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Dennis Hall: Why we’ve changed our model to target £1m+ clients

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I have always been wary of numbers, which sounds like an odd thing for a financial planner to say. Numbers do not lie (allegedly), and yet the reality is people interpret them in ways that best support their objective. There are areas, such as politics, economics and fund analysis, where the same numbers mean different things depending on who is talking. Yet despite the potential ambiguity of numbers, there are times when the conclusions are irrefutable.    

Our business numbers are one instance where we now believe there is irrefutable evidence to act, though it has taken a while to believe it. Our conviction in the numbers means we are now committing to significant changes in our strategy.

Before outlining the changes let me share some of our top-level numbers.  Our top 20 per cent of clients account for more than half our revenue, whereas the bottom 20 per cent provide less than one twentieth of our revenue.  That would not be so bad thing if all revenue was profitable, but it isn’t.

Depending how we slice it (and here’s where it can start to become subjective) only one third of clients generate profit at a commercial level. Another third ‘wash their face’, and the remainder run at a loss. We are running at nearly full, and do not wish to increase capacity by taking on more overheads, so something has to change.

With certain clients we have tried becoming less ‘high touch’ to make them profitable, but we are uncomfortable with that. Being ‘high touch’ is in our business DNA. So we have had to accept our current minimum fee is not high enough. And in terms of delivering a high touch service with an acceptable level profitability, we need to replicate the top one third of our client portfolio (and arguably only the top 20 per cent). 

This means the annual fee per relationship should be at least £10,000.  Based on our fee structure, this equates to an investment portfolio of £1m or more. Finding these clients in sufficient numbers is a tall order – we have taken eight years to reach this stage. But we are eight years wiser and more experienced, and we hope we have learned from our many mistakes.

So what does this mean in practical terms? Well, quite a lot! I have always thought we are reasonably good at branding, but we are updating the look, feel and quality of our literature. And in the past we have been less good communicating to the right type of investor, and subsequently attracting a mixed bag of client types.

But after eight years we have got a good idea of what wealthier clients are looking for, and have identified the areas we believe are not being very well served by others – though we are keeping those thoughts to ourselves for now.

There is, of course, a downside to all of this when we finally say goodbye to an existing client. But when handled with honesty and with empathy, we find there are no hard feelings, instead they are grateful for being matched with an adviser they can work with in the future, rather than being left by the wayside. 

Dennis Hall is managing director at Yellowtail Financial Planning

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. ‘the annual fee per relationship should be at least £10,000’ – blimey, that must be extremeley high touch service as Dennis puts it, or its terribly high risk and they need to cover the cost of advice risk, or they have very high overheads. Or maybe a combination. I am surprised that a business such as this has taken the time it has to identify this trend but i suppose, at least it is aware that some clients are not pulling their weight. Have they considered how the FCA will view this obvious cross subsidy however? Personally Dennis, I think you are a brave man highlighting this in an industry article

  2. I dunno, Dennis, your clients may be different from the kinds of people I know, and indeed they may be different from the kinds of clients that I work for in my little marketing consultancy. But I have to say that I don’t know many people – and I don’t know any clients – who are happy to shell out ten grand year after year without any obvious correlation with the amount of time, expertise, effort or work that their affairs actually needed.

    All the professionals I know – lawyers, accountants, medical consultants, even marketing blokes – charge by the hour. At this early point in the fee-based era percentage-based charges may feel comfortable to wealth managers because they’re the most similar alternative to commission. But I can’t believe they’re going to be sustainable in the longer run.

  3. It`s a tough message to deliver sensitively -” you`re dumped, but no hard feelings, eh?”. That apart, good luck with the strategy, though I can`t help wondering whether it`s the clients who have become uncommercial, or the firm.

  4. And, when the top twenty percent of clients realise their £10k a year spent doesn’t actually represent good value for money what then? Does the business go broke or do they have a plan ‘b’ for that inevitable day?

