Client Retention Key To Lucrative RIA Business

New Year’s resolutions are very much passé. It’s not because they aren’t a good idea, it’s that most people don’t stick to them -- like diets, for example.

So we’ll refrain from yet another top 10 list, or a top 13-and-a-half list, or whatever. Instead, we’re going to pose a question: Is it more lucrative to retain an existing client or bring on a new one?

Some back-of-the-envelope math turns up just how valuable and efficient it is for advisors to engage in some serious client retention. This is due to the built-in price escalator in the assets-under-management (AUM) model common among registered investment advisors (RIA).

“Retention is so much cheaper than new acquisition,” said GJ King, president of RIA in a Box, a website designed to help advisors run their practices more efficiently, in an interview with InsuranceNewsNet.

An advisory with $50 million in AUM would need to win an average of 7.6 new client relationships every year for a decade to achieve financial results equal to an advisor with an annual client referral rate in the 5 to 10 percent range, according to an RIA in a Box blog published last spring.

Unfortunately, winning nearly eight new client relationships annually is the exception rather than the rule for firms with less than $50 million in assets, the blog noted.

Consider the following: An advisor charging an advisory fee of 1 percent per year on a portfolio of $1 million would earn $10,000 in the first year.

By year 10, assuming an 8.4 percent annual return, the investment portfolio would have grown in value to $1.90 million — after annual advisory fees of about $19,000. The 8.4 percent is the average annual return from 1926-2014 for a portfolio with 50 percent stocks and 50 percent bonds.

In this scenario, the cumulative client fee revenue over the 10-year period is just under $141,000, according to RIA in a Box.

OK, so now let’s scale up a bit.

Assume the advisor has 50 clients, each with a beginning portfolio size of $1 million. The advisor charges an annual fee of 1 percent of assets for each client and suppose every portfolio delivers an annual return of 5 percent.

Assume a 5 percent client referral rate with no new nonclient referrals, and that the advisor delivers an annual client retention rate of 95 percent.

The advisor with $50 million in AUM will conclude year 10 with around $74.4 million in assets and $6.29 million in cumulative revenue.

Not bad.

Now assume that the same advisor boosts existing client referral from 5 percent to 10 percent of clients every year.

That same $50 million AUM advisory would conclude year 10 with $118.47 million in assets and $8.32 million in cumulative revenue, according to RIA in a Box calculations.

“By moving the client referral rate from 5 percent to 10 percent, the same firm was able to increase year 10 total assets by close to $44 million and cumulative ten-year revenue by over $2.5 million,” the blog post noted.

The lesson is that even a very small percentage shift in the client referral rate is likely to yield far more revenue over the 10-year period than the likelihood of bringing on an average of 7.6 new clients every year for a decade.

“Retention is the ugly stepchild of the RIA industry,” King said. “It’s not the rainmaker or the front-office role, but while less sexy, it’s arguably more integral to running an RIA firm.”

So before printing new business cards with the title of “New Business Development Director,” perhaps this New Year’s Resolution should be to go out and print cards with the title of “Old Business Redevelopment Director.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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