Retaining clients is one of the most important components of a successful advisory practice. After all, there are costs associated with obtaining new clients, and to lose them results in not only lost revenue, but makes the entire endeavor a waste of time.
PriceMetrix, a practice management software and data services company, just released a new study on client retention. I like the company’s work and find it very credible, in part based on the size of their database, which encompasses 7 million investors, 500 million transactions and nearly 40,000 financial advisors.
The study concluded that advisors who retained 95% of their clients during the period 2010-2013 increased total assets under management (AUM) by 25%, while those who retained 80% increased assets by just 12%. Growth and success are definitely related to client retention.
Some of the key takeaways from the study include:
- The most critical years of a relationship are years two through four. The first year of relationships is often viewed as a honeymoon period, and retention was found to be 95%. But retention dropped dramatically overall in years 2-4 to just 74%. Advisors should demonstrate – or reprove – their value added to clients around the first anniversary as part of their standard client servicing practices.
- Advisors with larger client households do better than those managing less than $250,000. The average household with $100,000 in assets has an 87% retention rate, while the average retention rate for $500,000 households is 94%. In this case, size does matter.
- Pricing matters. The moral of the story here is not to price either too low, because clients will not see your value-added, nor too high, because as we all know, no one likes high fees. The optimal pricing range was found to be between 1.0% and 1.5% of revenue on assets (ROA).
- Fee-based accounts are slightly more likely to stay than transactional accounts (91% v. 89%), but hybrid households – which include both fee-based and transactional accounts – are the most likely to stay at 95%. This result is very interesting and somewhat contradicts the trend toward fee-based business (and managed accounts). Perhaps the best strategy when trying to convert clients to fee-based business is to suggest they keep their current accounts rather than necessarily replace them.
- Advisors who have multiple retirement accounts with a household are much more likely to keep the relationship. The retention rate of clients with no retirement accounts is 85%, one retirement account 86% – but 94% for those with multiple retirement accounts.
- Older clients are far more likely than younger clients to stay with their advisors. 30 year old clients were found in the study to have an 82% retention rate, 40 year olds an 87% retention rate and 50 year olds a 90% retention rate. This is not completely surprising given everything we know about todays’ younger generation. But it does indicate that advisors should diversify their books by age in order to keep stability.
I think these are all important points to keep in mind. I wouldn’t necessarily recommend changing your marketing strategy because of the study, but it should influence the way you talk to clients, how you treat current clients and provide some points on how you can fine tune what you do.
