Commonwealth Independent Advisor

How You Can Increase Scalability by Segmenting Clients

Posted by Maria Considine King

June 3, 2014 at 10:00 AM

client segmentation for financial plannersIn the early stages, advisory businesses must focus on growing a book of business. Once you've established yourself and your business, however, you must shift your attention toward capacity and scalability to help ensure profitability and success as the workload increases and expands.

Let me paint a picture: An established financial advisor enjoys a strong book of business and a steady stream of new clients. The advisor hires employees, implements a strong marketing plan, and turns the practice into a full-fledged business operation. Daily life becomes very busy and the advisor must wear many different hats—financial planner, investment manager, business owner, staff manager, client relationship manager, and more. There's less time to proactively manage client relationships or prospect for new business, the critical activities that drive growth.

At this juncture, the advisor faces a critical question: How can I free up time to prospect and manage more client assets—without adding expensive resources that eat away at profit?

Increasing Capacity and Scalability Is the Answer. Here's Why.

The 2012 InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms shows that top-performing firms significantly outperform other advisors in terms of productivity metrics, indicating that they have greater capacity and scale. Firms ranking in the top quartile for overall financial performance report revenue per head count (advisor plus staff) of $260,725. This is well above the $170,285 average for firms in the other three quartiles.

Interestingly, clients at top-performing firms generate an average of $6,500 in annual revenue, only slightly higher than the $5,600 average for firms in the other quartiles. But the advisors at these top-performing firms handle 107 active client relationships, compared with only 73 at other firms.

This study demonstrates that top-performing firms have more capacity and can handle a larger workload with fewer resources. This advantage flows directly to the bottom line. In fact, each client relationship at a top-performing firm is 193-percent more profitable than each in the other three quartiles.

So how can you increase scale and capacity? Commonwealth's Practice Management team believes client segmentation is a great strategy to start with.

How to Increase Scalability with Client Segmentation

You have roughly 2,000 working hours at your disposal each year. That's it. Your ultimate value proposition is the advice that you provide to your clients, but you can only serve a limited number, especially if you offer proactive, high-touch service. Building a scalable practice requires defining a focused client model and delivering services to each client segment in a profitable way. To do this, take the following three steps.

Step 1: Define your ideal client. Create a persona of your ideal client's characteristics. This will help you manage your business's revenue growth and focus your marketing efforts. To begin, answer the following questions:

  • What type of client will help you achieve your vision for the business?
  • What unique financial needs does this client have?
  • How much revenue does an ideal client generate for the business? 
  • How many ideal clients do you need to achieve your vision?

Step 2: Segment your book. Client segmentation for financial planners is vital for increasing capacity and scale. Segment successfully by answering these questions:

  • How many ideal clients do you have now?
  • If you divide your total number of clients into four tiers, how much revenue does each tier generate? What is the average revenue for each client in those tiers?
  • Which clients generate high amounts of revenue but need more of your attention?
  • Which clients generate low amounts of revenue but take up too much of your time or your staff's time?
  • Do you have any unprofitable clients who should be referred to another firm?

Step 3: Define the services that you will offer to each segment. Think about how you will work with each segment of clients and determine if you should offer specialized services. Ideally, you will allocate services in such a way as to ensure that your large clients don't subsidize the cost of delivering services to your smaller ones. Consider the following questions:

  • To which segments will you offer wealth management services? How much will you charge for those services?
  • Will you provide specialized services, such as retirement income projections, to specific segments?
  • Will you manage investments yourself using model portfolios or outsource this responsibility to a third-party manager?
  • How many client meetings will you offer large clients? Small clients?
  • How many proactive touch points will you offer large clients? Small clients?
  • What special experiences will you provide A+ clients?

Growing Scalability Has Many Benefits

Segmenting your book of clients is a best practice for increasing your business's capacity and scale. Not only will this grow productivity and your bottom line in the long term, but it will also help improve your time management and efficiency and hone your overall business strategy.

Be sure to stay tuned as we examine another best practice for scalability: improving operational efficiency.

Have you tiered your services for clients with different levels of investable assets? What successes and challenges have you experienced with client segmentation?

A Guide to Valuing Your Financial Advisory Practice

Topics: Practice Management

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