all of a firm's professionals, employees, overhead and operations, divided across its entire client base.

Notably, looking at all participants in the study vs. the top-performing advisory firms in the group (Figure 2), there was little variance in the total expense per client.

The baseline client cost is well established and can be used as a benchmark for measuring the most important metric in determining, quantitatively speaking, if a client is “right” for the firm: Individual client profitability.

On the other side of the ledger, the typical independent advisor practice generated $7,404 in revenue per client in 2013, according to InvestmentNews Research. Given the expenses above, this translated into a median profit per client of $1,101 last year, or a profit margin of roughly 19% for all participants in the study.

Download the complete white paper, “Paths to profitability: Steps for defining and finding the right clients” now.

This margin should be considered the “equator” for any adviser who is assessing the quality and profitability of an individual relationship. For a firm to be successful and grow efficiently, it is not enough for a client relationship to simply be profitable. The relationship should be on par with, or better than, this 19% margin in order for an adviser's practice to be able to make continuous investments in its business, weather fluctuations in the markets that will impact asset levels, and maintain the long-term sustainability of a firm's enterprise value.

The clients of elite advisers

Using these benchmarks as “balance sheet beta,” advisers can define the framework of the ideal client relationship and then begin to identify true paths to superior profitability and outperformance.

The industry's top-performing firms have taken a strategic approach to finding and developing the right clients. With the costs of carrying clients being largely consistent across the business, top firms separate themselves by more consistently identifying higher quality individual relationships — and ultimately maximizing services and related revenues provided to each client.

The results produced by the industry's top-performing firms are impressive and underscore the power and importance of working with the right clients: The top advisory firms generate $10,352 per client in revenues, nearly 40% greater than all other firms. This allows top firms to have relationships that produce $3,867 in profit per client — or 3.5 times the profitability levels of the industry normal.

+ Zoom

This outperformance holds form across firms of all sizes in the industry (Figure 3).

This blog post is an excerpt from the white paper “Paths to profitability: Steps for defining and finding the right clients”


What do you think?

View comments

Recommended for you

Related stories

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Identifying unconventional risk and finding a secret weapon in client portfolios

Advisers are hungry to find new alternative investment opportunities. But Rupal Bhansali of Ariel Investments says the secret weapon could be right under your nose - in cash.

Latest news & opinion

Nontraded BDC sales in worst year since 2010

The illiquid product's three-year decline is partially due to new regulations and poor performance.

Tax reform debate sparks fresh interest in donor-advised funds

Schwab reports new accounts up 50% from last year, assets up 33%.

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print