Advice Market Blog
How’s your client retention in your advice practice?
May 18, 2016
Sorry to say – your practice will never achieve 100% client retention over the medium to long-term.
All of your clients will depart this mortal coil at some point in time, others will divorce or separate and still others will relocate to a new country, state, city, or town. Some may even leave you because they don’t think you’re doing a good enough job, you charge too much or they feel unloved.
In this study published in late 2013, the reported median client retention rate was 94%. Advisers at the 10th percentile only retained 84% of their clients, while an adviser at the 90th percentile retained 98% of their clients.
Client churn is inevitable but that’s no reason to ignore its importance because the ultimate success of your practice relies heavily on retaining clients so you can extend their lifetime value and, ultimately, maximise the value of your practice. After all, at some stage in the future you will want to achieve a ‘liquidity event’ at the highest possible valuation.
Retention is also an essential precursor to both increasing share of wallet and generating genuine referrals.
At this point, here’s a definition – client retention is the set of activities that your practice undertakes with the goal of reducing customer churn.
Due to the relatively ‘sticky’ nature of client relationships in the financial advice industry compared to other industries, client retention rates for average to well performing practices tend to sit in the range of 94% – 98%, which means an annual client churn rate of 2% – 6%.
If your practice is currently operating at a retention rate of 94% (with an implied annual churn rate of 6%), what would it mean to your bottom line to reduce the annual churn rate to 5%?
Let’s run some hypothetical numbers.
- Your annual retention rate = 94%
- your annual churn rate = 6%
- average client age = 55 years
- average annual revenue per client = $5,000 (ex. GST)
- average client life expectancy = 75 years
- you have 100 clients
Based on these numbers, you could expect to generate revenue of $100,000 (unadjusted for CPI) per client over their remaining lifetime (20 years x $5,000 p.a.) X 100 = $10,000,000 in total.
The implied average client economic lifetime, based on the current churn rate of 6%, is almost 16.7 years. This means that unless you can reduce the churn rate, you will miss out on generating 3.3 years of revenue per client = $16,500 = $1,650,000 in total.
If you could reduce the annual churn rate from 6% to 5%, this would result in an implied average client economic lifetime of 20 years, resulting in being able to extend the economic lifetime of each client by 3.3 years and generating additional revenue per client of $16,500 = $1,650,000 in total.
None of these calculations take into account the attractive financial benefits of generating additional referrals as a result of extending client lifetime nor the savings linked to avoiding the costs of marketing activities to acquire new clients to replace those who have churned.
As you can see, this is no small deal and when it comes time for that long awaited ‘liquidity event’, every client you can prevent from prematurely churning has a significant impact on your ultimate pay day.
Client retention also brings other benefits such as:
- Opportunities for next-sell, cross-sell and up-sell of products/services that may command higher margins and/or lower cost of service. A number of studies have suggested that the acquisition of a new client can cost 5x – 10x more than maintaining an existing client, so client retention has a positive effect on costs and the bottom line.
- Greater likelihood of generating positive ratings, reviews and testimonials that can be used in your marketing activities to attract new clients
- Retained clients may be less price/cost sensitive. A client who is loyal to your practice is more likely to accept a price increase than a new client provided you can demonstrate value delivered.
Assuming each of your clients is profitable, it makes a lot of sense to extend the client lifetime as far as possible by minimising churn. Because when a client churns, your practice will lose everything it has spent to acquire and support that client up to that point, as well as all of their future revenue (direct and indirect).
If your practice isn’t consistently achieving higher retention rates year on year, then you need to figure out what you can do to arrest the leakage of existing clients because that’s having a direct impact on the value of your practice.
Here are some strategies worth considering.
1. Incentivise For Retention
Your existing clients are your most valuable asset. If your Advisers aren’t remunerated to retain clients they may be tempted to spend their time chasing new clients instead. So it would be worthwhile reviewing the current remuneration policies to ensure there is sufficient incentive in place to make client retention a key outcome.
2. Set Expectations With Your Clients
Setting clear expectations with each of your clients early in the relationship is crucial to retention and here are some reasons why.
- Your clients will be very impressed if you can actually deliver on what you promised earlier and this will also help to enhance your personal integrity.
- Uncertainty is a client ‘relationship killer’ – any uncertainty in the client’s mind will weaken their relationship with your practice. By eliminating uncertainty, you will provide peace of mind and confidence in your ability to deliver on your word.
3. Engage With Existing Clients
If you use marketing campaigns, you should be putting as much effort into your existing client campaigns as you put into the rest of your marketing. Use campaigns to:
- Nurture your client relationships
- Encourage clients to engage with your practice on a regular basis
- Expand your relationships by next-selling, cross-selling, up-selling and asking for referrals
- Identify clients who are at risk of defecting
- Continually deliver on your value proposition
4. Measure Retention Intent and Loyalty (Not Just Satisfaction)
Client feedback (like the feedback delivered by this service) can help you improve your services and enhance your client relationships. But it’s not very effective to just measure “satisfaction” because that is too vague and often can’t be easily actioned. Satisfaction is not a very strong pointer to retention. Instead, you should focus on behavioural intentions such as whether your clients will remain a client and if they would refer you to someone else. Also, ask for qualitative feedback to identify the underlying reasons for their responses to these questions.
5. Use Smart Surveys
A survey is used to gather accurate, actionable feedback about a client’s experience. Surveys let your clients know that you are thinking about them and actively communicating to find out what they are thinking about you and their future intentions. Acting on feedback will help improve the client experience and increase retention rates.
How are you addressing client retention and what strategies are working in your practice?
How’s your client retention in your practice is the second in a special five-part series which has been authored by Ray McHale, Founder of Marketing-Based Assets International Pty Ltd and in collaboration with Spiros Christoforatos, Founder of AdviceMarket . Both Ray and Spiros are passionate about providing businesses with the tools, guidance and support required to ensure they are thriving, robust and dynamic entities in the ever evolving space that is financial services.
Ray’s mission is to make sure practices (just like yours) become very successful by generating valuable insights about their client relationships. He helps practices identify and listen to their clients, measure financial impact and take targeted action to maximise the value they create. His company provides consulting services, on-line resources such as Valuiza and coaching/mentoring services. Simply visit www.valuzia.com to find out more about Ray and how he can help you.
Spiro’s ambitions, through his AdviceMarket platform, is to make it easy for consumers to connect with advice professionals and to provide advisers with another way to grow their personal brand and expertise to an audience that is looking for verified and socially proofed advisers. Ultimately the goal is to contribute to increasing financial literacy among the community and to encourage all Australians to seek advice. If you’re an adviser and you want to find out more visit https://www.advicemarket.com/adviser-signup/