WealthManagement Magazine

The 4-60 Rule

You've heard of the 80-20 rule - 80% of your business comes from 20% of your clients. Consultants Rod Hagenbuch and Rich Capalbo say there's also the "4-60 rule." That is, 4% of your revenue comes from the bottom 60% of your book. Ignoring this rule can be a killer.When Merrill Lynch shuffled its management structure a few years back, Rod Hagenbuch and Rich Capalbo were scooted out the door.But things

You've heard of the 80-20 rule - 80% of your business comes from 20% of your clients. Consultants Rod Hagenbuch and Rich Capalbo say there's also the "4-60 rule." That is, 4% of your revenue comes from the bottom 60% of your book. Ignoring this rule can be a killer.

When Merrill Lynch shuffled its management structure a few years back, Rod Hagenbuch and Rich Capalbo were scooted out the door.

But things turned out well for the former Los Angeles branch managers. They formed their own training firm, Quantum Leap Institute, which is now training reps at a number of financial services firms, including Wells Fargo. They don't work with individual brokers.

Their work is an outgrowth of the years they spent developing and implementing training programs for Merrill reps. The first step of their program - then and now - is having brokers analyze which accounts generate business. One truth is apparent: Every broker has too many accounts. Most of these accounts produce little business but take time to service nevertheless.

Hagenbuch and Capalbo plead guilty to the past offense of encouraging brokers to open lots of accounts. They now say new-account contests and other mass account-opening activities are "behavioral addictions." The cure is paring the book and finding new ways to prospect.

RR: You became aware of the 4-60 rule while you were managers at Merrill Lynch.

Capalbo: One thing Merrill Lynch does perfectly is report where the business comes from. You see where every dollar comes from.

Hagenbuch: We had data for 700 reps over six years - every broker in the district.

RR: I've looked at some of the data and it's eerie. The 4-60 rule seems to apply every time - especially for million-dollar producers.

Capalbo: At other brokerage firms we now work with it's exactly the same. Until you reach a million in production, it's maybe the 5-60 or 6-60 rule. But no one does 20% of their revenue with the bottom 60% of the book.

We have data from a mutual fund client that shows the same thing. Four percent of their wholesalers' business comes from 60% of their broker/customers. Why? Their sales managers tell them to visit as many offices as possible. They buy bagels and get in so they can fill out the sales report. But what they need to do is visit a few key offices, then see the broker in the corner office, not the entire office.

RR: Merrill shows the top accounts - those that produce $5,000 or more in production credits. It looks like a 60-8 rule is at work at the top end. These accounts are about 8% of the book but consistently produce 60% of a rep's revenue.

Hagenbuch: We've seen anywhere from 70% to 85% of revenue coming from 15% to 20% of the book. We don't emphasize that 8% of the accounts do 60% of the revenue because brokers tend to focus on losing 40% of their revenue. So we focus on the 15% to 20% that produces 80% of the business.

RR: It seems obvious that brokers should pare the bottom 60%. Do these accounts really take much time to service?

Capalbo: Some years ago, we started a poll of sales assistants in two or three offices of the district. The SAs said 50% to 70% of their time was spent with this [bottom] group.

Hagenbuch: I just spoke with a broker at Wells Fargo who was tracking his time. Seventy percent of his time is spent with accounts of $50,000 [in assets] or less.

RR: Is this really true - a typical broker could retain 60% of his income while freeing up more than 90% of his time?

Hagenbuch: Yes, in theory. But our message is that 60% to 70% of reps' time is spent on unproductive business. If we can move productive time from 30% of the day up to 40%, productivity goes up 33%. It's not the drastic changes that are successful. It's the small, doable changes that make the difference.

RR: Both of you say cold calling and opening lots of accounts is a waste of time.

Capalbo: At Merrill, we found that the 20% of the book that does 80% of the business all came from referrals. The bottom group came from cold calls. Out of hundreds of brokers, we only found a few top clients that came from cold calls.

RR: So why is the emphasis placed on cold calling?

Hagenbuch: Historically, people think opening accounts is great.

Capalbo: The guys running the businesses today grew up at a time when cold calling is what you did. But there's been a paradigm shift. MCI is calling everyone, too. And now everyone has money in the market. It used to be if you got a client on a cold call, it was probably a good account.

The problem is that brokers are measured by new accounts and assets. So you have to play that game to keep your job. But when you get to some point, stop it.

RR: Pretend I'm a broker and give me a game plan.

Capalbo: The first thing we do is show reps their data. Brokers should give their sales assistants a list of the 20% of accounts that give 80% of the business so they can jump on those accounts when they call. Wealthy clients don't always demand something right away, so they can get lost.

Hagenbuch: Without that kind of process, both brokers and support people will respond to immediate needs - you know, the guy who calls in screaming about a lost $5 dividend.

Capalbo: Then you need to change your behavior. Why do you do what you do? What behaviors are killing you? What are two or three things you can do differently? Write them on a Post-It note - nothing longer. We ask brokers for three behavioral adjustments.

RR: And eliminating unproductive accounts is an important step?

Capalbo: Attendees at our seminars get rid of 100 accounts the day they leave. We give them a script that basically goes: "I'm not real happy with the job I've done for you. I think we should buy a mutual fund and look at it once a year. That's how you make money. If that's not acceptable, then you probably need to get somebody else."

RR: If you don't cold call, how do you build a clientele?

Hagenbuch: As Rich said, we first have reps analyze their books. Then they evaluate their unique values. Next, we get into what we call "smart marketing." Asking for referrals doesn't work.

But if reps ask their top clients for advice about rebuilding business around more people like them, the clients offer it. Reps ask them: "How would you identify the people I should be talking to? What is the most appropriate way to contact these people?" We've seen many reps gain introductions to niche groups this way.

RR: Thanks to you both.

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