How advisors can better understand their scale and capacity

In the past few years, there have been more discussions about understanding an advisor’s scale and capacity, and the conversation seems particularly relevant to advisors this time of year. During tax season, for example, advisors work long hours to accommodate their clients and are also busy at home with their families. And when summer arrives, an advisor’s vacation plans could threaten even the most efficient enterprise. So, how can advisors simplify their workload and gain more time back?

THE POWER OF SEGMENTING

Most advisors are familiar with the traditional way of segmenting their book: A+, A and B clients. These segmentations are universally known or used by advisors. They refer to your core clients — the ideal ones who fit into your business matrix and contribute heavily to your firm’s revenue and profitability. It doesn’t matter if you refer to them as platinum, gold or silver as long as you understand that they’re the lifeblood of your practice.

But the next step in this process is where it gets interesting. In addition to traditional segmenting, advisors also rank clients as C or D clients and often instruct an associate advisor to service those clients. From a quantitative standpoint, these C or D clients may contribute little to the firm’s revenue. And it’s important to question the wisdom of hiring staff to serve clients who may not be a good fit for the practice.

A DIFFERENT CATEGORIZATION

At Commonwealth, after establishing A+, A, and B clients, we suggest that advisors analyze the rest of their client base and attempt to segment it in terms of qualitative attributes.

Perhaps they are strategic clients, which means they could have great potential for the future, even if they don’t contribute much revenue now. Medical interns on rotation would be an example of strategic clients you may want to keep around.

Or they could be a legacy client, someone with a history or past relationship with your firm that would justify keeping them on. Legacy clients could be relatives who work with you or the widowed spouse of a dear friend. The clients that remain after this process are often tagged as nonideal, ones who may not contribute to the firm’s overall profitability and could be a drain on resources.

But how can you measure the impact of nonideal clients on your practice and staff?

Take advantage of tools. At Commonwealth, we always strive to better understand our advisors’ scale and capacity and to find ways to benchmark their service models. We use diagnostic tools to help advisors assess the efficiency of their service model and client base, and employ interactive exercises to help them grasp the trade-offs of certain choices. Our team spends valuable time ensuring that advisors have aligned their service models with their support staff so that high-priority clients get the attention they deserve.

Maximize your time. Our 2021 data shows that approximately 75% of advisor revenue came from clients in the top three deciles. Knowing how vital these clients are, our advisors often develop a service matrix that allows extra time and energy with this specific group. This way, advisors can surprise and delight their high-performing clients by attending their charitable fundraisers and important social events or by holding specialized client meetings. For strategic and legacy clients, the key is to deliver a great client experience but with more scalable approaches by leveraging outsourcing providers, digital tools and more selective touchpoints.

MAKING ROOM FOR GROWTH

In my experience, advisors excel at letting their most essential clients know they matter. But it’s at the opposite end of the spectrum where many advisors fall short. They struggle to prune nonideal clients and part ways, even when they know it’s the right decision. And looking at our 2021-2022 data gleaned from advisors who worked with our practice management team on scale and capacity, we found that the bottom 50% of clients generated only 9% of revenue.

Think about the time, energy and additional work this type of client group requires, then decide if there are changes you can make in your own practice. Pruning nonideal clients often leads advisors to breakthroughs in growth because they have more time to focus on other activities. So, before you hire additional staff or undertake an expansion plan, determine where you can free up time and better leverage your resources to make room for what truly matters.

Kristine McManus serves as chief advisor growth officer at Commonwealth Financial Network.