This case study is based on the situation of a client of the Covenant Group. The name and critical details have been changed to preserve client privacy.



To a casual observer, Janet North would appear to be a very successful advisor. In 10 years, she had grown her practice to a level admired and envied by many.

Revenue has increased every year. She has a large support team and her office conveys an aura of success. The walls are adorned with citations for her charitable work. Her clients are primarily successful business owners and professionals, and most new clients come as referrals or due to Janet’s high visibility in the community. She can always be seen entertaining her clients at the country club and the best restaurants in town. If there is a performing arts function or a charity golf tournament, Janet can be counted on to buy a block of tickets and bring a number of her clients to the event. By all accounts, she has “made it.”

So why was Janet sitting across from me wearing such a stressed look?

The answer could be found in the document she was holding. It contained the results of a benchmarking study her sponsoring firm had commissioned us to do. The survey compared individual participants to their peer group, the entire company and the industry at large on a wide range of business metrics and best practices.

Janet’s production, sales and assets under management ranked her near the top of her firm. But those weren’t the statistics that were bothering her.

“I just don’t get it,” she said. “I am one of the most successful advisors in my firm. For the past five years, I have never failed to qualify for the President’s Club and, in fact, I placed in the top 10 twice during that time. I’ve always believed that if I continue my rate of growth, I stand a good chance of being No. 1 in the next three years.”

“And I believe that you can do it, too, Janet,” I interjected. “But as you can see, production alone doesn’t equate to overall success. You scored extremely well on the revenue side of the equation, but you ranked in the bottom quartile on profitability. You are making good money. But there are advisors in your firm who generate less business but run more successful practices. Their profit margin is much higher than yours.”

“I have always felt that if I simply kept increasing the amount of business, I would be profitable,” she said.

“Of course, increasing your volume of business will increase the total profit, but it doesn’t necessarily increase the profit margin,” I responded. “You are being effective, but not as efficient as you should be. Your total expenditure per dollar of revenue is much higher than that of your peers. For example, you are receiving only $60 of revenue for each dollar you attribute to marketing costs. The average of your peer group is more than $190.”

“How do we fix that?” she asked.

“We can examine the value of each client relationship you have and compare it with the amount that you are spending to maintain that relationship. From the survey, your total income last year was approximately $600,000. You take approximately six weeks per year of vacation and other activities when you aren’t working, which leaves 46 weeks. On average you work about 45 hours per week. Quick arithmetic tells me that equates to about $290 per hour for your time.

“I know you have completed a client-segmentation exercise that identified your top 20 clients, as well as your A, B C and D clients. So let’s take a typical ‘top 20’ client and compare the associated expenditure with the amount of revenue you earn from that client.

“According to the survey, your top 20 clients clearly receive a great deal of attention. You meet with them quarterly for a review; you take them to lunch on their birthdays; they’re invited to your Top 20 Dinner, a golf tournament, a client-appreciation event and a portfolio manager meeting. In addition, they receive your newsletter, a gift at Christmas and personalized cards from you at all other holidays. In the benchmarking study, you estimated that you spend approximately 12 hours per year of your personal time maintaining a relationship with each of your top 20 clients.”

@page_break@“I like to treat my top 20 clients well, and I get paid well for doing that,” she said.

“Yes, you do get paid well by your top 20 clients. They represent 40% of your total revenue, or $240,000 per year — an average of $12,000 per top 20 client. But let’s continue.

“You also estimated your staff spends about nine hours a year working on your behalf for your top 20 clients, at an average wage cost of $50 an hour. In addition, direct costs for materials, the birthday lunches, client-appreciation events, etc. come to about $450 per year. If we add all that up, you spend in excess of $5,000 per year on each of your top 20 clients. Does that number surprise you?”

“I guess I didn’t really think it was that high,” she said. “But it is a worthwhile investment if each one generates $12,000 in revenue.”

“Yes, it is,” I told her. “In fact, your $5,000 investment per top 20 client yields you a 140% margin. That’s impressive.

“But let’s look further down the list, for example, to your A clients. They are obviously valued clients as well because they generate approximately $150,000 of total revenue. You have identified 45 clients as As, so the average revenue each generates is about $3,300. You aren’t quite as lavish with them as your top 20 clients. They get semi-annual instead of quarterly reviews; they aren’t invited to your Top 20 Dinner; and they do not attend the portfolio manager meeting. Other than that, they get everything your top 20 clients receive. When we add up the variable and fixed costs associated with your A clients, the average total expenditure per A client is $3,200, compared with $3,300 a year of revenue.

“In effect, you are not making money on your A clients. You are spending too much for the revenue they generate. There is no margin. The story is very similar when it comes to your B clients. Each generates, on average, $1,300 a year of revenue and you are spending $1,100 a year to get that $1,300. Paradoxically, your C and D clients yield the highest margin because you commit very limited resources to them. Unfortunately, the dollar amount of net profit they generate is very small.

“You are right to differentiate the level of service and marketing you provide by the value of each client. However, it is essential to appreciate the value of each client and then allocate your resources commensurate with that value.”

“So, what do I do about that?” Janet asked.

“There are two solutions. One would be to reduce the level of personal contact that you have with your clients because, quite frankly, that is your biggest cost item — the value of your time. We don’t want clients to feel your commitment to them has declined, so we’ll have to be careful how that is done. Leveraging technology and the time and talents of others in your practice may be one way to do that. The other would be to increase the average revenue you receive from each client. Which do you think would be easiest to accomplish?”

“How about a combination of both?” she said.

“That’s what I was hoping you’d say,” I replied. “The strategy would be to create a service level agreement and marketing activity schedule that you deem appropriate for each client segment. It should detail specifically the activities and service you want to provide. By calculating the costs and comparing them with revenue by client segment, we’ll identify where the margin is unacceptable. From there, we’ll look for ways to cross-sell, move upmarket, increase share of wallet, increase introductions, and so on. There are a number of ways we can make each client relationship more profitable.”

Over the next couple of weeks, we worked together as Janet defined what she called her “client experience” and adjusted it to ensure it yielded a fair margin at all client levels. Where those margins were thinner than desired, we designed a marketing, sales and service program to increase the value of each relationship.

A year from now, Janet’s company will conduct the benchmarking survey again to measure progress. My guess is she will rank very near the top in all categories. IE



George Hartman is a coach and facilitator with the Covenant Group in Toronto. He can be reached at george@covenantgroup.com.