Webinar Series with Facet

Survey Results –
RIA Capacity and Segmentation Practices

Facet Wealth recently partnered with CANAM Research to survey over 300 RIAs about their capacity and segmentation practices. Facet CFO Lisa Rapuano and Co-Founder and Head Planner Brent Weiss have teamed up with industry expert Bob Veres to present the results in this one hour webinar hosted by Advisor Perspectives.

Watch as Lisa, Brent, and Bob provide insights into the results through their unique perspectives. Be sure to read through the detailed questions from attendees and answers from these experienced financial professionals.

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Download your copy of the RIA Capacity & Segmentation ebook today. An ideal companion to the popular webinar, this ebook delves deeper into the results of the survey conducted by Facet Wealth and CANAM Research. 

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Webinar Q&A

Q: With low assets, how many advisors are using financial planning fees to service high income clients?

1. ____%

2. Before deciding if this makes sense for you, review your goals for your firm.

3. Firms successful in providing planning for high income clients charge a flat fee for planning to make the relationship profitable.

4. Firms focus on a niche—high income does not mean right fit for you. Develop a true value prop and focus on it; you will deliver more value and justify your fee.

Regardless of what industry metrics show, you should be thinking about what goals you want to achieve and what type of clients you want to work with. There is long term opportunity in working with high income clients as they will, eventually, develop wealth (or so we hope). The key is to understand how this can be a strategic segment for your firm. It requires a different pricing structure to ensure that you can manage the relationships profitably today while still keeping it appropriate for the client. The typical AUM based model will likely not work, at least in the short-term, if you are providing the right level of service to deliver real value. Top firms understand where they can deliver true value with their services and expertise, they develop a fee structure that they can justify based on their value, and they take a disciplined approach to bringing on the right kind of clients. Growing, forward-thinking firms are looking at ways to drive growth for the next generation of wealth. NextGen wealth will either be inherited or newly created by successful individuals that either make good money or own businesses. Firms, and most top firms are thinking this way, are looking at ways to properly service these clients while also maintaining profitability.

I would also argue that not all high income individuals are made the same. Successful firms focus on niches, definitions can be broad or narrow, but they are focusing on areas where they can differentiate their services and drive real value that will justify the fee for your services (e.g. young doctors, young partners in law firms, etc). If we are being honest with ourselves, successful people understand the value of excellent advice and they will pay for those services. And if they don’t, they are likely not an ideal client long-term.

Q: What is the best way to transition long time clients to other advisors in the office without breaking the client's trust and have them "boomerang" back?

1. Use this as a way to focus on the right clients for your firm.

2. Not all clients should transition to another advisor at your firm.

3. Use segmentation to determine good relationships, strategic relationships, and profitable relationships.

4. If you transition them internally, the right/best approach takes time—you don’t transfer trust, it must be newly developed over time.

5. For clients that are not a good fit, find an alternative.

This is a great question and a situation that I personally experienced at my previous firm. I’ll share what we did well, and what we learned, along with some of the mistakes that we made (so you can hopefully learn from them!).

We made two primary mistakes. 1, we transitioned all clients, and 2, we did this too fast. We held one meeting, transitioned clients to me, and it created friction (for years in some cases). Some clients eventually did go back to my partner. Also, we transitioned people based on AUM and revenue. It should be a more thoughtful discussion that included AUM and revenue, but also looked at personality, relationship, areas of expertise, etc. On point 1, we should have been more thoughtful about what clients were a good fit for the firm and should transition. Instead of using this as an opportunity to focus on the right clients, we transitioned all clients which only led to time, capacity, and profitability issues in the years following. And then we had to decide if we wanted to transition them again or help them find a better alternative.

