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