50 Clients is the New 100

Ad­vi­sors can prune their prac­tices to fo­cus on the most prof­itable in­di­vid­u­als — but it takes more than just time.

Financial Planning - - Contents - BY MICHAEL KITCES

Ad­vi­sors can prune their prac­tices to fo­cus on the most prof­itable in­di­vid­u­als — but it takes more than just time.

No hu­man be­ing can men­tally man­age more than 150 in­ter­per­sonal re­la­tion­ships, yet ad­vi­sors pur­sue a ros­ter of 100 ac­tive clients.

Does an ideal num­ber of clients ex­ist? Some ad­vi­sors may ser­vice a few dozen in­di­vid­u­als, oth­ers sev­eral hun­dred. Is there a golden mid­dle ground?

Be­fore un­pack­ing this freighted ques­tion, it’s good to re­mem­ber an ad­vi­sor’s his­tor­i­cal role, which pri­mar­ily was that of a sales­per­son for in­vest­ment or in­sur­ance prod­ucts. Ad­vice — when it was there to give — was in­ci­den­tal to sell­ing bro­ker­age ser­vices. Con­se­quently, the ad­vi­sor-client re­la­tion­ship was more akin to that of ven­dors and cus­tomers, where busi­ness was trans­acted, and lit­tle else.

We now think of clients as peo­ple we serve in an on­go­ing ad­vice re­la­tion­ship that lasts years, if not decades. How, then, should an ad­vi­sor go about build­ing a steady ros­ter of real, ac­tive clients that can help en­sure fi­nan­cial suc­cess?

A grow­ing body of re­search sug­gests that no hu­man be­ing can men­tally man­age more than about 150 to­tal in­ter­per­sonal re­la­tion­ships. Since most of us re­serve a few dozen of those slots for our friends and fam­ily, it’s not clear that any pro­fes­sional could man­age a 100-plus ros­ter of real, ac­tive clients. And yet it’s a com­mon an­swer to the ques­tion of how many clients are needed to en­sure fi­nan­cial suc­cess.

The truth is that serv­ing 100 real clients in an on­go­ing plan­ning re­la­tion­ship takes time. Dif­fer­ent ad­vi­sors serve clients in dif­fer­ent ways. Some may fo­cus on in­ter­act­ing via email and video chat, while oth­ers may fol­low a reg­u­lar rou­tine of meet­ing in per­son with clients two to four times per year.

An ad­vi­sor may rea­son­ably ex­pect to spend 12 hours an­nu­ally work­ing with each client to pro­vide on­go­ing ad­vice. This might be de­liv­ered in four two-hour meet­ings through­out the year, plus one hour per quar­ter of in­tra-meet­ing work be­hind the scenes. For a more fre­quent, high­er­touch ser­vice model it could mean one hour per month of on­go­ing email com­mu­ni­ca­tion and check-in meet­ings. Ul­ti­mately, firms might even craft a client ser­vice cal­en­dar that in­cludes a com­bi­na­tion of client meet­ings, calls and ed­u­ca­tional events to spec­ify the scope of ad­vice ser­vices through­out the year.

Work­ing 12 hours per year with 100 clients would add

up to 1,200 hours, which is cer­tainly man­age­able. Some­one who works 40 hours per week all year, and takes off two weeks for va­ca­tion, works about 2,000 hours. That means 1,200 hours of client-fac­ing time rep­re­sents only 60% of the ad­vi­sor’s bill­able time, leav­ing 800 hours — or roughly three hours per work­ing day, or about two days per week — avail­able for all the other ac­tiv­i­ties in­volved in run­ning the busi­ness. That may be com­pli­ance obli­ga­tions, mar­ket­ing or any be­hindthe-scenes sup­port work for clients.

At a bill­able rate of $150/hour, those 1,200 hours of client-fac­ing time add up to $180,000 of an­nual gross rev­enue for the ad­vi­sor, even though he/she is only nom­i­nally paid for 60% of his/her work­ing hours.

Of course, gross rev­enue is not nec­es­sar­ily a net amount that the ad­vi­sor takes home, but prior in­dus­try bench­mark­ing stud­ies have noted that the most suc­cess­ful, tech­nol­ogy-lever­aged solo ad­vi­sors take home as much as $0.87 for ev­ery $1 of gross rev­enue, which is in­creas­ingly fea­si­ble given the avail­abil­ity of tech­nol­ogy tools and flex­i­ble vir­tual as­sis­tants for ad­min­is­tra­tive sup­port.

