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5 Measures of Client Loyalty

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Wouldn't it be cool if a financial advisor could create a client loyalty quotient — a measurement whereby the advisor can tell where to focus efforts and which clients get priority treatment? After all, clients who feel unappreciated for their loyalty are more likely to shop around for a new advisor.

Advisors typically segment clients by annual revenue or total assets under management and then pay the most attention to those who invest the biggest sums. But there's more to gauging loyalty than revenue and AUM.

Unfortunately, there is no single number that enables us to rank clients definitively on loyalty. The trait is a spectrum and the measurements are subjective.

But here are five questions advisors should ask themselves when trying to assess client loyalty and segment clients accordingly. Clients will have different degrees of loyalty in each of these five areas. But the exercise is valuable.

1. How long has the client been with the advisor? Give points to clients who have stuck with you through up and down market cycles, even if they haven't invested much — if any — in the way of additional assets year to year. These loyal clients have become the backbone of your business. Chances are you have figured out how to communicate and work with them in a way that works for you both.

2. How much of the client's assets does the advisor manage or instruct? Give additional points to clients who let you instruct them on their 401(k), even though you are not compensated. The fact that a client trusts you to advise on these assets is a sign of a strong business relationship. It adds to the stickiness of the interconnection and makes it less likely that the client will leave you.

3. Does the client follow the advisor's recommendations? Certainly, credit goes to clients who take your recommendations. That is a good return on the time that you have invested in counseling your clients, and it is a sign that they value your expertise. But some clients are always shopping for information and second opinions, hopping from one advisor to another. They will leave you exhausted and frustrated that you didn't spend your energy on a more loyal client.

4. Does the client refer the advisor to other prospective clients? There is every reason to express appreciation for clients who send referrals your way. This is truly a lucrative measure of loyalty in that 41% of new clients come via referrals from family and friends, according to Cerulli. In fact, personal referrals are the prime way that advisors gain new business, well ahead of professional referrals — from accountants, lawyers and such — which account for 15%.

5. Has the client introduced you to family members? Award extra credit to clients who have helped you gain the next generation of clients, particularly their millennial children or grandchildren. Researchers have estimated that more than $41 trillion in wealth will pass from one generation to the next in the next 50 years — the greatest transfer of wealth in U.S. history. One report in recent years claimed that just 2% of children keep their inheritances with their parents' advisor. That's hard to believe, but if it's true, it's because children often don't know the advisor beforehand.

Wayne Badorf, CFP, CFS, is head of intermediary sales for Wells Fargo Asset Management and president of Wells Fargo Funds Distributor.

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