Client retention key to growing a book: report

Reaching that high retention level, however, can prove a difficult for advisors particularly when working with new clients. For example, the report shows that in the first year of a client relationship the probability of retention is 95%. That number drops to 74% by the end of four years.

“The advisor client relationship is not unlike any other human relationship,” says Patrick Kennedy, vice president, products and services at PriceMetrix and author of the report. As in a marriage, an advisor-client relationship is likely to have a seven-year itch, says Kennedy, although in this case it is more like a four-year itch.

As such, advisors need to remember that even though a client signs on the dotted line they likely have not fully decided whether or not the business model is right for them. Says Kennedy: “You’re still in a sort of evaluation period.” During this probationary period, Kennedy says advisors shouldn’t try to add more services to woo clients but instead should be clear about the regular services offered.

In terms of identifying loyal clientele, the report identifies older, high net worth clients with a hybrid fee model as the most steadfast individuals. According to PriceMetrix, the retention rate for clients with a hybrid account structure – consisting of transactional and fee-based accounts – is 95% whereas strictly fee-based models have a 91% rate and advisors running a transactional business have a retention rate of 89%.

Hybrid accounts likely have a higher retention rates because as it requires opening multiple accounts with one advisor, says Kennedy, and therefore fosters a deeper client-advisor relationship.

Furthermore, clients using these types of fee structures tend to be higher net worth individuals who generally remain with the same advisor. For example, the retention rate of households of $100,000 or less is 87%, according to the report, at $500,000 the retention level moves up to 94% and at $1 million retention sits at 95%.

As well, advisors with a large number of small households will find it difficult to hold onto their higher net worth clients. According to report results, advisors have a retention rate of 97% of high net worth individuals if clients with less than $250,000 make up 20% of an advisors book of business. Conversely, when small households make up 80% of an advisors business the retention rate of high net worth clients is 94%.

Next: Find success by focusing on a particular market segment
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Find success by focusing on a particular market segment

These statistics emphasizes the importance of focusing on a niche, says Kennedy. “Like any other business,” he says, “we find that advisors are more successful when they demonstrate that they are focusing on a particular market segment.”

Younger clients are also more likely to search for a new advisor or to try and do their own investing compared to older investors, according to PriceMetrix. Results show that there is an 82% probability of a 30-year-old client remaining with his or her current advisor. That chance jumps to 87% for 40 year olds and 90% for clients who are 50 years of age.

“[Younger individuals are] willing to try the full advice model,” says Kennedy, “but in addition to discount brokerages, we’re seeing more Internet-based, robo-advice services and I would expect younger investors are a little bit more open to models like that.”

The report was generated from PriceMetrix’s database consisting of 7 million retail investors, 500 million transactions and almost 40,000 financial advisors in brokerages.