(The above pre­sumes an in­de­pen­dent RIA model that can be run in a rel­a­tively lean man­ner as a solo ad­vi­sor, as con­trasted with ad­vi­sors on an in­de­pen­dent bro­ker-dealer plat­form, where many only re­ceive 80% to 90% pay­outs on their gross rev­enue, with some wire­house or em­ployee-bro­kerdealer plat­forms of­fer­ing pay­outs as low as 40% to 50%.)

On $180,000 of gross rev­enue, be­ing able to net up­ward of 80% would re­sult in ad­vi­sor com­pen­sa­tion of more than $150,000 per year, or about three times the U.S. me­dian house­hold in­come.

Busi­ness Mod­els

No­tably, while it may take just 12 hours per client at $150/hour to gen­er­ate a net take-home pay of $150,000 per year, that doesn’t nec­es­sar­ily mean that charg­ing $150/hour is the most ef­fec­tive way to gen­er­ate rev­enue.

A pop­u­lar billing al­ter­na­tive is sim­ply the AUM model. At a typ­i­cal 1% AUM fee, this would ne­ces­si­tate av­er­age in­vest­ment as­sets of just $180,000. The “just” is jus­ti­fied, given we op­er­ate in a world where there are nearly 30 mil­lion house­holds that are clas­si­fied as mass af­flu­ent, with a liq­uid net worth be­tween $100,000 and $1 mil­lion. For these clients the ad­vi­sor pro­vides on­go­ing plan­ning ser­vices along with in­vest­ment man­age­ment — though os­ten­si­bly the in­vest­ment man­age­ment func­tion may be out­sourced to a TAMP, given a solo ad­vi­sor’s lim­ited ca­pac­ity to do hands-on in­vest­ment man­age­ment.

And in fact, in­dus­try bench­mark­ing data shows solo ad­vi­sor firms are al­ready fo­cused pre­dom­i­nantly on serv­ing this mass af­flu­ent clien­tele with an Aum-cen­tric busi­ness model — and can do so very suc­cess­fully.

Another op­tion en­tails charg­ing the client an on­go­ing re­tainer fee, ei­ther for an out­right amount of $1,800 per year or bro­ken is down fur­ther as a monthly re­tainer model for $150/ month, which over 12 months equals $1,800/year. The virtue of the monthly re­tainer model is that it fur­ther opens a range of prospec­tive clien­tele who might not have the avail­able as­sets to pay an on­go­ing 1% AUM fee, but who have enough in­come to pay the ad­vi­sor di­rectly from their cash flow. These prospec­tive clients may be younger pro­fes­sion­als such as physi­cians and lawyers, with healthy in­comes but also sig­nif­i­cant debt and/ or lim­ited savings.

Of course, an on­go­ing plan­ning re­la­tion­ship can also mean clients will need as­sis­tance im­ple­ment­ing var­i­ous ser­vices prod­ucts over time — not on a purely trans­ac­tional ba­sis, but on an as-needed ba­sis as their lives change.

Ac­cord­ingly, many ad­vi­sors adopt a hy­brid model of charg­ing AUM or re­tainer fees while also gen­er­at­ing some level of com­mis­sions from the im­ple­men­ta­tion of ei­ther se­lect in­vest­ment prod­ucts or ap­pro­pri­ate

Clients who pay more of­ten ex­pect more ser­vice. That means you may need some ad­di­tional staff sup­port.

Craft­ing a client ros­ter re­mains a marathon, not a sprint, but the re­wards — both in dol­lars and time saved — are sub­stan­tial.

in­sur­ance prod­ucts — e.g., term life in­sur­ance, disability in­sur­ance or long-term care in­sur­ance. Pre­sum­ing it’s done in a man­ner that still meets the ad­vi­sor’s fidu­ciary obli­ga­tion to act in their clients’ best in­ter­ests, im­ple­ment­ing prod­uct so­lu­tions can fur­ther sup­port an ad­vi­sor’s rev­enue to gen­er­ate the tar­geted $150/hour or $1,800/year client. That way, the ad­vi­sor is com­pen­sated for what their time is worth.

On the other hand, the ad­vi­sor’s rev­enue for prod­uct im­ple­men­ta­tion may be sub­stan­tially re­duced by a bro­ker-dealer or gen­eral agent’s slice of the un­der­ly­ing com­mis­sions.

Bat­ting for 100

In the end, per­haps the biggest chal­lenge is fig­ur­ing out how to se­cure 100 clients.

