Mother-daughter firm finds its sweet spot

NEW YORK — Cynthia Keithley, principal of Keithley Investment Group LLC, goes to almost any length to serve her small-fry clients. But as a financial advisory business grows, the ability to say “no” can be the difference between profitability and stagnation, according to consultants at Curian Capital LLC, a Denver-based provider of separately managed accounts, which also performs practice management analysis for client firms such as hers. Curian last month released its Advisor Practice Management Survey, which found that three-quarters of 880 advisory firms surveyed hadn’t analyzed their net margins or identified ways to improve financial results. Most financial advisers haven’t established criteria to determine which clients are profitable, the survey concluded.
Hit or miss “Every fall, we would revise our strategic plan, but growth was hit or miss, based more on intuition and gut feelings than on the plan,” said Karen Keithley, the director of marketing at the Council Bluffs, Iowa, firm and Cynthia’s daughter. One of the problems was the firm’s inability to identify and deal with clients who were unprofitable, she noted. There was no systematic “culling” of unprofitable clients, but some would leave through “attrition” or “benign neglect,” said Cynthia Keithley, whose firm manages $77 million in assets. “Mutual fund clients can’t be fired, so they in effect become house accounts of the fund,” she added. “In the Keithleys’ case, we identified $14 million in assets that were unprofitable,” said Dan Maurer, senior vice president of marketing for Curian. “If a client takes seven hours of an adviser’s time a year — which let’s say is worth $175 an hour — that’s about $1,200.” If the client doesn’t have enough assets to produce a recurring revenue stream of $1,200 or more, such as from having a certain size mutual fund account generating a certain amount of fees, the client probably is unprofitable, Mr. Maurer added. “Higher-end clients shouldn’t subsidize the bottom,” said Rodger Hoofnagle, Curian assistant vice president of product development. Advisers shouldn’t add clients just for the sake of having more, he said. “The focus should be on net numbers after expenses — not gross numbers,” Mr. Maurer said. But unprofitable clients often can be made profitable by reducing costs and moving them to products or onto autopilot platforms that are better for them and the adviser, he added. “The Curian analysis indicated that our sweet spot is clients with between $80,000 and $325,000 in assets,” Cynthia Keithley said. Clients below and above the sweet spot might not generate enough fees in relation to the hours invested in them. But asset level alone doesn’t tell the whole story. Clients with more than $325,000 can be profitable, especially if they are in the accumulation stage and don’t require a lot of hours, Cynthia Keithley said. Advisers can have “outlier” clients well above the sweet spot if they, for instance, “have all equity positions that never trade,” Mr. Hoofnagle said. “But that doesn’t work if they were sold a variable annuity with all upfront compensation and no trails,” he said. “In four to five years, the front end has been spent, and the adviser is servicing the client for free.” “It depends on what the larger clients need,” Cynthia Keithley said. “For high-net-worth clients who require a great deal of trust work and estate planning, we refer them to attorneys and other professionals who prepare the documents.” In addition, smaller clients with whom Cynthia Keithley or her daughter has a personal relationship often are retained. Six months have passed since the Keithley firm implemented the Curian recommendations, and profits are up about 10% compared with the level a year ago. But the Keithleys are unsure how much of that is attributable to Curian’s advice. “Moss Adams [LLP in Seattle] and Tiburon [(Calif.) Strategic Advisors LLC] offer similar services that cost $10,000 or more,” Cynthia Keithley said.