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The ABC of profitability

How do I manage out non-productive clients from my client base?

Alastair Conway Head of strategic propositions, Sesame

The past 17 years have seen financial advisers faced with a wealth of obstacles to overcome. Many of these changes have not been easy to deal with but the resilient nature of most advisers has enabled them to adapt their businesses.

However, these changes have in the main only required a tactical response rather than a fundamental shift in the way advisers deal with their clients. Depolarisation, combined with continued pressure on margins, has changed all that and there is now a need for advisers to take a long hard look at their businesses, especially their client bank.

In the new regulatory environment, advisers will have to recognise that they are likely to have certain clients who are not profitable and indeed could be a real burden to growing their business in the future. This requires the adviser to step back and do the necessary work to segment their client base.

For many advisers this represents a challenge, as their reputation has been built on being a local champion of advice to all clients. However, the old rule that you get 80 per cent of your profits from 20 per cent of clients is also true of most IFA businesses.

How does an adviser go about segmenting his or her client bank? First, they must find out what it is their clients want and value most. This will be crucial for advisers in deciding their service proposition and the ongoing marketing activity they need to provide.

Some clients will be more suited to a transactional-based service and others will be prepared to pay for a holistic service. The key principle in the future will be that if a client wants an ongoing service, whatever that service may be, they will have to pay for it.

The next step is to distinguish between those clients who are currently profitable to serve and those who are not. Clients who fall into the unprofitable category are still welcome, of course, but this will either be when they have a specific transaction they want to carry out such as a remortgage or if they can be encouraged to adopt a more profitable relationship with the adviser, such as paying a retainer in exchange for an ongoing service.

This segmentation work will undoubtedly take up advisers’ valuable time but the outcome will be healthy for their business in the long term. By properly segmenting their client base, advisers will finally reduce the random way in which many have worked in the past.

The adviser’s goal should be to provide the services that clients are looking for while benefiting from being properly and openly remunerated for that service.Once advisers have accepted this step-change in the way that businesses need to operate, it will help clients finally to appreciate the true cost of advice and the valuable service that you provide.

Phil Billingham Managing director, Phil Billingham Associates

In the classic model, our profits come from our A clients, of which there are probably only 30 or so per adviser. These clients love us and are profitable. We then have B clients, which are either profitable or love us. That leaves our C clients, which neither love us nor are profitable. These are the clients we are referring to.

Once you establish that you cannot deal with these clients on a profitable basis or that they will not pay a retainer, then they should go.

At this point, the usual technique is to write to these C clients and explain there are increased regulatory and other costs.To remain a client, they must now pay a retainer. This may be tiered – gold/silver/ bronze. You may well offer to offset any minor ongoing income against this. Very few of these clients will accept the retainer option.

You need to write to them and let them know you no longer regard yourselves as their advisers.

You now have a couple of options: You can point them to a Find an Adviser website, such as the PFS, or you can think about passing them to another adviser, who may pay you an income. After all, one firm’s C clients may be another firms B clients. This may be especially true of a multi-tie operation, who may use less-qualified advisers than most IFAs.

That leaves the thorny issue of ongoing income. Once you have orphaned these clients, should you continue to accept this income?

My view is you can and should continue to accept this until another adviser takes over. After all, you will carry on receiving post, which involves admin costs.

I realise the above makes it sound easy, so I will add a few thoughts.

It may be an advantage if this process is spread out, giving you, and your clients time to get used to the idea and make sure your back-office system can deal with ongoing commission if you are to offer the retainer option.

Be careful with getting rid of long-established clients. Could they be a source of referrals, if asked? Are they approaching retirement or another event which will generate income? Also are you sure you cannot deal with them profitably? What about using a paraplanner? What about direct-offer business – do not bin all the files. Ever.

Be ruthless in sifting the paper files and scan the remainder. This process is likely to generate moans and complaints. Sorry. But there is an old engineering saying – measure twice, cut once. Apply this rule to this process.

IFAs who would like to find an expert to help them with business advice should email

New Model Adviser is produced in association with DWS Investments


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