These days, financial advisors are facing a huge time crunch. Both their best and worst clients are beating down the door for extra attention, as they seek to repair the damage done to portfolios and retirement plans last year. In a post-Madoff world, prospects have become more skeptical of a financial advisor's bona fides and take a lot longer to woo. And, in a volatile and uncertain market, selecting investments and managers has gotten more complex and time-consuming. This means FAs face some tough choices about where to spend their energy — and on whom.
“In challenging times, where advisors may need to communicate more than normal, they only have time to communicate frequently with their A and B clients,” says Bill Bachrach, president of Barach and Associates. Their “C” clients are often more numerous, but generate far less revenue. And in this environment, A and B clients can't be ignored: A recent survey by Prince & Associates, a firm that provides research on the high-net-worth, found that 15 percent of the wealthy left their financial advisors in 2008 and 70 percent moved at least some assets out of an advisor's hands. Wealth management consultants have long recommended that advisors fire their least lucrative clients as their practices grow, but few advisors have actually taken that advice — until now.
Take Jason Wenk, who launched his fee-only RIA, Retirement Wealth Advisors in Jenison, Mich. five years ago, but only really began to purge his book of “C” clients for the first time last year. Wenk, who works with four other financial advisors, an operations manager and administrative assistant, focuses on money management and does some financial planning. With assets under management at $100 million today, up from roughly $9 million five years ago, Wenk says a third of his 145 clients accounted for just 10 percent of his assets, but took up just as much of his time. Wenk allocates four hours to talk with each client per year (three hours in person, one hour on the phone), which meant he was spending more than half the week just talking with clients. He didn't have enough time to build his business.
So last year, Wenk slashed the number of clients he works with to 96, handing the rest off to one of the other advisors who work at his firm. He held onto a few long-time clients who didn't meet his new criteria just because they were low maintenance and a pleasure to work with. But the rest he broke out strictly on the revenue they generated per hour worked.
Dumping a third of his accounts gave him the time to pull in new ones: In the first quarter, he attracted four new clients with a minimum of $2 million in assets. So, he decided to reassign another 40, bringing his total down to 60. The benefit has been two-fold: “I spend more time with my best clients, who are really the ones paying the bills anyway. Now they are getting the value they deserve. More importantly, I start functioning a little more as a business person and less like a slave to my clients. Unfortunately, that is what happens when you have a lot of clients — especially in the middle of a nasty market.” The moves seem to be paying off, despite the down market. Revenues were up 20 percent in the first quarter this year versus last year.
Richard Capalbo, a former Merrill Lynch manager who co-founded The Quantum Group and the Quantum Leap Institute, a consulting firm specializing in the financial services industry, says it is more important to let go of lower tier clients now than it ever was. “This market is going to be directionless,” he says, and clients are going to continue to demand more time and attention over the next several years. Advisors may be afraid to give up any source of revenue because income is down — especially if they're getting paid on a fee basis, he says. But that's just not a good way to do business. “In an environment where most people are saying, ‘Hey, I am going to change FAs if I don't hear from my FA on a regular basis,’” clearing the deck to make sure you have enough time for your best clients is critical.
C's a Crowd
Many consultants believe, in fact, that the vast majority of advisors have too many clients. “They're leaving them parked in there just in case. Advisors say, ‘they don't generate a lot of money, but they don't take up a lot of time, and I might need that money some time,’” says Bachrach. Generally, industry consultants suggest that a single financial advisor should not directly manage more than 150 clients. Of course, this figure will vary somewhat according to an advisor's business model. Some advisors in high end fee-only wealth management can serve as few as 25 to 40 clients, whereas advisors with more of a transaction-based or team-based approach could make serving over 100 clients work. Sure, some advisors — with the support of a client service associate or junior advisor — might even be able to manage 600 smaller client relationships if they're providing investment management as opposed to complex wealth planning, but most consultants still advise against it.
