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Building the Business 101: Assessing Your Clients' Value

How to determine a client's value to your practice.

Veena A. Kutler and Annette F. Simon, 04/26/2007

This monthly series of articles describe the many steps and occasional missteps we have taken in building our financial advisory business, Garnet Group LLC. Currently, Garnet has eight staff members, more than 90 clients, $300 million in client net worth under advisement, and offices in Bethesda, Md., and Boston. Veena Kutler, CFA, and Annette Simon, CFP, are the principals managing the Garnet office in Bethesda.

In our previous column, we discussed client categories and described our process of classifying our clients into five broad categories: busy professionals, retirees, legacy families, business owners, and young families. As we explained, defining categories provided insight about why our clients were coming to us and helped us to target future growth by focusing our marketing efforts on three of the five categories.

In this article, we will continue with a discussion of client assessments and the value that each client relationship brings to our practice. 

The Garnet Client Assessment
Our two offices serve more than 90 clients, and we appreciate every relationship. But quite honestly, we are quants at heart and feel compelled to understand the unique and relative value each client contributes to our practice. We recognize that value goes well beyond revenues or even pure profitability. In our view, value encompasses other factors, including the difficulty or ease of the relationship, the quality of interactions between the client and our staff members, and the client's ability and willingness to refer additional business to Garnet.

Does client assessment make a tangible difference in our practice? We believe so for two reasons:

  1. While our goal is to provide superior service to all clients, some clients are true friends to our business and we want to recognize that.
  2. By identifying clients who seem to be an extraordinary fit with our practice, we learn how we should target our marketing efforts to acquire similarly outstanding clients.

Does Client Assessment Turn People into Numbers?
Our approach to wealth management has always been holistic; from day one, we see and treat our clients as individuals and not as numbers or accounts. As we began our client assessment, we had to ask ourselves whether we were in danger of losing that client-focused mindset.

As we began fleshing out the criteria, however, it became clear that they were based on factors well beyond asset value or fees paid. We were seeking to build a profitable client base we can enjoy working with, one that would help to keep our staff happy and willing to stay in the business for many years.

After much discussion, we came up with the following criteria for rating our clients:

Annual Fee
The revenue in dollars that a client brings to the practice is inarguably a factor and a major one in the assessment.

Fairness of Fee
Some clients who have been with us since we first started or whose issues were more complex than we initially realized pay fees that are significantly lower than newer clients whose fees were calculated in a more objective way. Loyalty to our longtime clients has led us to let those who pay relatively less slide, but over time, some fees have become dramatically skewed. All partners have differing opinions on this factor. Annette feels it is inherently wrong to have clients with similar financial profiles and degrees of complexity paying significantly different fees; Veena is more cautious about raising fees and alienating clients we have worked with for years. Our Boston partners, Lisette and Tanya, feel the tug of loyalty to clients who helped them start their practice and also have been reluctant to raise fees, but see the necessity of it.

Required Resources
Clients with complex issues demand more resources. For example multiple outside accounts, annuities or limited partnerships require administrative time as well as analytical effort. We take pride in our comprehensive service and are always willing to put in the necessary time to help our clients but complexity has to be a factor in assessing overall client value.

Stress Factor and Client Attitude
We attempt to quantify the quality of interaction between Garnet staff members and the client. Some clients keep us smiling through every phone call and meeting and generally every interaction with them is a pleasure. They let us know that we are important to them--and what person (advisor or otherwise) doesn't appreciate that? In addition, some clients refer us to other potential clients and are willing to speak to prospective clients about their experience with us. By helping us grow our business they become very valuable to our practice. Other clients are challenging to deal with because they are demanding, impatient, constantly cancelling meetings, or refuse to follow up on the recommendations we make to them. We know clients come in assorted flavors and are willing to take them as they come. Ultimately, though, this is a key factor for us.

Future Value
Clients who have fewer assets today, but a lot of potential and willingness to build a stronger balance sheet may be just as valuable (perhaps even more so) as those with sizable net worth who are in the process of depleting their resources.