The right way to do this is gradually. This is a relationship and trust-based business, and these bonds are not created overnight. Like all best practices, they take time to properly implement. I wish there was a magic way to do this today, but, if you want to do this right, you have to take your time and gradually transition the relationship. Best practices are to bring the “successor advisor” into meetings with the current lead advisor to begin participating in the client relationship. Allow the other advisor to engage the client during meetings, to deliver certain parts of the meeting agenda, to develop rapport and trust and to establish themselves as the advisor that has expertise in their particular needs. Done right, this will take 1 to 2 years depending on the relationship they have with the current lead. When done well, this will create stronger client relationships. I saw this first hand. Even with the mistakes we made, the vast majority of my clients (95%) eventually commented that they were glad the transition occurred as it was simply a better fit.

Q: How do you gracefully turn someone away?

1. With empathy.

2. Fulfilling your fiduciary duty—doing what is right for them.

3. With grace and dignity.

4. You need to do this to protect your time.

5. There is now a solution you can trust.

This is, oddly, a challenge for a lot of advisors. I say “oddly” because this is normal in other industries, but, we (myself included) as advisors find it difficult. We want to help people, and find it hard to tell someone “no” especially if there were referred by a friend, COI, or existing client.

I did this quite often at my previous firm, but I have to admit the first time I did it I was terrified! However, here is what I realized:

  1. First, I had to protect my very valuable time. We all know that a bad fit only takes up valuable resources.
  2. Second, taking on a relationship that was not a good fit for me was also not the best solution for that individual or family.

The couple, in my example, was referred by a top client of mine so you can imagine that there was added anxiety. We had a great conversation about their situation, I gave them a few general pointers, explained how I charge and why I did not think my fee structure made sense for them. I also introduced them to a local advisor that may be more appropriate. They were very appreciative of my time and, the most amazing thing, they actually called my client (who had initially referred them) and THANKED them for not taking their business. They were so thankful that I spent time with them and that I was honest and sincere in wanting what was best for them. The moral of the story is this: prospects will thank you if you help them understand you are saying “no” because you want what is best for them.

At Facet, we have helped our partner firms deal with this same issue. We have over 100 firms that refer prospects to us that do not meet their ideal client profile. This helps advisors stay focused and know that they have a partner they can trust to take great care of the families they have to turn away.

Q: How do you view the ideal capacity thresholds for teams (i.e. Partner, Senior Advisor, Associate Advisor)? 75 per team or per Partner/lead advisor?

1. Depends on the services you provide—comprehensive planning is between 50 and 75; asset management can be 100 or more.

2. Capacity/client number is typically for the LEAD advisor for the relationships.

3. Supporting team members—a paraplanner as an example—can work across teams to drive leverage.

First of all, the number of clients will vary depending on the level of services and the depth of the relationships. We saw a wide range in our survey as services ranged from full planning to investment management only. Comprehensive planning, to no surprise, will take more time than simply managing assets. With that said, the ideal number is typically determined by the lead advisor for the client. This is the person that manages the relationship with the client. Members of your support staff may “touch” more relationships, but they do not drive or manage the overall process. For firms that offer planning, we see a range from 25 to 75, with 75 being “normal” for a typical RIA. Lower numbers typically correlate to advisors working with UHNW clients. On the investment side, numbers get close to 100 or more as we can see in the data. The bottom line is that the right number of relationships is a function of your valuable time and the services you provide. The more services and the deeper the relationship, the fewer clients can be serviced properly by an advisor.

Q: Is there any strategy/analysis we should apply for determining whether small clients today are worth keeping because of their future value over the next 10-30 years?

1. The strategy is defining your value proposition and your ideal client.

2. If a client does not meet it, you should seriously consider transitioning the client (or not taking them on).

3. Segmentation is the analysis that will allow you to see where you are today, measured against step 1.

4. Then you need to take action to get you closer to your ideal client profile.

5. Non-strategic accounts will almost never add value long term.

Great question and one that is top of mind for most advisors when they go through a segmentation exercise. The strategy, much like in financial planning, is to clearly define your goals as they relate to your firm and to your ideal client. The analysis part of this is using segmentation as your KPI (key performance indicator) scoreboard to tell you how well you are doing in relation to your goals.

