Finding the profit formula for your business

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

Nathan Pomer had been an advisor for twelve years but had reached his peak revenue five years ago. He was tired of working harder and harder for the same return.

“That’s a typical problem with advisors at your career stage,” We explained. “The strategies you put in place in your first few years in the business were the right ones to get your business off the ground and growing for a few years. Unfortunately, five years ago your business realized all the growth potential of those original strategies but you didn’t develop new strategies for the next stage of growth. And it’s easy to see why. Most advisors get caught up in the daily grind and feel pressure to keep things moving. We call this working in the business, and while doing so generally ensures that revenue will continue to come in, it’s not a growth strategy. Real growth comes from the effort of working on the business — strategic planning.”

Nathan told us he probably hadn’t worked on his business for years. “I know I need to look at my business and where it’s going, but I never make the time.”

Norm Trainor, Nathan's coach, explained, “Adrian Slywotzky, a Harvard Business School professor, has written a number of best-selling books on profitability — the importance of profitability to business, particularly to North American businesses. Slywotzky argues that most corporations are not set up to be profitable. Most organizations fail because they never find the profit formula. Your challenge as a businessperson, as an entrepreneur, is to find the profit formula for your practice.

“For most advisors in your position, the answer lies in how you structure your clientele and how you build your business and operations around that structure. Most advisors don’t understand the relationship between profit and their clientele and how best to harness the value of their clientele to generate a profit.”

When Norm asked Nathan how many clients he had, he answered:

“Roughly 500.”

Norm explained that “A typical advisor can really only work at a deep level with 100 clients. So, you’re probably best to consider your other clients effectively orphaned.”

Nathan didn’t like the sound of that.

"Nathan," said Norm, “I don’t think you can tell me with conviction that you have relationships of any depth with clients outside your top 100. For each client do you know their financial and life goals, the issues and problems they face, their deepest needs, wants and values? Do you know if you are their primary advisor? Who their other advisors are? What their total net-worth is? How many products or services do they have with you compared to their other advisors? How much wallet-share do you have?”

Nathan admitted he couldn’t answer that question for the bulk of his clientele.

“So, one thing to look at in your business is a solution for dealing with these 400 clients. If you can’t service them and grow them, what are they doing in your business?

The other reality we needed to emphasize is the effect these clients have on his profit. If a typical advisor were to graph his or her profit against their clientele, they would most likely find that 150% or more of their profit comes from their top 40 clients. The rest of their clients take them back to 100%. So, the profit they make on their key relationships is lost on the mass of their other lower-level relationships. But this doesn’t need to be the case. With the right strategies in place, an advisor can extend the profit potential well beyond the 40-client mark. Furthermore, the remainder of their clientele can add to their profit rather than detract from it, albeit at a decreased rate.”

Nathan asked if I was suggesting he segment his client base.

“Yes,” said Norm, “but I want you to have a clear understanding of the effect of segmentation on profit, and how exactly to segment your client base. I don’t believe a lot of advisors go about it the right way. You need to have sound criteria for selecting who’s in and who’s out of your A list, and you need to have the discipline to actually segment your list. Too many advisors aren’t rigorous enough. They tend to keep people in their A list who don’t actually belong there, and this drags down their profit.”

Nathan asked what criteria he should use to segment his client base.

“A good way to do that is to examine the value potential of each client. Value potential is based on such things as the client’s net-worth, their potential for growth, their ability to lead you to other high-value prospects and the complexity of their financial needs. You then need to consider each client’s propensity to buy. Some clients might have high value, but a low propensity to buy. You can graph the “Value Potential” of your clients against their “Propensity to Buy”. Ideally, you want to find as many clients with high value who also have a high propensity to buy. Those, of course, are going to be your AAA clients. But if a client is not likely to do business with you, you’re probably better off not categorizing them as AA or even A list clients.

“Your next challenge is to come up with a strategy for realizing the potential value each client represents. For financial advisors there are essentially three key strategies to focus on: one, grow your client’s assets under management; two, cross-sell; and three, consolidate. If you apply these three strategies to your high-value clients who have a high propensity to buy you will increase the profit of your business.”

“But I won’t have time to service my other 400 clients,” Nathan said.

“I hope not. They’re only dragging your profits down anyway. As I said, you need a plan for dealing with these other clients. That’s what becoming profitable and moving up market is all about. And you have various options. You can share the servicing with another advisor, or marketing service or hire a junior sub-producer. You need to focus on increasing the calibre of your A clients. My guess right now is you may have only 40 or so legitimate A clients. As you get more efficient and disciplined about your business, you’ll be able to grow that to 50, then 60 and 70 plus, and that’s a business you can get excited about.”

Nathan agreed. He had reservations about taking time away from his business to segment his clientele and develop a sales and service strategy, but he forced himself to. He booked three days out of the office and worked on his business plan. He was surprised at the results. His clientele was more messed up than he thought. There were lots of high-value potential clients he treated like AA or A clients and too many AA and A clients he spent way too much time and energy on. It was no wonder he hadn’t been able to grow his business over the past few years. He decided the only way he’d ever be able to make his business more profitable would be to hand over the servicing of all his AA and A clients to a junior advisor, which is what he did. Within a few months, Nathan limited his servicing to 200 clients with plans to weed that down to 100 over the next 18 months. But he was already seeing great results. His revenue for the first six months of the year was 30% higher over the year before.

Lessons Learned

Nathan learned four important lessons about finding the profit formula for his business:

• For a typical advisor, only the AAA  clients are profitable. When they add in their AA and A clients, their profits often get worn down, sometimes all the way down.
• Advisors need to understand the relationship between profit and their client relationships and they need to structure their businesses to reflect that reality.
• Segmenting your clientele requires discipline. Only clients with high value and a high propensity to buy should be included in your AAA list.
• If there is a strategy for AA and A clients, these segments can be net contributors to profit, rather than detractors.

________________________________

The Covenant Group is referred to by many as where entrepreneurs go to become Business Builders. They are considered to be thought leaders and authors of the best-selling books, The 8 Best Practices of High-Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.