Once we agreed upon our criteria, it was time to launch Microsoft Excel and create a spreadsheet to weight the various factors and come up with the metrics for our client assessment. In our practice, Annette, the spreadsheet enthusiast, eagerly tackled this challenge.

We assign a weight of 50 to the total annual fee and 10 each to fee fairness, resources required, stress factor, client attitude, and future value. Client fees are scaled with the highest annual fee receiving 50 points; all other client fees are assigned a proportion of 50 points relative to the highest fee. So, for example, say the highest client fee is $50,000 per year; a client paying $20,000 per year is assigned 20 points in the fee category.

Using our firm-wide formula for calculating retainer fees, each client's actual fee is compared with the calculated fee in order to calculate a Fee Fairness rating of one to 10 points. If, for example, the fee calculation produces an annual fee of $15,000 but the client is paying $9,000 per year, the fee fairness rating is six.

For the stress factor and client attitude ratings, we asked each member of the staff who deals with a client to assign a number from one to 10 for stress factor and another number from one to 10 for attitude. Most of our assessments on these measures were similar, and we were able to come to consensus on each rating. (In all cases, 10 is the best score and 1 the worst, so a high stress factor client might get a one or two, not a nine or 10.)

In rating future value, we use just three numbers. Clients who are actively and consistently adding to their portfolios receive 10 points in this category. Those who are consistently depleting their accounts are assigned zero points. Clients who are neither building nor depleting their resources are given five points for their future value.

With our categories and assessments in hand, we now have more insight into our practice. Not only do we better understand our current client base, we also have a better feel for the clients who are attracted to us. As we evolve and grow our service offerings we can target them to our natural potential client base. Equally important, each time we consider adding a new client service (e.g., bill paying or account aggregation) we can evaluate it in the context of our client base and ask ourselves if it appeals to the market segments we want to attract in the future.

What Other Advisors Do
Do other advisory firms use categories and assessments? We were curious and reached out to our colleagues at the National Association of Financial Advisors to learn what other firms are doing. Not surprisingly, we found many similarities but some differences in the way other advisors view their client bases.

Georgia Bruggeman, of Meridian Financial Advisors in Holliston, Mass., echoed many of our views when she commented, "I can tell you that I have begun to segment my clients because otherwise you lose focus as you grow. After you gain enough traction, you need to decide what you want your practice to be and who your target market is. When I started, I wanted to help everyone. I was going to save the world. Now I look for someone who is willing to take direction and will follow through on the recommendations. Most of my clients are too busy to pay enough attention to their finances. My clients tell me how they truly appreciate the peace of mind I have been able to give them. The natural first step to segmentation is assets, but I also look at how committed the client is to growing those assets and following through on the plan recommendations. Personality and fit are critical, although I think if those are not present the relationship would not happen anyway. If I find that a client is not following through on recommendations I will attempt to get them on board and bring that to their attention but the relationship will suffer."

Doug Kinsey, Artisan Financial in Dayton, Ohio, put it succinctly: "We really don't classify clients by the traditional A, B, or C method. We do sit down and review at year-end our ongoing value to each client and whether or not they are deriving the appropriate benefit from our relationship. However, we prefer clients who are pleasant to work with and truly appreciate what we offer."

Curt Fey an advisor in Pittsford, N.Y., took a different stance. "I do not evaluate clients in terms of importance to the practice. I do evaluate them how well I fit their requirements, compared with others." Although he goes on to concede, "I do not accept persons who give me grief."

And therein lays the tale. Life is short, and none of us want to work with people who give us grief, although each of us might have a different definition of what that means. By categorizing and assessing clients, we can create a better practice for ourselves and a more productive experience for our clients.

How do you evaluate and classify your client base? What actions did you take to grow your client base once you got past the "qualified if breathing" stage? What other practice management concerns do you have?

We're curious. E-mail us at dc@garentgroup.com and let us know. Also, let us know if there are practice-management topics you would be interested in having us discuss in the column.

Next month, we will discuss clients and prospective clients who didn't fit our practice. Saying goodbye or never getting past hello will be the topic.

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