As competition intensifies in the increasingly commoditized financial services arena, financial advisors should adopt strategies that optimize client retention. That’s because it costs much more to acquire a new client than to retain an existing one.

There is no consensus on how much more it costs to acquire a new client, but estimates range from five to 10 times the cost of retention.

Understanding the costs involved can help you determine how much time, energy and money to invest in client retention strategies as opposed to prospecting for new clients.

“There is no doubt that the cost of acquisition is higher than the cost of retention,” says George Hartman, CEO of Toronto-based Market Logics Inc. He suggests the real costs can be determined only by assessing specific client-related factors, such as client lifetime value, longevity of client relationships and outlay of actual expenses, among other variables.

The costs of retention vs acquisition aren’t the same for all advisors, says Julie Littlechild, president of Toronto-based Advisor Impact Inc. Typically, costs vary depending on several factors, such as advisor or company strategy, product offerings, and infrastructure and technology expenses.

The expenses incurred by an advisor working for a large corporation would be different from those of independent advisors, says Vas Pachapurkar, vice president of financial services for Ontario in Toronto with Winnipeg-based Investors Group Inc. That’s because the former group of advi-sors are supported by a corporate infrastructure. Certain costs are passed on to the corporation, whereas independent advisors largely foot their own costs.

Still, acquisition costs are generally higher for all advisors.

Littlechild suggests the cost of servicing existing clients can be classified into three categories:

> fixed costs, which include office, technology and support staff;

> variable costs, such as marketing initiatives and educational and appreciation events;

@page_break@> the advisor’s time.

Theoretically, Littlechild says, the fixed costs are the same for each client in a particular practice. They can be calculated by dividing the total fixed cost by the number of clients, which provides the equivalent of a “hurdle rate” or a minimum cost per client.

Variable client retention costs vary by type or asset level of client, who are typically classified as A, B or C clients. Advisors normally spend more time with their A clients, who may also benefit from a greater share of educational and appreciation events.

Says Littlechild: “There is less additional cost for retaining a low-priority client vs a high-priority one.”

Adds Pachapurkar: “Some clients have higher expectations, resulting in higher frequency of contact.”

Pierre McLean, senior vice president with responsibility for national sales at Franklin Templeton Investments Corp. in Toronto, says some advisors are “a little too focused on costs” and not proactive when it comes to client retention strategies.

Retention initiatives — such as acknowledging client milestones such as birthdays, inviting clients to a movie or giving them a gift basket — are relatively inexpensive, McLean says, yet these initiatives are often driven by the level of revenue generated by each client.

Other client retention costs may be those associated with various forms of communication, such as newsletters, investment commentaries and outlook reports; telephone calls; postal mailings; regulatory reports; seminars; and conferences.

“The cost of retaining a client must be compared with the revenue generated by the client,” Hartman says. “The longer you keep a client, the more likely you will get a bigger share of wallet.”

Long-standing clients often require less of your time and, consequently, prove to be more profitable.

Client retention is also built upon trust, says Pachapurkar. In turn, trust builds loyalty, which leads to referrals — which are the most economical way to gaining new clients.

Otherwise, the costs of acquisition may include expenses incurred through marketing and advertising campaigns, seminars, workshops, collateral material, trade shows, networking events and other programs.

Essentially, these cost-bearing initiatives are directed at potential revenue generation — with no guarantee of success — and can be
expensive. IE