Throwing Good Money After Bad: Low Value Clients

There are many elements that define the success of a practice--the quality of clients, delivery of service, recurring revenue, and more.

Ultimately, the value of a practice comes down to profitability. A number of factors affect profitability, but one of the most significant is the amount of resources spent supporting low value clients.

Generally speaking, any investment made in staff or other expenses should be justified by a significant return. Too often, practice leaders assume that any dollar spent on clients is a dollar spent wisely. But not all clients are created equal. Clients with assets less than $100,000 generate minimal revenue for the practice and usually require more time and energy to manage. Its best to find efficient ways to manage these clients with as little investment as possible. This can be achieved by streamlining and simplifying service offerings for this segment, automating administrative functions and marketing directed at this segment, and then focusing any high-cost resources on servicing your high-value clients.

Another option is to offload low value clients so you can direct all of your energy to servicing high-value clients. This is a good option, especially if you have not established clear criteria for what constitutes an ideal client for your firm or you have grown significantly, either organically or through acquisitions, and have not taken the time to evaluate the quality of your new book of business. Your focus as a firm may have changed since those clients were acquired, or you may just have a better sense of what makes a profitable client for your unique practice. Either way, it’s important to know what makes an ideal and profitable client for your firm and structure your firm to best target and serve that type of client, while eliminating all the rest.

Bottom line, if you are spending money on resources it should be directed toward clients that are making you profitable. At least once a year, assess and clarify your target client and audit your roster to make sure that every client fits that criteria. Make a game plan for either servicing non-ideal clients with as little effort as possible, or for offloading them to another advisor. Don’t let years pass without considering the quality of your business. It could cost you.

There are many elements that define the success of a practice--the quality of clients, delivery of service, recurring revenue, and more.

Ultimately, the value of a practice comes down to profitability. A number of factors affect profitability, but one of the most significant is the amount of resources spent supporting low value clients.

Generally speaking, any investment made in staff or other expenses should be justified by a significant return. Too often, practice leaders assume that any dollar spent on clients is a dollar spent wisely. But not all clients are created equal. Clients with assets less than $100,000 generate minimal revenue for the practice and usually require more time and energy to manage. Its best to find efficient ways to manage these clients with as little investment as possible. This can be achieved by streamlining and simplifying service offerings for this segment, automating administrative functions and marketing directed at this segment, and then focusing any high-cost resources on servicing your high-value clients.

Another option is to offload low value clients so you can direct all of your energy to servicing high-value clients. This is a good option, especially if you have not established clear criteria for what constitutes an ideal client for your firm or you have grown significantly, either organically or through acquisitions, and have not taken the time to evaluate the quality of your new book of business. Your focus as a firm may have changed since those clients were acquired, or you may just have a better sense of what makes a profitable client for your unique practice. Either way, it’s important to know what makes an ideal and profitable client for your firm and structure your firm to best target and serve that type of client, while eliminating all the rest.

Bottom line, if you are spending money on resources it should be directed toward clients that are making you profitable. At least once a year, assess and clarify your target client and audit your roster to make sure that every client fits that criteria. Make a game plan for either servicing non-ideal clients with as little effort as possible, or for offloading them to another advisor. Don’t let years pass without considering the quality of your business. It could cost you.

If you have an associate financial advisor or you are thinking about hiring one, you may want to better understand the economics by utilizing our AFA Analysis.

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