High-value clients and the asymmetrical nature of advisor math

Clock signaling value of an advisor's time

The Problem

It shouldn’t come as surprise that nearly every advisor we speak to wants more high-value clients. And if you’re an advisor, you’ve probably sat through at least a dozen conference breakout sessions that promise to tell you the secret to adding these high-value investors to your book. You’ll notice that we see a distinction between high-net-worth and high-value clients. High-net-worth doesn’t help if the client doesn’t provide significant revenue. High-value clients are your top revenue generators. To get more high-value clients, you need your existing high-value clients to advocate on your behalf, in the form of referrals. This requires high client satisfaction and deep relationships at the top of your book of business. For the purpose of brevity, let’s say that we all recognize how much time and effort it takes to build those referral-worthy relationships with your existing high-value clients. To have the time to do so, you’ll need capacity, which brings us to our key focus: the equation.

The Equation

If you were the CEO of a company, your primary focus would be on two things: revenue and cost. Because it doesn’t matter how much revenue you generate if your cost structure is out of whack. With advisor practices, most advisors only focus on revenue and ignore cost, because the biggest cost is not hard dollars, but time. And many advisors don’t know what their time is worth. Let’s say your practice brings in revenue of $800,000 a year. And let’s say you take two weeks off and work 40 hours a week, or 2,000 hours a year. $800k divided by 2000 gives you an hourly rate of $400 an hour. That’s the hourly cost of your time. If your practice brings in $500k, your rate is $250 an hour. If it brings in a million, your rate is $500 an hour. Now think about how you spend that valuable time on your clients. If, like us, you believe that advisor practices tend to follow the Pareto principle, also known as the very asymmetrical 80/20 rule, then you believe that 80% of your revenue comes from 20% of your book of business. This is shocking to no advisor anywhere. Here’s what is shocking: Our experience leads us to also believe that, in many cases, the bottom 50% of an advisor’s book of clients only delivers 5% of the total revenue. Half of the work delivers 5% of the value. In other words, your top 20% may drive 16 times more revenue than your bottom 50%. If this is true for you, when you’re spending time servicing the bottom half of your book, what’s the return on your $400-an-hour investment?

The Solution

To create capacity for the top of your book—the portion you want to advocate for you—you need to spend less time on the bottom of your book. We recommend three options:
  1. Decrease resources. Move your lower-level clients into a one-to-many service model, where they are getting proactive, scheduled advice and solid investment solutions, but with less demands on your time.
  2. Increase revenue. Create a segmented approach, where the level of service is determined by the revenue generated by the client. Treat your clients fairly, but not equally. Be transparent and set clear guidelines on what service clients should expect from you at their current level. If they trust you with a greater amount of AUM, then the service level can reasonably increase. But resist the urge to over-invest in your bottom-tier clients. Instead, reserve the additional time and energy for those clients who are generating sufficient revenue to justify high-touch service.
  3. Disengage. For some demanding clients who generate unrewarding amounts of revenue, the appropriate option may be to tell them they’d be better served elsewhere. If you can’t afford to provide a fiduciary level of service to them, you may have a responsibility to turn them away.

The Transition

This is the simplest, hardest principle of them all: To succeed at gaining high-value clients requires hard work and a disciplined process. You need to clean up your book of business to create capacity for the high-value clients. In a recent blog post, we listed the four fatal assumptions we’ve seen advisors make that prevent them from implementing these transitions. Advisors assume that transition is easy, that their practice is different and these tenets don’t apply to them. We believe they do apply. We believe these tenets are tyrannical in their unavoidability. And yes, transition is hard, but it’s easier when you ask for help. So ask. If you’re committed to the concept and want to start or accelerate the process, we are ready to assist. Let’s talk about how we can help you transform your practice. Contact your Russell Investments representative or drop us a line in the comment box below. We’ve been working on these advisor transitions for decades and can walk you through them, one step at a time.
Disclosures: These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. This material is not an offer, solicitation or recommendation to purchase any security. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management. Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand. The Russell logo is a trademark and service mark of Russell Investments. Copyright © Russell Investments Group, LLC 2018. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments. RIFIS: 19809