Let me share with you how I handled this at my previous firm and then we can apply it directly to your question. We had five tiers that resulted from our segmentation: A ($10k+ in revenue), B ($5k+ in revenue), L (Legacy—adult children of A clients), S (Strategic—think HENRYs) and T (Transition segment). As and Bs were profitable and good relationships for our firm. Because we had a minimum planning fee of $5k per year, we were in a good position to turn good, long-term clients into profitable clients. We were very disciplined about this. It took us a while to get there but it changed the way we did business in a good way. Legacy accounts were strategic as they were related to our top clients and the goal was to make sure we developed a great overall family relationship, and captured next generation assets. Strategic accounts were younger clients that were high earners, owned a business, or had a layer of complexity that required our expertise. As mentioned previously, these clients still paid a minimum planning fee of $5k, every client paid our minimum. This allowed us to remain profitable before they had the wealth that was more appropriate for our AUM-based model. Trying to predict a great opportunity more than 10 years out is difficult. Plus the NPV really isn’t that great.

If there is no indicator today, it likely won’t be a good relationship long-term. The last thing I will add here is that our minimum planning fee helped us stay very focused in our new relationships. If a client did not have the income to support the fee or if they were unwilling to pay it, it usually meant it was not a good fit for our specific value proposition. It took a fair amount of discipline to stick to this, but boy were we glad we did based on our long-term results.

Q: How many qualifiers do you have for each segment and what do they look like?

1. Keep it simple—maximum of 3.

2. Identify your key qualifiers based on your goals as a firm and where you deliver true value.

3. Review your segmentation periodically to make sure you are driving the results you are looking for.

The survey results showed that key qualifiers for segmentation were AUM, revenue, need-based, and life-stage-based. For me, as I think about the shifting landscape in the industry and the need to deliver more value and deeper relationships, I tend to look at need-based (i.e. services required) and life-stage-based segmentation. My 3rd filter was revenue. After I asked the question “Does this client fit my ideal client profile,” I then asked “Can I generate revenue, service them profitably, while driving the financial health of my firm (and maintaining my own sanity)?” That is just my preference as a younger/G2 advisor. This allowed me to think about where I deliver true value in a relationship. Don’t get me wrong, AUM was easy and nice to track, but I found understanding what type of client I was attracting and enjoyed working with helped me to better understand the overall health of my firm. I will share that my partner, who started the firm and who was about ten years my senior, primarily focused on AUM. He was magical at business development and used net new assets as his measuring stick. It served him well, and I, as a next gen advisor, focused more on the quality of the relationship, the connection to the value that I bring and the longer term potential.

Q: In a world that is complex and ever changing, what do you think about the need for firms to establish strategic collaborative relationships with consulting firms and other professional advisors that are more robust that the typical networking relationship?

1. Mile deep, not mile wide.

2. Industry is moving towards deeper and more valuable relationships.

3. Best firms have a clearly identifiable and differentiated value prop.

I love the forward-thinking nature of this question. At my previous firm, I spent a lot of my time focusing on developing my “dream team” of partnerships and synergistic professionals (full disclosure: this was after about five years of trying to be everything to everybody). As we look at where the puck is heading in the industry, we need to think about delivering true value to our clients and to driving deeper, more meaningful relationships. Go a mile deep, not a mile wide. And there are several benefits here. If you can deliver true value to clients with very complex financial lives, you will develop a competitive advantage that will be difficult to erode. You will never have to worry about fee compression or a price way because you compete on value and not on price. Second, ancillary professionals will start to know you as the true expert in a specific area. Every attorney and CPA in your area hears the same thing from advisors: “I work with families that have more than $1M in assets.” That is a terrible way to develop a solid network. (Although I did it for a while as well.) However, if you have meaningful relationships with other professionals and can say you specialize in X, Y, or Z, you can set yourself apart because you bring something different to the table. Top firms have a clearly differentiated value proposition, they focus their time on high-value activities and they develop better relationships with a very selective group of other successful professionals. Like everything else, it takes time, but it will pay dividends.

