Updated Monday, March 17, 2014 as of 1:08 PM ET
Tuesday, August 13, 2013

What would you do if you realized the bottom 50% of your client base contributed less than 15% to your overall revenue, but was using over 80% of your time?

For most advisors, analyzing the profitability of their business is something they’ve been intending to do: “I know I should do that – but I just haven’t had the time.” Yet when they finally do, many advisors have been surprised, almost shocked, to learn how unprofitable the bottom 50%, 60% or even 70% of their client base actually is.

REVENUE

The first step in analyzing a practice’s profitability is knowing how much revenue is coming in and where it’s coming from. Start by running a list of client households and the revenue each has generated over the past 12 months. If this information isn’t easily available in a report from your clearing firm or broker-dealer, you may need to run the list by client and then group the clients by household using the last name and/or address. Put the information into a spreadsheet. Combine revenue for each client in the household into one amount for the entire household.

Next, sort the households by revenue, greatest to least. Segment the list into 10 parts and calculate the revenue per decile. What percentage of your revenue is coming from the top 20%? According to the Pareto rule, those top two groups will contribute about 80% of your total revenue.

EXPENSES

The second layer a firm’s profitability analysis is expenses. What does it cost you to do business, and what are the costs associated with serving specific clients? Expenses usually fall into three categories: Fixed expenses, variable expenses and time costs. Fixed expenses fund the existence of your business, including office space, equipment and utilities; variable expenses for certain segments of your client base – for example,  special or additional services for top clients or niche clients

Time costs – the value of your time and your staff’s time – can be the most difficult to measure. You have time spent on running the business itself and then time spent serving clients collectively and clients individually. If 80%  of your revenue comes from the top 20% of your client households, do those households get 80% of your practice’s total time spent serving clients?

COST OF CLIENTS

Compiling a spreadsheet to calculate the cost of clients requires a little more effort than the revenue analysis. You may need to review the past quarter or two quarters with your staff to arrive at an hours-spent figure for each client or household.

Another approach is to implement a client time-tracking sheet and ask staff to log time spent with clients on account maintenance, annual or semi-annual reviews, performance reporting and trouble shooting. You may want to track your time separately from staff time, as your “hourly rate” should be significantly higher. Assign hourly values for staff time and advisor time, and calculate the total time cost per client or household.

By subtracting the time cost of the client from the revenue cost for the same period, you can arrive at a simple profit/loss for each client. Sort your list again by the P&L column, and compare to your initial revenue analysis. Did some households drop from the top 20% and others rise up? What percentage of households landed in the red zone – those who are actually costing you to serve?

PRIORITIZE

Now comes the more difficult (but incredibly valuable) part – deciding what to do with your analysis. Your first priority should be ensuring that clients in the top 20% of profitable households never have a reason to go elsewhere. Meet with your staff so they understand who these clients are and determine how they will be treated differently from other clients. That’s not to say that your other clients should receive poor service; it’s a matter of prioritization. For example, if your service standard for all clients is to return calls and emails within 24 hours, your top 20% of clients may get calls and emails returned within two hours.

Of course, further segmenting your client base, establishing service levels for each segment and adjusting client expectations may require additional considerations beyond the simple P&L.

Chris Kirby, Senior Business Consultant, Securities America Financial Corporation. Chris is a business consultant for Securities America's Practice Management Group and serves as a consultant/coach for the firm’s Business Consulting Service, helping advisors manage a more efficient, profitable and satisfying practice.

This is an issue that most advisors would be well-served to consider. It is also germane to the decisions about which clients one wants to bring with him/her when they are going to change firms. While some well-meaning and good-hearted advisors are loathe to turn anyone away, paring one's book to include only those clients where time is well-spent is beneficial for both the advisor and the advisor's clients who follow the advice given and provide referrals. Finally, it can actually make a book more valuable when it comes time to sell, as no one wants to buy a bunch of unprofitable, time-wasting accounts.
Posted by Ron E | Tuesday, August 13 2013 at 4:24PM ET
How true, how true how true!

For some reason advisors and business owners alike disregard and have no idea how much it costs to acquire or keep clients. And as mentioned, they treat all clients the same.

That is until they get to a point where they are frustrated and overwhelmed because they don't have time to prospect -- let alone take care of their current clients properly -- because they're wearing too many hats and/or they're "spaghetti marketing".

It all goes back to the basics. Who or what is your niche? Who is your ideal client? How are you segmenting your clients and the time you (or your staff) spends with each client?

Why have "D" clients; unless they're immediate family members of your AAA clients. Why spend the same amount of time with B clients as you do with AAA clients?

The bottom line is that when a business owner weeds out their D clients, they have more time to prospect with potential AAA clients. But first the advisor needs to stop "practicing" being in business and rebuild the core foundation of their business from the bottom up taking into consideration the most important question... "what does success mean to them"... vs. what they think they should be building.

Posted by Maria M | Thursday, August 15 2013 at 5:18AM ET
Very simply, while doing the segmentation note which clients are 401k participants. Why? Well, it's typically an area where FA's "GIVE" away 401k advice to clients. If it's your advice, why give it away? It can be a great revenue producer and might move some of the bottom 20% up a level. Efficiently provide those 401k clients advice (on more than an annual) basis requires automation. Take a look at www.ez-adviser.com.
Posted by Bob L | Tuesday, August 27 2013 at 3:32PM ET
The key to reducing your own business costs is to take the time out to have a look at how you are performing. Is your cost on clients exceeding? Look at every part of your job. Sometimes people think their costs are very low; and after taking a proper look at how they work, they find they could reduce them considerably.
Posted by KIMMY B | Wednesday, October 02 2013 at 12:58PM ET
You need to know how profitable your clients are for two reasons:

Assuming you are a softy and cannot bear turning anybody away, in the long run, you will be doing a disservice to your clients since you are so bogged down by sheer quantity that you cannot deliver quality.

Secondly ultimately the objective of every business is profitability and if you do not keep an eye on the bottom line, you will be doing a disservice to all stakeholders.

Posted by tasha123 s | Saturday, October 12 2013 at 12:35PM ET
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