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.

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.

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

Jul 10


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Surprises when reporting on Morningstar

Assistant managing editor Susan Kelly speaks with senior columnist John Waggoner about the interesting discoveries he found in speaking with the analytics giant.

Latest news & opinion

Focus Financial IPO could be a sell signal for RIAs

The $100 million stock offering will fine-tune RIA valuations.

Ex-Edward Jones broker sues former firm, alleging racial bias

Complaint alleges the firm's policies limit African-Americans' 'income and advancement opportunities'

Piwowar defends SEC's best-interest rule

SEC commissioner says the Department of Labor rule set up an 'unworkable, impossible set of standards for people to comply with.'

RIA in a Box acquired by private equity firm Aquiline Capital

New owners plan more growth for the software service provider.

IBDs with the most female reps

Here are the 10 independent-broker dealers that have the most female reps.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print