Art by John Malta

The 20/80 rule is well-known in the retirement plan advisory industry. “They say that 20% of your clients give you 80% of your revenue,” says Michael Kane, managing director of Plan Sponsor Consultants in Atlanta. “They also say that, for some newer advisers, 20% of their clients take up 80% of their time—which is unfair to their good clients.”

But Kane understands how plan advisers can end up with unprofitable client relationships. “What happens is, when you first start out as an adviser, you just want to get some plans,” he says. “It’s only some time after that you realize you have bitten off more than you can chew, in terms of the hours you spend working for some clients,” he says. “And when they start out, most advisers are gun-shy about asking for the fee they need, so they tend to lowball it.”

Marc Caras, head of the retirement plan network at Pershing in Jersey City, New Jersey, agrees. “You may be expending considerable time and resources on the services, and you may have given up a lot on the fee in the beginning, to get the client.” Also, he adds, “the biggest client is not always the most profitable.”

But in this fee-sensitive environment, figuring out what to do about unprofitable clients is challenging, Caras says. “There is only so much in fees that you can charge,” he says. “There’s a pinnacle—and believe me, it’s not that high.”

Breaking It Down
To grow their business the right way, advisers call it imperative to calculate the profitability of their client relationships. As a veteran adviser, Kane has learned the keys to profitability: clearly define his firm’s services for a client upfront, benchmark and set the fee to ensure fair profitability, and then deliver on every element of Plan Sponsor Consultants’ value proposition.

Tracking the exact time each staff member spends on each task for a client takes time in and of itself, says David Stofer, founder and president of Mariner Retirement Advisors, in Leawood, Kansas. Mariner uses CRM, or customer relationship management, software that tracks the projects the firm does for each client, such as advising on nondiscrimination testing or preparing a quarterly investment review. Experience has taught Stofer and his colleagues approximately how much time a project should take, which enables them to determine how much it costs the firm to serve a particular client.

But, when asked how Mariner ensures that it has profitable client relationships, Stofer says, “The first thing we do is try to really understand the needs of the client.” Having that knowledge means, from the start, the advisory firm can produce a detailed service agreement and set its fee to ensure fair profitability.

After several years of trial and error in trying to track the profitability of its clients, Lakeside Wealth Management figured out how to look at the issue proactively. It did a comprehensive analysis of how much time it took to conduct the full range of specific plan tasks, firm President Timothy Rice says, and that helped it set fees and sponsor expectations at the right levels. It looked at everything from prepping for quarterly sponsor meetings to time spent contacting terminated participants.

The advisory firm, with main offices in Chesterton, Indiana, also assigned an average cost to each of those tasks by pinpointing how much of that work must be done by a lead adviser vs. a junior adviser vs. an administrative staff member. While it does not charge clients by the hour, the practice did determine an hourly dollar value for a lead adviser’s work, a junior adviser’s work and an administrative staff member’s work.

“It seems daunting,” Rice says. “But if you break it into components of serving a client—that is, for each task, what a support person will do, what a junior adviser will do and what a lead adviser will do—you can assign a dollar value to [those tasks]. Then you can determine the profit margin you need and the fee. The industry standard is that you should look for a 20% to 25% profit margin.”

Lakeside recently started tracking the time spent on work for individual plan clients, once an engagement begins. “We started by tracking one plan, and now we track three or four,” Rice says. “It has allowed us to test our assumptions about how much time it takes to do things.”

Adviser coach John Bowen believes thinking about existing clients’ profitability in isolation is not enough. Bowen, founder and CEO of CEG Worldwide LLC, headquartered in San Martin, California, suggests a more strategic approach. Because advisers have such a well-defined sense of their business model and the right type of client to serve, this should help them target prospects that will be most profitable for them, he observes.

“Look at the big picture first,” Bowen says. “‘Who am I going to deliver the most value for [where] I can differentiate myself and be distinctive?’” Then advisers need to consider putting systems in place that best serve those clients and to attract a steady stream of new clients like them. “If you start out being unsure of what you’re trying to accomplish, it gets messy very quickly,” he says.

If an adviser does have an unprofitable plan sponsor client, he should have “an adult discussion” with it, Kane says. The adviser should show the sponsor a documented breakdown of the advisory firm’s hours spent working on that plan, and expenses incurred such as travel to meetings.

