The cost of managing clients is well understood: the financial industry has been studying the issue, vital as it is, for better than two decades.
If you don’t know how much your customers cost to serve, you can’t set a realistic fee structure – it’s a truism that can’t be violated. Curiously, among all the numbers being summed up, a vital component has been left out of the equation.
What is the cost of acquiring a client? A simple question, meritorious in conception, yet curiously, even mysteriously, often unasked and unmeasured. It’s a potentially costly oversight, to say the least. We wonder how many practices founder on its unregarded shoals.
Recently, attention has been focused on the question by Kitces Research. Their investigation covered 800+ advisors, who were surveyed to determine the cost of locating, pitching and onboarding a new client. Kitces found that new customers ain’t cheap: advisories spend an average of $3,119 for every one enlisted on their rolls. How does this considerable cost break down?
The main component, based on survey results, is advisor time: $2,600 worth per new customer. This time cost contrasts with actual-dollar marketing expenditures of a reasonable $519 per signup. Human capital, particularly the kind that could be employed in more directly profitable ways, is very expensive.
This cost may be bearable for well-capitalized firms, but smaller houses, particularly in the early startup days, may find it crushing – three grand per customer is a daunting burden. One suggestion is for cash-strapped firms to simply spend more on advertising, particularly online via social media, paid ads and email campaigns, and allocate fewer advisor hours to the client-search task.
But would this work as effectively as the human-centered approach? Clients today are certainly comfortable with e-platforms of every kind and few have problems interacting with them. Meanwhile, as the digital web spreads ever further over our lives, the advantages of the personal touch, a human voice at the end of the line, sensitive to one’s unique needs, are ever more appealing. Reducing advisor time in client search and acquisition may be cost effective, but if prospects are turned off and seek more welcoming shores, the economies are wasted.
The issue remains acute for advisories. If client acquisition is too costly, the firm may be saddled with the dreaded J-curve of profitability. This happens when the cost of onboarding exceeds the client revenue of the first year, and the aggregate profit over several years. If not taken too far, the advisory can usually hang on into profitability – indeed, the gains from long-term clients, those on the books for 20-30 years, makes the initial expenditure look paltry. However, if a firm markets too hard and spends beyond its means, while poised for long-term earnings, it could face short-term bankruptcy.
Two factors need to be measured: cost effectiveness (the price paid to acquire a client) and cost efficiency (how much revenue does a client brings in vs. the acquisition cost). Based on these metrics, we should be able to determine the best client acquisition strategy to follow. If only it was that simple.
The Kitces survey suggests there’s no easy answer: everything depends on the company’s approach to marketing – and there are many. Meanwhile, the survey shows that modern fashions, like social media, to name the star attraction, are often inefficient, while old-fashioned techniques like radio broadcasting, of all things, work quite well. It all requires a delicate touch, but with robo-advisories bringing in clients at less than a third of the cost for traditional firms, there is clearly need for inventive cost cutting in client acquisition.
For more information, please read:
The Most Efficient Financial Advisor Marketing Strategies And The True Cost To Acquire A Client | Kitces