I’m sure you’re familiar with the statistic: it can cost five times more to attract a new customer vs. retain an existing one. So, does that mean you should set prospecting aside? Perhaps. Because the greatest growth opportunity could exist within your own book of business.

I recently came across a discussion paper from Russell Investments in Australia, a business that has been working with financial advisers to build more valuable, efficient, and faster growing businesses for over 20 years. Over that time, they’ve collected data from thousands of advisers and gathered numerous insights into the drivers of success. Read on for their formula for growing revenue wealth, by prospecting your own client book.

Read on for key insights. I realise that given the current environment in the UK, and the move away from portfolio values for segmentation, not all will be relevant. There are a few gems, so I thought it was worthwhile sharing it.

Drivers of revenue production

There are two critical metrics that correlate with firm revenue production: return on assets (ROA) and revenue per household (REV/HH). The key to unlocking growth and creating efficiency in your advice business lies in improving these two metrics.

These metrics show that the most optimal path to growth does not involve increasing your assets under management. Instead, it involves increasing the productivity of the assets you already have under management, for your existing clients. In other words, the best opportunity to grow revenue and increase efficiency may be by prospecting your own existing book.

Revenue optimisation: focus on profitable clients

Revenue optimisation Transition to advisory

You probably already know the Pareto principle, better known as the 80/20 rule, applies to many adviser practices. For most advisers, on average, the top 20% of clients generate nearly 80% of the firm’s total revenue. Russell’s adviser data also shows that for an average adviser, the bottom 50% of clients typically generate less than 5% of the firm’s total revenue.1

This means that in an average adviser’s book, about half the client relationships are unprofitable and may not generate enough revenue to justify the time an adviser spends servicing them. But this challenge also presents a tremendous opportunity for growth, simply by changing the nature of the relationship with unprofitable clients.

Organising for growth in three steps

This does not necessarily mean you should get rid of clients. After all, you’re in this profession to help people. And you’ve already put in the time to build relationships with your clients, even the ones with lower portfolio values. Instead, view these relationships as an opportunity for growth. Russell have found the most efficient growth strategy is to identify unprofitable client relationships and adopt a turnkey, fee-based, advice solution – one designed to give all clients the investment guidance they need and potentially grow your revenue at the same time.

Russell propose the following three steps to improve the productivity of existing assets and clients.

1. Identify the opportunity: client prioritisation

How can you be sure which of your clients deserve more of your time and which should be assigned to a robust-but-efficient turnkey solution? Russell identified three criteria to filter advisers’ books for growth opportunities:

» Low ROA. Return on assets (ROA) is a simple, powerful indicator. They believe clients generating less than 50 basis points of ROA are likely unprofitable for your business. They are candidates for a fee-based advisery relationship.

» Suitable AUM. Keep it simple and think of £200k in AUM as a dividing line. Clients with less than £200k investable assets may be the best candidates for turnkey, model-based strategies. Clients with more than £200k may require a more customised investment approach.

» Age. Based on their decades of practice management experience Russell view the age of 70 as a simple and effective categorisation line. Clients age 70 and younger may have time horizons that are sufficiently long to consider transitioning to a service-based solution.

Client Prioritisation Lens

Client Prioritisation Lens

2. Quantify the opportunity: high potential AUM

The next step is to quantify the opportunity. Russell has done some of this work for you. When they applied the above three criteria to advisers’ books, they learned that, on average, 33% of AUM on a typical adviser’s book can be considered high-potential AUM. In other words, 33% of the average adviser’s book is filled with relationships that could generate significantly more revenue than they are currently generating.

They found that if these advisers were able to convert their high-potential opportunity into advisery relationships and charge a 1% fee, they could increase their revenue by 30%, on average.2

Unprofitable clients may be a servicing liability to the business, but they also represent a tremendous opportunity. Especially if advisers have never undertaken an exercise to clean up the book.

Quantify the opportunity High potential AUM

3. Capitalise on the opportunity: Execution and accountability

The final step is all about action. The opportunity for growth is there, but change is hard. Most advisers recognise that there’s an opportunity to improve the efficiency of their books. And many advisers understand that there are a lot of unprofitable smaller accounts in their books as well. But most haven’t dedicated the time to identify clients who could benefit from a transition, quantify the opportunity, and devise a strategy to prioritise and execute a plan.

 

The bottom line

As an adviser, you hear a lot about change management. The only constant is change. Change is an ongoing process. Yada yada yada. Wouldn’t it be nice if change wasn’t always a burden? In this case, we believe that change can mean increased profitability for your practice and right-sized solutions for your investor clients. By creating a prioritised plan to identify, quantify and capitalise on the opportunity, this may truly be a change for the better.

 


1 Data collected from advisers who attended Russell Investments Business Solutions workshops between 2015 – 2017. Non-bank advisers (sample size: 477). Clients sorted by revenue descending.
2 Average high potential AUM and Average potential increase in revenue from advisers who attended Russell Investments Business Solutions workshops between 2015 -2017. All advisers (sample size: 1110).

 

This article was originally written by Johann Schneider of Russell Investments in Australia. It has been modified for the UK Financial Adviser audience.