  5. @ Money Guidance – I hear you but regardless of whether its the clients or the business it obviously needed done for Dennis to stay profitable and we must remember that is one of the things the FCA insist we do – be solvent and of good character. If that is what it takes to do then vey good luck to him and his business. I do not have any clients with £1 million of assets either currently invested or kicking around to be invested and I think, like most advisers reading these bloggs find it difficult to come to terms with that level of fee. However I do have it on good authority that these kinds of investors are not averse to these kinds of fees. It is all relative. Anyway best of luck Dennis, I hope it works well.

  6. Isn’t it a bit of a stretch to say that someone with a £1m pension fund is going to automatically be cash-rich and will therefore not baulk at a £10k annual fee.

  7. #Marty. Agree with you that it is entirely Yellowtail`s decision and I would not question this in the absence of access to the firm`s MI. My point was a general one: the number of £1 million plus clients is finite, and it might be seen as a gamble not to differentiate service levels and have another client segment which might contribute to meeting overhead. Also profitability is a moveable feast – e.g. perhaps director`s remuneration levels are not aligned to the market which is being served. I have a couple of clients in this category and, boy, do they get their pound of flesh.

  8. Oh Dennis – how many times have you changed your model in the few years you have been trading ? Do you really believe what you are writing or just trying to get more publicity ? or something else ?

  9. I am fed up of listening to this companies dribble if how they can make money and what suits them, they need to start to consider what can they do for others and how best they can make money for other people and maybe then they will will attract some higher value customers.

    He’s some posh bloke who thinks he better than the rest of the IFA community, if I was the FCA I would be looking carefully at this company, I bet it’s all model portfolios that probably have not done as well as The top multi manager or a average distribution fund like Invesco over the longer term.

  10. David Robinson – Three errors in the first ten words – that’s impressive. “I am fed up of reading (not listening) to this company’s (not companies) drivel (not dribble)…you really ought to have stopped there. Just saying.

  11. Thanks for the comments (well most of them) and a couple of points of clarification that didn’t come through in the original 500 word article (it was never going to be enough words).

    Bones – fair comment, and I’ve lost count of the number of changes we’ve made along the way. It’s a process of continuous improvement, and I doubt we’ll ever stop changing things.

    To the several others concerned that we’re pushing into a sparsely populated world and at a fee level people won’t pay – in my experience clients don’t do stupid. We’ve been charging fees expressed in money terms (not percentage terms) for 8 years, and we rarely lose a client – they obviously see enough value in what we do.

    Others who agree that whether we’re right or whether we’re wrong it’s a business decision, have hit the nail on the head. Bear in mind that as a Central London practice, with those levels of overhead, our base costs are that much higher than elsewhere. I have a responsibility to those clients we do serve, as well as our staff (and myself), to run a profitable business rather than a not for profit organisation.

    Of course I’m not the only adviser who thinks like this. If you can lay your hands on a copy of IFP’s Financial Planner magazine for April, read the article on Jason Butler’s practice – they’ve been there, done that and got the t-shirt. Like Jason I happen to think we’re well placed to take business off wealth managers and private banks. And if I’m wrong? Well it’s not like it’s an irreversible decision.

    Again, thanks for the comments – they’re like a sanity check!

  12. An interesting piece. With one mighty truth. We should all be looking to work with those with the wherewithal to pay our fees.

    But there are several ‘howevers’.

    I take note of the posts and there are the following points:

    1. It’s all very well deciding who you are going to try and attract and what you are going to charge them, but isn’t that cart before horse? What are you going to do for them and is it value for money? As I understand it these types of people really only want three things – to see their money grow, to pay as little tax as possible and to hang on to their wealth.

    2. If the adviser either uses trackers or outsources. Are people willing to pay 1% for that? And if outsourced what of the additional cost?

    3. I know of alternatives where clients can get a really bespoke service, with reasonable track results at somewhat less than this. So what of retention rates?