“It is subjective and depends on what type of client base the advisor wants, but rarely can an advisor effectively serve and profitably build a client base with hundreds of clients — they have to be practice management machines for that kind of volume to work,” says Nancy Imholte, founder of Forte Coaching. “If you're getting beyond 150 clients, I wouldn't call those clients, I would call them customers,” agrees Dan Inveen of FA Insight. “If the best 20 percent of your clients are providing 80 percent of your revenue, why are you wasting your time with that other 80 percent? You just can't afford to anymore.”
Most consultants believe that it's okay to make exceptions — the “old lady” who has been with the advisor from the beginning and has been like a second grandmother, the client who happens to socialize with a lot of high-net-worth people and has provided a wealth of referrals, the soon-to-inherit daughter of the advisor's largest client. But for the rest, if they are not providing revenue, and the advisor is already pressed for time, chances are the client would probably be better served by another advisor anyway.
But telling clients you can't work with them anymore isn't an easy job. For some advisors, old habits die hard. Capalbo says there is a basic belief system flaw in financial advisors: “Most of them, when they got into the business, were told to open accounts, and that is what they did. They did it well and they continue to do it well. Unfortunately, even when they get rid of a bunch of accounts, they tend to open a bunch more just like the old ones.”
Randy Carver, founder of independent firm Carver Financial Services, affiliated with b/d Raymond James, says that like many FAs, he fell into that trap at the beginning of his career: trying to grow the client base without regard to the profitability of each relationship. “You could have a huge client who generates very little revenue and takes up a lot of time,” he says.
Ted Feight, President of fee-only RIA Creative Financial Design, says letting go of long time clients is one of his biggest challenges, but something he will have to do this year. Feight, who has been in the business for 36 years, manages $25 million in assets and provides asset management and wealth management services to 73 clients. He knows that, realistically, 43 of those clients should go.
Feight's A and B clients account for almost 40 percent of his book and 67 percent of his income, individually contributing around $2,000 to $3,000 in income a year. His C through E clients make up the other 60 percent of his book, and just 23 percent of his income, individually contributing $1,200 or less a year. Feight says his C and D clients are more needy, too. He plans on providing many of these client referrals to other advisors, but worries it will be an adjustment for some. He is a fee-based advisor and suspects that few other fee-based advisors will take them on.
The How To
Mark Little is at the opposite extreme. In 2000, he decided he needed to gut his book of 1,242 client accounts. Just 18 months later, he was left with 17 clients, each of whom had between $1.2 million and $1.8 million in assets. Over the following 18 months, he built his business back up to 91 clients with referrals from that original 17. He was so successful with this process that he created a website for other advisors (TrustedAdvisorToolkit.com) to document how he did it. He started by creating a spreadsheet containing assets and estimated recurring annual revenue for every single client and then sorted the list for the latter. He says there were eight pages of clients in his spreadsheet with zero recurring revenue.
Little let clients go in incremental steps, only dropping his least profitable clients when he could replace the revenue they generated with fees from a new “ideal” client. So if he signed on a new client who provides $10,000 in recurring annual fees, he would go back to the spreadsheet and identify the clients at the bottom of his list that he could let go without losing revenue. Before deciding how to handle the dismissal, he would identify what kind of relationship he had with the client, and what that client's needs were, and act accordingly. Some got letters, others phone calls and still others meetings. He would inform them of the change to his business model and offer to help them find another advisor. Little did make exceptions for around four clients who were moving towards a significant planning event, and another 10 clients who did not fit his new minimums, but whom he wanted to keep anyway.
His process certainly paid off. He was generating $388,000 in gross dealer concessions in the beginning of 2000, and by October of 2002 he was reeling in $1.6 million in recurring fees. Originally an independent b/d called Wall Street Services, Little renamed the firm Summit Wealth Management after he merged with another advisor in 2005. He now has a a silent partner role, while the other advisor handles the majority of the clients at the firm.
“The advisors I find who do well in this marketplace have a very defined process: They know what their ideal clients look like, how to convey value, they know what clients are looking for,” says Dennis Gallant, principal and founder of Gallant Distribution Consulting. “They've gone through business planning and know where they want to go, and they are also winning business,” he says. “Advisors can come out of the recession clean and mean. They need to figure out a way to make things work efficiently and effectively or they're not going to be able to make it in the business.”