Q: Ways you think advisory firms can differentiate themselves going forward.

1. Deeper relationships.

2. Greater service/breadth of service.

3. Specialization and expertise.

4. Sales people get paid to sell product, generalists get paid to sell their time and knowledge, niche advisors get paid for their expertise and wisdom.

Simply put, the keys are:

  • Deeper relationships (robots cannot take this from you)
  • Better service (either more touch points OR greater service offerings)
  • Driving value with specialization and expertise

All of these will help create a differentiated value proposition and a more focused brand/reputation. I attended a conference once, and they put 100 mission statements and value propositions up on the screen. How many do you think stood out? 5! 95 of them were almost exactly the same. The 5 that stood out were: special needs in trust planning, international tax planning, planning for the LGBT community, planning for divorced women, and a family office type shop. Are these the five areas you need to pursue? Of course not. The point of my story is that you knew exactly what these firms did, how they were different, and where they created real value. Top firms in the industry take similar approaches. They are focused on working with the right type of clients, and, as a result, they generate more referrals, have greater consistency in their service delivery, and have a more recognizable brand.

Q: Lower tier clients—are there advisers who really are going years without talking to these clients? Are these asset management clients?

A: As surprising as this sounds, the answer is yes. Keep in mind that some clients are unresponsive, so this doesn’t sit solely with the advisors. We see this most often when there has been a merger, acquisition, retirement, or other restructuring. These more material events can be difficult to handle if not properly planned, and can lead to client service issues. In some cases, this problem arises from rapid growth. As a firm grows with more profitable accounts, the smaller relationships start to receive less service. Bottom line, it happens and it shouldn’t. The top firms in the industry do not do this or they understand that there is a service issue and are actively working to fix it. The firms with whom we (Facet) partner have realized that they can no longer deliver their services profitably or no longer have the time to properly service their clients, so they transition them to us in a win/win scenario.

Q: What is the average staff to advisor ratio in RIAs? What is the average staff to client/household ratio in RIAs?

1. The right ratio depends on your firm and services delivered.

2. Have seen teams of two to teams of 5+ (for specialists).

3. Generally speaking, 3 seems to create some good balance (lead, associate, admin/ops).

I have never been a big fan of averages, as it is hard to then apply the information to your situation. To give this conversation better context, I’ll share what I have seen over the years and what I have learned from some top industry consultants. Teams, as defined by staff to advisor or staff to client, range from 2 people to north of 5 in some cases. The sweet spot appears to be 3 team members per client. This consists of a lead advisor, an associate advisor or paraplanner, and an operations employee. This team structure allows the lead advisor to focus on the relationship and rendering advice, the associate to focus on planning and prep, and the ops person to focus on primarily administrative tasks. It is a good division of labor and drives leverage for each role. Smaller teams generally speak to a firm being younger, so staff is limited, or to a more generalist approach to planning. Larger teams are typically associated with firms that have experts in areas of tax, estate, trusts, etc. and who deliver a true wealth management solution. The common thread is that top firms understand where each team member can drive real value for the client and the firm. Your time is valuable, we cannot create more of it, so build your team to maximize that value.

Q: What is your definition of servicing a client?

1. Top firms provide comprehensive planning.

2. Service levels can vary but there is typically a lead advisor that manages the relationship

3. And a team that supports the lead and handles ops/admin to create leverage.

The definition of servicing a client will vary based on the type of firm. Are you a planning firm, an investment management firm, a retirement plan services firm? To keep this focused, let’s look at the typical advisory practice that provides planning and investment services to individuals and families. First, there is no set industry standard for “servicing a client”. However, when you look at firms that are growing—often at 2 times the rate of the average firm—they have developed clear standards around services to be provided to clients and the delivery of those services. Firms that are developing an economic moat around their business are including both financial planning services and investment management services. The planning aspect is the real value driver for these firms moving forward. Value, as defined by consumers, is driven by deeper relationships (i.e., trust), knowledge and expertise for their situation (i.e., a specialty), excellent service (i.e., having time for them), and breadth of services. Top firms are looking at ways to add value. In doing so, they can clearly define their value proposition both internally and externally which, in turn, leads to greater growth.

