Sustainability Pillar #1: Manageable number of client households

In order for advisors to meet the fiduciary standard under the new Department of Labor rule, the level of oversight required for client relationships will likely increase on the whole – thereby impacting the total number of serviceable households.

The key question: How many households can you effectively serve?

The serviceable number of households is different for all advisors. It is often complex and depends on several factors such as: client AUM and revenue, operational efficiency, technology integration, service matrix. At Russell Investments we have developed a straightforward method that can help you understand the dynamics of successfully managing the number of households in your book. Furthermore, we believe that today, more than ever, advisors must take a realistic inventory of client relationships and adjust accordingly, especially when you consider that each client household in your book:

• requires a minimum level of time and resources from the advisory firm to fulfill the obligation of advice. The final DOL rule will increase the requirements and corresponding resources necessary to fulfill that responsibility, but the time and resources come at a cost. Are all of your clients generating sufficient annual revenue to cover their “cost” to your business?
• represents an equal unit of enterprise risk. That unit of risk is demonstrated by the client’s ability to bring a lawsuit. This risk has always been apparent; however, the final DOL rule likely increases the liability of maintaining IRA client relationships because of the higher fiduciary standard and the oversight surrounding the new rule. Whether the (IRA) account is big or small, belongs to your top or bottom client – from a regulatory standpoint, every account is “fair game” for scrutiny.

The value of your time Understanding how to successfully service the number of households in your book begins with understanding the value of your time. This is a simple economic formula designed to provide a foundation for determining manageability of a client household:

> Take your annual gross revenue ($800k in this example) and divide it by 2000 hours (approximate total number of work hours per year).

> The result gives you the value of an hour of your and your team’s time – much like an hourly rate a lawyer or a CPA would charge.

> Now that you have an idea of the value of your time, you have more clarity in terms of which households remain valuable to your practice.

Auditing season

By establishing your organization’s value of an hour, you have a metric to quantify the “expense” associated with client management. This “expense” can be measured against the “revenue” to determine profitability at a household level. The path toward sustainability rests on reviewing the profit feasibility and then factoring in the liability associated with maintaining each client relationship. Advisors will be pressed to make sound business decisions to determine the appropriate number of manageable households viewed through both the profitability and liability lens. In addition, finding scale and efficiency become even more of a priority to potentially accommodate a larger number of manageable households.

What’s next

Be sure to check back over the next week as we discuss the next pillar of a sustainable advisory business:

1. Manageable number of client households
2. Product inventory control
3. Documentation of key processes
4. Optimized client experience and portfolios