When advisors Matt Taddei and Kirk Ludwig moved their registered investment advisory over to Schwab in 2007, they had 60 clients and $36 million in assets. But by the second half of 2011, the firm had grown to 200 clients and $123 million, without adding any new bodies. The 10-person staff was burnt out.
“We were growing rapidly and our staff was overwhelmed,” said Taddei, founder and director of risk management at San Rafael, Calif.-based Taddei, Ludwig & Associates.
At that time, 60 percent of their clients were bringing in 29 percent of the firm’s revenue. Ludwig was handling both the firm’s wealthiest clients as well as many smaller clients, which were taking his time away from their most profitable clients. The partners knew they had to make a change—specifically by segmenting their clients.
“The next $123 million we bring in, it can’t look the way our current situation was because frankly none of us would have any personal time,” Taddei said.
Many believe client segmentation is all about firing small clients. But that’s not how Taddei and Ludwig did it. They hired a younger advisor to serve the firm’s smaller clients, implemented a new fee schedule for incoming clients, and created a formalized process for their service offering to different tiers of clients.
“It wasn’t that we were taking away what we offering to our tier three and tier four clients; we were just adding more to what we were offering to tier one and tier two clients,” Taddei said. “The most experienced, most educated advisor in our firm is working with tier one and tier two clients because they’re the ones with the most challenging, most sophisticated needs.”
The firm went through Schwab’s “Managing Client Profitability” program, a consultative program that helps advisors align their resources—people, expenses and time—to the right clients. Advisors don’t necessarily have to give up smaller clients when they’re segmenting them, said Scott Slater, managing director of business consulting for Schwab Advisor Services. They should, instead, focus on what they can manipulate: who is assigned to the client, the scope of the offer, and how it is priced.
“Keep the clients, but make sure you’ve created a more scalable and more appropriate service model in order to serve the clients,” Slater said.
The first thing Taddei and his firm did was to hire a less experienced advisor, Paul Kingsman, in 2012. Kingsman advises many of the firm’s smaller clients, taking much of the workload off of Ludwig. They are also creating a career path so that he can eventually serve larger clients.
“I’ve worked with a client in the Midwest for instance,” Slater said. “They’ve got advisors who’ve got an incredible number of credentials; they’re CFPs, CFAs, CPAs, tax specialists, and they’re working with clients that just don’t need the level of skill that they have. The better way to do that is to find someone who’s coming up through industry, who’s younger, who understands it, who isn’t expensive, but who has the time to devote to it and systematizing how that’s done so that those smaller clients are actually getting a better and more consistent client experience.”
Taddei and Ludwig segmented their clients into four tiers—each with their own defined service model. For first-tier clients, for example, they meet with them four times a year, face-to-face. They meet with three- and four-tier clients once or twice a year in person, plus once or twice by phone. For higher end clients, they create very tailored portfolios, whereas with smaller clients, the portfolios are more generic.
The partners also knew they needed to change their pricing to be competitive on employee salaries and benefits and technology.
“Whenever we looked at the benchmarking, we said, ‘Our retention is in the top 20 percentile, our growth is in the top 20 percentile, and our pricing is in the bottom 20 percentile,'” Taddei said. “'Does that seem right?'”
Many advisors find it hard to talk to clients about raising fees, but Taddei didn’t have to. They implemented a new fee schedule for any new clients coming in the door. Also, rather than putting asset minimums in place, they put a minimum fee in place for new clients.
Now that the program is in place, Taddei says the firm's referrals and profitability are strong, and their staff has become less overwhelmed. They are on track to have their most profitable year.