Segment your book for a stronger firm

Most new advisors are concerned with creating a viable practice and their primary focus is growing their number of clients so they accept clients indiscriminately. They cement this approach into their practices and it’s difficult to change. Yet as their firms mature, advisors should fully analyze their businesses to determine if they’re running as efficiently and profitably as possible.

Most advisors believe that the greater the percentage of wealthy households in a book, the better. That’s because while the smallest accounts make up 52% of the average advisor’s book, they only make up 9.3% of total revenue, a 2010 study by PriceMetrix finds. One of the biggest problems of small accounts is that an advisor spends a disproportional amount of time and money servicing them. Advisors who have not analyzed their practices may fall into this mess without realizing it.

High-producing advisors manage their books differently than average advisors, much like seasoned advisors manage their books differently than rookies. A typical breakdown for an advisor with under three years’ experience is 66% small, 31% medium, and 3% large households. For a seasoned advisor with 10 or more years of service, the composition is 51% small, 42% medium, and 7% large households. The key is to only keep clients who are part of larger, more profitable, relationships and farm out small or unprofitable accounts. Ending relationships with less-productive accounts will make room for more productive ones.

By segmenting your book you’ll identify which clients to focus on, which relationships to cultivate and which to let go.

Read: 2 strategies for being a competitive advisor

How to segment

Segmenting a client base will result in delivering services commensurate with a client’s value to the firm. It’s a challenging exercise for even the most sophisticated practices.

The first step is to decide:

• which services your practice will offer;
• how big your firm will be;
• what kinds of clients do you enjoy working with;
• how to strengthen your relationships with your best clients.

How you decide to divide your book really depends on what is important to you. There are different metrics and qualifications you can use to determine how your clients fit with your business. For profitability, you can examine your annual revenue per client. For growth opportunities, you can look at your client’s profession or potential. For satisfaction and time management, you can determine the clients you appreciate and separate them from the headaches who are more difficult to serve.

Once you have a thorough understanding of your book, you can then divide your clients into segments. Separate your clients into four groups. The top group is the “A” clients, the highest 20% who consistently generate 70% to 80% of total revenue. Deliver top-end service to these clients.

Your “B” clients are those who are not quite your best revenue generators, but they have potential and you enjoy working with them. Selectively add to this group both high-potential clients and clients who are a part of a particular profession or other niche on which you would like to focus.

The “C” group is the accounts that don’t generate much revenue. These households still get quality service but not as often as your best clients. This means you have more time to focus on your most profitable segments.

The fourth group, the “D” clients, consists of your worst clients. They don’t generate much in revenue relative to your other clients, or you don’t enjoy working with them. They’re time-consuming and require more effort than they’re worth. At minimum, the average mature book should stop working with clients who generate less than $1,000 in revenue, or those who take up a disproportionate amount of your time.

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Developing service models

Once you’ve segmented your book, you then need to develop a service model for each tier. You may decide to meet with your favourite clients four times a year, take them to dinner, mail them birthday cards and provide them with exceptional personalized service. For your “B” clients, perhaps you can meet with them twice a year and communicate with personal emails and phone calls. For your “C” clients and smaller accounts, meet with them once a year and communicate solely with generic emails and newsletters. Finally, begin to remove your “D” clients from your practice.

Regular review

Reviewing your segments periodically is a good way to ensure one group doesn’t contain a disproportionally large number of clients. If you’re losing money, time and other resources, you’ll better understand why.

Advisors need to manage their brands, processes, technology to enhance productivity and free up time to pursue growth opportunities. Segmenting the client book helps manage current clients effectively and allows advisors to focus on attracting the types of clients who are important to future growth.

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Christopher Ambridge, CFA is the President and Chief Investment Officer of Provisus Wealth Management. Chris has nearly 30 years of experience in the investment industry and works with independent financial advisors across the country.