    4. I believe Dennis has his office in the City – so no doubt overheads are rather eye watering. What other costs in a small practice? Can these be reduced? As ever it isn’t what you make, but what you actually get to keep that counts. Turnover is vanity – profit is sanity.

    5. Eight years in this business isn’t very long – unless you have come from an asset manager, accountancy practice or other significant role in financial services. Can you in fact attract these types of clients with an eight year CV?

    6. With the greatest respect to anyone in this business it is also a point that if you want to attract HN clients you need to be a person of substance yourself. I’m not saying that Dennis isn’t, but those reading the article need to understand that those with £1million investable assets are (so to speak) not very likely to take advice from someone who lives in a council flat and rolls up on a cycle. (If you see what I’m getting at).

    We read of many who set out their stall, but what of the business and entrepreneurial background and skills? I’m not saying Dennis doesn’t have them and I’m sure he may be well aware of all the above points, but it doesn’t appear in his article and I would have thought that these are core to the whole proposition.

  13. An interesting article but i read it from a very different point of view. I’m with one of the other commentators in that i don’t operate in the HNW client arena so while i can understand what Dennis is trying to do it doesn’t really impact my business model. That isn’t to say that i can’t take something from this article and adapt it.

    Despite it being 16 months since RDR changed the way advisers charge we’re still looking to make sure we have the right charging structure in place. Like many other firms we’ve initially continued with the percentage fee structure but i don’t believe that this is acceptable in todays post RDR world and we’ll probably change in the near future.

    Good luck Dennis and if you are looking for anyone to service your clients with £0 – £999,999 then just give me a shout.

  14. Harry Katz | 15 April 2014 12:45 pm

    6. With the greatest respect to anyone in this business it is also a point that if you want to attract HN clients you need to be a person of substance yourself. I’m not saying that Dennis isn’t, but those reading the article need to understand that those with £1million investable assets are (so to speak) not very likely to take advice from someone who lives in a council flat and rolls up on a cycle. (If you see what I’m getting at).

    Having said all that; in the good old home service days we wanted ‘hunger in their bellies, up to the eyes in debt and a whopping great mortgage to pay’ before we even considered someone for the job of advisor. (nay, salesperson) How the times change eh? There’s not that many millionaire in the North East who would use an IFA practise of two partners (we live in hope) but we get by with what we’ve got. I bet our running costs are considerably smaller as well and I don’t have to fight through the traffic every day just to get where we are. I think I like what we’re doing better even though I doubt I’ll ever have clients paying £10k PA in fee’s. Each to their own.

  15. @JInker

    That’s a bit beside the point. Home service salesmen wouldn’t even get a sniff of anyone with £100k let alone £1million.

    As you say they were recruited with ‘hunger in their bellies, up to the eyes in debt and a whopping great mortgage to pay’ and sold the most awful crap with the excuse that their gullible punters were better off with what they pedalled than without – always open to question! Their demise is testament.

    I haven’t always been in London. I have worked in Manchester for many years, know your part of the country fairly well and Yorkshire and can assure you that there are plenty of well off people all over the country. Some are even prepared to consult IFAs!

  16. Very interesting piece, Dennis and in particular because the focus is on assets and not issues, and on a single year and not the life of the relationship. £10k pa is not a lot to pay every year if I saved £50k in tax I would otherwise have given to HMRC…every year. It is not a lot if I paid it from the £70k profit I made on my investments…every year. It’s not a lot if my consequent growing legacy is protected for my beneficiaries. However, it may be a great deal if I could have done it myself from year 2. It may be a great deal if I can see what rival businesses charge in year 2. It may be if after 10 yrs I’ve paid £100k in fees and have no discernible benefit from the relationship. It may be horrendous if I’m also paying another £10k for the platform and portfolio constituents. It may be utterly galling if after 10 yrs I discover I’ve paid over £200k in fees and have no discernible benefit from the relationship.

    That begs the question – is the delivery of advice what is being charged for, irrespective of the ultimate outcome, or should any subsequent shortcomings attract a ‘rebate’?

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