“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practice as effective as possible.

Advisor says: i heard you speak at a recent conference and took particular notice of your comment that most advisors spend far too little on marketing. You stated that in your experience, the average expenditure is less than 2% of revenue, while top-performing advisors will spend three to five times that, or even more, promoting themselves. My practice grosses around $450,000 a year and I cannot imagine committing $25,000, let alone $50,000, to marketing.

I have spent lots of money in the past on various marketing activities, such as seminars, client-appreciation events, newsletters and so on. I have had no great results from any of them. So, I find it hard to see the value in wasting even more money. How do these advisors justify such a large expenditure? Am I missing something?

Coach says: I am always intrigued, after addressing an audience of advisors, by what captured their attention the most. Sometimes, it is the major theme of the presentation itself that prompts some advisors to look at their businesses in a different way. Other times, it is the weight that people give a smaller comment made in support of a bigger concept that catches me by surprise. And when that occurs, I know what can happen next (because it happens to me, too): we start thinking about how this supportive comment applies to our own situation and miss the connection between it and the real issue.

This was one of those instances. The real issue, while related, was not that advisors typically spend only a very small percentage of their revenue on marketing themselves. That’s a fact; not an insight.

The more important message, which I’ll have to make sure I stress more emphatically in the future, was that if advisors had a better appreciation of the true lifetime value of a client, they’d think of marketing more as a high-payback investment than as a questionable expense. Then they’d be willing to commit a greater proportion of their revenue to attracting new clients.

I also stated in my presentation that the lifetime value of a client can easily be 50 to 100 times the revenue you earn from your first transaction with him or her. With that as a benchmark, how much would you be willing to invest to acquire a new client?

When you consider the ROI on your marketing expenditures this way, you will find that you can justify a much greater investment in self-promotion, thereby powering your practice for significant business growth. Those seminars that cost you $5,000 each won’t seem such a bad investment if, on average, you gain one new client per seminar and that client has a lifetime value of, say, $100,000.

So, how does a $5,000 expense translate into $100,000 of revenue? Let’s first agree that three things comprise the lifetime value of a client:

All the revenue generated by the sales you make to that client, for as long as he or she remains your client. For example, if your client has $100,000 invested with you and you earn a 1% fee, that’s $1,000 a year. If the client stays with you for 10 years, that’s $10,000 of value to your business (not accounting for growth within the portfolio).

All the revenue generated by the sales you make to people who are introduced to you by the client. As in the example above, if new clients obtained through introductions from current clients invest $100,000 at a 1% fee and stay with you for 10 years, they also each add $10,000 of value to your business. Or, put another way, they each increase the value attributed to your original client by $10,000 to $20,000.

All the revenue generated by people introduced to you by new clients who were introduced to you by your initial client. Following the same example, these people also would each add $10,000 value to your business, thereby increasing the value of the client who started the chain to $30,000.

And so on. We could go on and on, for as many iterations as you wish. Each time you obtain a new client as a result of an introduction from a previous client, you increase the lifetime value of the person who started it all.

In the presentation you saw, I used a graphic illustration of how a client who generates $2,000 per year of revenue to your practice and introduces just one new client to you in the first year, who, in turn, introduces you to someone else – and so on – has a total value to your business of $110,000 in just 10 years. Make it two introductions and the 10-year revenue total jumps to $200,000.

Is it unrealistic to believe that if you do a good job for your best clients and you approach them in the right way, they will refer you to one or two new people a year?

If you really want to see the power of the “lifetime value” concept, start adding in assumptions about factors such as market gains that build assets under management and, therefore, increase revenue. Then, consider opportunities such as increasing share of wallet and consolidation of assets, both of which have a positive impact on client retention.

So does the number of referrals provided; clients who have given referrals tend to be more loyal over time.

You also could make some assumptions about adding new products and services that will further increase the value of a client. Have some fun with the math for whatever scenarios you want to create that realistically reflect your business. I think you will be surprised by the results.

Another way to get a feel for this concept is to try this exercise: take one of your top clients – let’s call her Janice – and trace the value she has contributed to your practice. Look at the revenue from products and services that Janice has acquired over the lifetime of her engagement with you: the renewal/service fees she has generated; the referrals she has provided, and the revenue from those referrals themselves; as well as the revenue from others to whom they, in turn, have referred you. To put the icing on the cake, project a similar scenario over, say, the next 10 years.

When we do this exercise in our workshops, almost inevitably, someone will jump up and say something like “I had no idea Janice was so valuable!”

Of course, as I have stated in other columns, you want every client relationship to be profitable (unless you intentionally decide to do charitable work on a specific client’s behalf, which is fine, too).

So, it is important to consider the “lifetime profit” of a client, as well as his or her lifetime value. In addition to the costs of acquiring a client, you will have ongoing service costs eating into that lifetime value. These are less easily quantified because service in our industry is often “on demand.” However, these costs can be estimated fairly accurately if you have defined marketing and service levels prescribed in your client-segmentation matrix.

So, here’s my question: how prepared are you to earn the lifetime value of your clients? In the simple example above, if you were sitting across the desk from your new client, would you look at him or her as a $1,000-revenue client, or as someone having $50,000-$100,000 of lifetime value? My guess would be that if you take the latter approach, you might pull out all the stops to demonstrate your capabilities and, perhaps, treat that client with a little more care and respect. That’s not discriminatory; it’s just good business.

The most important – and, often, the most expensive – sale you will ever make to a client is the first one. In that initial, critical transaction, you earn your client’s trust and open the door to a long-term relationship, additional sales and, equally important, introductions and referrals.

The bottom line is that you don’t have to go crazy. But don’t be afraid to spend money to acquire high-value clients. As long as your cash flow is healthy, spend what you need – in a practical way – to open the gate to those clients’ lifetime value.

George Hartman is managing partner of Elite Advisors Canada Inc. in Toronto. Send questions and comments to ghartman@eliteadvisors.ca.

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