“You can then say to the sponsor, ‘You have two choices: I can charge you more money, or we can cut down on what I’m doing,’” Kane says. “You need to work with the client and make it understand that it’s a P&L [profit and loss] thing. The poor adviser probably is thinking, ‘Oh my god, he’s going to bite my head off.’ But a business owner can understand that.”

Evaluating Bandwidth
The service adjustments most often come in a couple of areas, Kane has discovered. “What deviates is the number of meetings we do with the sponsor, and whether we offer financial wellness for participants,” he says.

In such cases, Stofer says, an adviser could opt to shift from four in-person sponsor meetings to two quarterly meetings done in person and two done by phone. “The scary part for an adviser is that you want to be in front of your clients: If you aren’t, there is always an adviser who is local who is willing to do it,” he says.

Still, not all sponsors understand an adviser’s profitability quandary, Kane says. “If the sponsor says, ‘I don’t want to do that—I expect the same level of service,’ you have to have the courage to say, ‘It’s not working out.’ As you grow, you have to ‘prune’ clients that are unprofitable,” he says.

Bowen concurs. “So many financial advisers could be more profitable by giving up some of the business they have now,” he says. “That would free up time, energy and money so they can grow those parts of the business where they can really differentiate themselves. To build a great business, you want to be thoughtful about how you allocate your time.”

As Stofer’s client base grew over the years, he found that hiring junior advisers made business sense because it freed up a more-senior adviser like himself. “Younger advisers tend to handle smaller, less-complex plans, and more-senior advisers tend to work with larger and more-complex plans,” he says.

Looking closer at client profitability helps Lakeside Wealth Management “evaluate our bandwidth and the future capacity [of] our organization,” Rice says. “It has allowed us to think about, ‘Who do we need to hire in 2017, 2018 and 2019 if we continue to grow at this rate?’ We are asking, ‘What is smart growth?’”

A Road Map to Profitability

For advisers to have profitable clients, Pershing’s Marc Caras says, “Much of it is about managing time and clearly defining the set of services the advisory firm is going to provide to a plan client—and then trying to hold to that.”

So Caras recommends formulating a service agreement for each client, which details what services the advisory firm will provide to that plan. Split those services into two buckets, he suggests: plan sponsor support and participant support. “For each bucket, what is the core fee and what is potentially extra, depending on what the sponsor wants?” he says.

Caras says, when writing service agreement contracts, advisers need to determine the level of attention a client will require. “How many meetings a year are you going to do with the sponsor? How many of those will be in person, and who from the advisory firm will be present?” he says.

“And if an advisory firm is working with employees, how many educational meetings a year will you provide, and what will those look like? Also, how much other support will the advisory firm provide to participants? Will the adviser leverage third-party resources such as the recordkeeper to provide some of that support?” he says. —JW 

What You Add

Many advisers don’t track their time, which is a mistake, says Randy Fuss, practice management consultant at CUNA Mutual Retirement in San Francisco.­

“You need to understand the service you are delivering to the client,” agrees Jonathan Blaze, regional retirement consultant at Thornburg Investment Management in Chicago. Advisers can detail their value by creating a service agreement, he says.

Equally important as determining profitability is communicating your value to your clients, adds Daniel Peluse, director of corporate plan services at Wintrust Wealth Management in Chicago. At Wintrust Wealth Management, “we are an extension of the committee,” Peluse says. “We view ourselves as an employee of the firm.” Peluse continuously reminds his client of the benefits that Wintrust brings to them, particularly their participants. “You can’t just do quarterly meetings. It’s important to educate plan sponsors about your value. We are with participants on a day-to-day basis.”

“As to how advisers price their value, we are seeing a standardization of measurement metrics of investments,” Blaze says. “That will help us as we see continued consolidation of advisers. And, because of the new fiduciary rule, we expect advisers will decide to be either a wealth management adviser or a retirement plan adviser. As advisers leave the retirement plan space, that will help you.” —PA

Key Takeaways:

• Don’t settle on a low fee to land new business;
• Determine services to be rendered and price ­accordingly; and
• CRM software can track employees’ time.