The first year of an advisors' relationship with a client is the easy part.

It's the second, third and fourth years that are much more critical to achieve long-term retention, a new study finds. Other tips from the report: Advisors should also try to work with larger (and older) clients, price their fees wisely; seek out hybrid accounts and try to have more than one account in a household.

During the first year of a new relationship, advisors enjoy a "honeymoon" period during which they retain 95% of their clients, according to the report from PriceMetrix -- a Toronto-based practice management software and data services company. But between years two and four, retention declines dramatically, from 95% to just 74%.

“In working to retain clients, advisors should keep these different stages of a client relationship in mind,” PriceMetrix CEO Doug Trott said in a release accompanying the report, titled Stay or Stray -- Putting Some Numbers Behind Client Retention. Advisors, he added, "should redouble their efforts to demonstrate their value to clients during the critical second through fourth years of their relationships.''

Some advisors, of course, do a better job of retaining clients than others. The most successful 10% percent of advisors retain at least 98% of their clients in any given year, according to the study, while the least successful 10% retain only 84% of their clients.

Successful retention, according to the report, is the result of the following five factors.


Advisors with larger client households do significantly better than those managing households with $250,000 or less in assets, according to PriceMetrix. What's more, the study found that the more smaller clients an advisor has, the lower their retention rate.

The average household with $100,000 in assets has a retention probability of 87%, while a household with $500,000 in assets has a retention probability of 94%.

The probability of retention does not increase significantly as assets grow beyond $250,000, however. A household with $1 million in assets has only a slightly greater retention probability.


Advisors whose fees are either relatively low or relatively high are less likely to keep clients, the PriceMetrix database analysis revealed. The optimal price range lies between 1% and 1.5% of revenue on assets, the study suggested.

"These results suggest that advisors who price their services too low may be undercutting the perception of their value among their clients,'' Trott said, ''while those who price too high may be creating insurmountable service expectations.''


Fee-based accounts are only very slightly more likely to stay than transactional (commission-based) accounts, with a 91% retention rate versus 89%. But hybrid households, which have both fee-based and transactional accounts, are significantly more likely to stay, according to PriceMetrix. Hybrid clients have a 95% retention probability.

''What this indicates is that the industry-wide move toward fee and managed business should be reassessed,'' Trott said. ''From the standpoint of client retention, a strategy of moving to a hybrid model, encompassing both fee-based and transactional business, may be better for advisors than one type of account over the other.''


Clients with deeper relationships with their advisors are more likely to be retained.  Indeed, advisors who manage multiple accounts -- including multiple retirement accounts -- within a household are much more likely to maintain the relationship, the report states.

For example, the retention probability for clients with one retirement account or none at all is virtually the same (85% versus 86%), but the probability jumps to 94% when the advisor manages two or more retirement accounts.

"When advisors surmise that they have only a share of a client's investable assets," the report counsels, "they should endeavor to increase their share, since doing so improves the prospect of retaining that client."


Older clients are far more likely to stay with their advisors than younger ones, the report states. A 30-year-old client has a retention probability of 82%, for instance, while a 40-year-old has an 87% probability and a 50-year-old has a 90% retention probability.

''These data points should give pause to those advisors who might expect or hope that pursuing younger clients will produce long-term client relationships'' Trott observed. ''While younger clients may have longer time horizons with respect to their financial plans, the data do not support the claim that they intend to spend many years with one advisor.''


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