At Facet, we define service as providing comprehensive financial life planning and investment management. Every client works with a dedicated CFP® professional to develop a personalized financial plan, and we manage assets when appropriate.

Q: When you consider asset minimum do you exclude 401k and 403b assets?

1. Generally speaking, yes. Clients with lower manageable assets today but with high future potential fall into the “strategic” account bucket.

2. However, if you do this, you should consider having a flat fee for your services if that client would not be profitable given what you can manage today.

3. Understand how segmentation can help drive growth at your firm . Develop segmentation practices that fit your business.

To me, the answer to this question starts with what segmentation means to your firm and how you segment your clients. In my opinion, a client that has manageable assets below your minimum today but with significant assets in a retirement plan would fall into a “strategic” client segment. They are not profitable today but represent a future opportunity. A few questions that come to mind are:

  1. What is the balance in the 401k, and will it lead to an “ideal client” as you define it in the future?
  2. Is this an upwardly mobile client (e.g.., good income, high savings rate, ability for retirement plan to grow, etc.)?
  3. How long until this money becomes manageable?
  4. Do you charge a minimum planning fee today to generate profit from the relationship today?

If we are being honest, most clients with sizeable retirement plans are likely close to a trigger event that will allow you to manage the assets, so it is hard to argue that you should not service the client and wait for that event. I had a client for whom I only managed $14,000 (yes $14k), but he had $1.5M in a 401k and was maxing the plan and made good money. His family became a strategic account for me due to the future potential.

Q: How important would you say having a focus/niche is? Have you seen a big difference in business between being a general practitioner and having a niche?

1. You can build a good practice as a generalist, however there are great benefits to having a focus/niche.

2. Consistency in service delivery will drive greater efficiency and capacity.

3. Brand/reputation strength will drive more referrals, and make it easier to focus marketing.

4. Differentiated value prop.

There is a generational shift occurring in the industry, and some, more than others, need to be prepared for it. What this tells me is that having a focused ideal client profile or a niche becomes more important the younger you are or based on whether or not you are building an enduring firm. Solo advisors approaching retirement need not worry about this, but advisors with 10+ years until retirement or looking to create long term enterprise value should very seriously consider doing this. Do I think it is critical to success for the next generation of financial advisors? Yes. Let’s talk about why.

Having a focused practice or a niche drives value in several ways. First, it allows you to create consistency in your services and delivery which generates greater efficiency, increases capacity, and lowers cost. Second, becoming an expert or specialist in your area will allow you to develop a reputation as the “go to” person and create greater brand value. This also leads to a more clearly defined value proposition which will set you apart as more services become commoditized. Last, but certainly not least, it will help generate more referrals from clients and COIs long-term as they will see you as a unique provider in your space. A recent Schwab study showed that RIAs with niches gained 26% more new clients and 41% more new client assets in 2017 compared to firms that don’t have niche client targets.

Q: If you're still focused on growth, should you still work on a target market or take what you can get and then segment/target later?

1. Short answer is to focus on a target market.

2. Taking on any client today will only lead to profitability and capacity issues in the future.

3. Discipline is a key characteristic of tops firms; be patient; it will pay off.

This is a great question and one that many advisors ask. The short answer is that you should be very targeted from day one. This takes discipline, but it will add value down the road. Advisors that are targeted see greater growth in the future as they have a more clearly defined value proposition, achieve greater profitability, and have more time and capacity to focus on value-driving activities. Firms that do not do this eventually reach a point where they do not have the time and capacity to drive efficient and profitable growth, and their businesses stall until they find a solution. I saw this first hand at my previous firm. We had clients that no longer fit our ideal client profile, as a fiduciary I felt obligated to provide service, but it ate into my very valuable time. At Facet, we have partnered with many firms to act as a trusted referral partner for the clients that may not meet your “target customer profile.”