It’s likely to be a rel­a­tively slow ramp-up. For new ad­vi­sors who ac­quire one new client ev­ery month, it takes eight years to get to 100 — and that’s pre­sum­ing no client turnover. If the ad­vi­sor builds mo­men­tum over time, per­haps net­ting two new clients per month af­ter the first two years, it still takes about five years. If in the first year or two the ad­vi­sor is still es­tab­lish­ing their niche, it could take six to seven years.

For­tu­nately, the ad­vi­sor doesn’t have to reach a full client base to make a liv­able wage. As noted ear­lier, a tar­get of serv­ing 100 clients with 12 hours per year of ser­vice at $150/hour leads to cu­mu­la­tive rev­enue of $180,000 and net take-home pay that could be as high as $150,000.

For some­one man­ag­ing just half those clients, that’s still po­ten­tially $90,000 of rev­enue and $60,000 to $75,000 of take-home pay, de­pend­ing on the ex­tent to which ex­penses scale up­ward, as some ad­vi­sory firm costs are still fixed over­head. That’s a liv­able wage in most parts of the coun­try and a very healthy one in many ar­eas.

Still though, a new ad­vi­sor may face an in­come gap of three to four years be­fore reach­ing those com­pen­sa­tion lev­els, which means it’s im­por­tant to have a plan to fill that gap dur­ing the ramp-up.

Rais­ing Rev­enue

Ob­vi­ously, the more clients pay for ser­vices, the fewer years it takes to reach any given tar­get level of in­come. Viewed another way, it may not even be nec­es­sary to try to reach 100 clients.

For in­stance, if clients are pay­ing twice as much as in the ear­lier ex­am­ples — say, $3,600 per year, or $300/ month, in some com­bi­na­tion of AUM and re­tainer fees as well as im­ple­men­ta­tion com­mis­sions — it only takes 50 clients to reach the same rev­enue. An ad­vi­sor work­ing with re­tirees rolling over $500,000+ port­fo­lios only needs 36 clients to reach the same level, pre­sum­ing a 1% AUM fee. If the ad­vi­sor can se­cure mil­lion­aire clients, it only takes 18.

Viewed another way, grow­ing to 50 great clients now has an up­side of $300,000 of gross rev­enue. Of course, se­cur­ing big­ger clients can be more dif­fi­cult, as there’s greater com­pe­ti­tion, more com­plex­ity and it likely re­quires more time to es­tab­lish trust and cred­i­bil­ity. It’s also worth not­ing that clients who pay sig­nif­i­cantly more of­ten ex­pect more ser­vice, mean­ing the firm may need at least some ad­di­tional staff sup­port.

Nonethe­less, at higher rev­enue lev­els there’s still am­ple room to hire staff and have more take-home pay. This prof­itabil­ity po­ten­tial is among the pri­mary rea­sons ad­vi­sors who be­gin with a broad base ul­ti­mately raise their min­i­mums.

In other words, the 50-client path­way is open to ad­vi­sors who set a tar­get for the value of their time as well as the amount of rev­enue per client nec­es­sary to com­pen­sate them. It’s then in­cum­bent on the ad­vi­sor to fo­cus on lift­ing rev­enue by adding new clients that in­crease the av­er­age, and ro­tate out the small­est clients. Stated more sim­ply, if the ad­vi­sor is fo­cused on build­ing a prac­tice around 50 great clients, it’s nec­es­sary to ac­tively man­age which clients get those slots.

In some cases, ad­vi­sors may try to jump-start the process by buy­ing an ex­ist­ing ad­vi­sory firm or at least a book of clients, though this re­quires ei­ther sig­nif­i­cantly more startup cap­i­tal or the will­ing­ness to take on sig­nif­i­cant debt to fi­nance the trans­ac­tion. Plus, if you have that much cap­i­tal avail­able, it may be more de­sir­able to sim­ply use it to cover per­sonal liv­ing ex­penses while grow­ing the client base di­rectly.

The fact that you need just 50 great clients can be in­cred­i­bly free­ing. It means there’s vir­tu­ally no client niche that’s too nar­row. And while the path to 50 is not nec­es­sar­ily cap­i­tal-in­ten­sive, it is a very slow build. Un­der­stand that craft­ing your client ros­ter re­mains a marathon, not a sprint, but the re­wards — both in dol­lars and time saved — can be sub­stan­tial.

An ad­vi­sor with 100 clients most likely spends 1,200 hours with them a year — about 60% of their bill­able time.

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