Conventional wisdom has long held that advisors have to focus their practices around their most profitable clients if they're to enjoy success. Why, experts ask, devote time to the bottom tier of one's clientele, the 'C' and 'D' clients, when you earn potentially far more in commissions and fees catering to 'A' and 'B' clients: individuals who are wealthier, and who generate more repeat business and referrals to other high achievers in their asset class.
One answer, say those who dissent from this view, is that there are ways to service profitably and cost effectively the Cs and Ds. Among them: outsourcing to a third-party provider that boasts marketing expertise and economies of scale; and delegating servicing to internal advisors who are best suited to working with low-margin clients.
Advisors also cite regulatory, competitive, contractual and ethical considerations as reasons for holding on to low-margin clients. But perhaps the most compelling of all is the prospect of converting a C or D prospect into a high-margin A client–thanks in part to the advisor's expert counsel.
"When we looked at our top 50 clients during a strategic planning session, we found that from 20% to 25% at one time occupied the market tier that we were considering selling to an outside firm," says E.W. "Woody" Young, a financial planner and president of Quest Capital Management, Dallas, Texas. "Had we executed a sale 10 years ago, we would no longer have had these clients or the individuals they referred us to. This was a revelation for us."
A decade ago, those sterling clients looked much like the Cs and Ds explored in a study of U.S. and Canadian advisors that ReMark North America, Toronto, Ont., released in June. In the U.S., the D clients (individuals who purchase one product and have no post-sale interaction with the producer) constitute 28% of advisors' client base, require 14% of their time and generate just 12% of the revenue. The numbers for C clients (those to whom "some" products, planning or services were sold) are little better. They account on average for 19% of U.S. advisors' clients, demand 17% of the advisors' time and produce 12% of revenue.
By contrast, A clients (they generate most of the revenue, consistently ask for advice and purchase at least three products) account for 26% of clients, require 40% of advisors' time and contribute to 51% of revenue. Among B clients, the numbers are 27%, 29% and 24%, respectively.
"Clearly, you're rewarded for spending more time with your A and B clients and have little incentive to work with the Cs and Ds," says ReMark President Brad Smith. "So, it's a game. The smarter advisors who know they can't service everybody are distancing themselves from their bottom tier. That's common sense."
And not only because these clients are not generating much new business. Byren Innes, a senior vice president and director of Toronto-based NewLink Group, which conducted the study on behalf of ReMark, says that C and D clients refer less often than As and Bs. (On average, advisors acquire 25% and 15% of clients through referrals from A and B clients, respectively. This compares with 5% and 2% from Cs and Ds.