Q: It seems like firms need to make a decision as to whether they bring in the next generation of planners/advisors to handle less profitable clients or to outsource. Part of me says bringing in the next generation of planners for purposes of handling less than desirable clients could erode enterprise value over the long term. Thoughts?

Spot on. The junior advisor solution for less profitable accounts is not what top firms do. Why? Because top firms know that these relationships do not drive long term value for the organization. With that said, there may be some less profitable accounts that are considered strategic. Best examples would be adult children of top clients, or HENRYs, for whom you can add value today. Other than these relationships, trying to create a profit center from non-strategic accounts does not add value. It lowers profitability, which is a major factor in enterprise value. You have to develop a different service model which is not supportive of your overall brand. And it takes away from firms developing their true value prop and identity. Top firms and focused firms know where they add value. They differentiate themselves in the market and they take steps to build a true brand. These are factors that add to real enterprise value.

Q: Have you noticed any percentage allocation patterns for highly successful advisors (i.e. advisors with over $1m in revenue spend 40% servicing, 35% bus. dev, 1% portfolio management)?

1. The typical advisor spends between 40% to 50% of their time on client service related activities, but this breaks down to meeting prep, planning, wrap up, and client facing activities.

2. Only 15% to 20% of their time is actually client facing!

3. The overall percentage of time spent on client activities does not change dramatically (within +/- 10)  but how they allocate it does. Studies have shown that top advisors spend at least 20% to 30% more time in front of their clients and less time on the previously mentioned tasks.

4. Top advisors use teams to create leverage and to focus on higher value activities.

Here is the bottom line: successful advisors spend their time where they generate the most value. At larger firms, advisors tend to have different strengths so their time may be spent on different activities (marketing, management, admin/ops work, clients, etc). Where you should spend your time depends on where you deliver unique value and your firm’s current assets and resources. Speaking to the industry in general, most advisors find that they spend between 40% to 50% of their time on client service related items. The interesting data lies in how this 40 to 50% is allocated. On average, only 1/3 of this time is spent with clients. That means advisors may only be spending about 15% to 20% of their total time in front of clients. Other activities include managing employees, general admin work for the office, business development, investment management, professional development, etc. Here is the trick of top advisors: most still maintain their other duties as their firms grow, however, by leveraging their teams, they are able to increase their overall client service time by 20% to 30% and they spend more of this time in front of clients developing deeper relationships. They let their team handle the planning analysis, meeting prep and other service related activities. Top advisors know the value of their time and they work to maximize it.

Q: Clayton Christenson of Harvard who suggests the JUST GOOD ENOUGH model is how most businesses get disrupted. How does that play into your thinking?

1. Just good enough leads to poor relationships.

2. Just good enough leads to competing on price and not on value.

This may be the best comment that I heard from the webinar. You may not be surprised to hear that I, and the Facet team, agree with this! Firms that try to be everything to everybody will eventually fail due to lack of focus or due to disruption (i.e., a new entrant to the marketplace). A “just good enough” practice model will lead to these firms to compete on price, and competing on price is a losing proposition. There is zero value creation for a traditional advisory firm trying to compete solely on price. Imagine a financial advisor trying to charge 1% for asset management that focuses on diversified portfolios that use low cost, index tracking ETFs. They would have to charge 30 bps or less to compete with robos. Not a game that I would want to play. However, if we look at top firms and firms with true economic and value moats, they are delivering exceptional levels of advice and service. The successful firms of the future will compete on value and not price. Value in our industry is driven by deeper and more meaningful relationships, trust, service, expertise, and an identifiable value prop that supports your brand. At Facet, we are disrupting the “just good enough” model because we believe all families deserve the best service and advice for their situation. We are delivering “better” at a more affordable price.