Lee Freeman-Shor investment development manager at Schroders, says time is most profitably spent maintaining and servicing existing clients
THE BUSINESS CASE for using multimanager solutions (fund of funds or manager of managers portfolios) is incre dibly powerful.
First let me demonstrate by way of a rather blunt example.
Supermodels do not get out of bed for less than £10,000.
Many accountants and solicitors do not work for less than £250 per hour.
So why do many advisers work for a client for £100 per year or less? Once the initial commission has gone, an adviser is often left looking after client portfolios that simply are not profitable to manage.
The table below demonstrates this point by looking at the revenue an adviser generates each year for managing a client's portfolio.
As you can see by the numbers, unless a client is doing other business to subsidise the adviser managing the portfolio, it does not make business sense to manage a portfolio for a client with £50,000 or less.
Once the costs of an adviser's time, secretary, paraplanner, office rents and bills, stationary etc, are taken into account it is simply not profitable.
This is the reason why fellow professionals like solicitors and accountants will typically not work for less than £250 an hour.
Moreover, by deciding to manage smaller size portfolios an adviser becomes dependent on constantly transacting new business instead of servicing and sourcing business from existing clients.
So why don't advisers operate more like accountants and solicitors? Success is about working smarter not harder.
At this point I can hear the familiar cry of "well that is the industry we work in, we cannot change it".
This response is typical and reflects the fact that few advisers get a chance to step back from the coal face to consider how they could work more effectively, in a manner that frees up time and earns them more money.
It is like an axe man, Bob, who has been trying to chop down a large oak tree for two hours and making little progress, saying he does not have enough time to stop and sharpen his axe because he still has another 10 more trees to chop down today.
If Bob simply took five minutes to sharpen his axe, he could cut the trees down in less than half the time and be far more effective and productive.
The right business solution Advisers need to decide how much they want to earn each year from every client that walks through the door to ensure it is a profitable relationship.
Let us assume this is £250 per client.
As the table (left) demonstrates, at 0.5% trail commission this means that it is only worth constructing a portfolio for the client with more than £50,000 to invest.
However, I am not suggesting advisers start turning away clients with less than £50,000 to invest, not least because for many this could mean culling 80% of their client base and losing a vital source of future revenues.
However, what I would suggest is that clients with less than this level should be put wholly into a fund of funds solution, where the day-to-day monitoring and investment decisions are taken away, thereby freeing up time to focus on more profitable activities - and growing the business.
A good multi-manager investment house will provide regular material to help give these clients a higher level of service than they may have received before.
By regularly servicing the lower end of the client base rather than overlooking them, an adviser business may benefit from referrals, future profitable business or inheritance monies.
Multimanager portfolios are an excellent business solution.
Recently Schroders ran a series of nationwide business development seminars with Ian Whitehead, who specialises in helping companies develop their businesses.
Ian used the following boxes below to demonstrate the smartest way to run a business: Super pleasing box It is generally 10 times cheaper to get business from existing clients and far less time consuming.
Advisers should therefore try to spend as much time as possible in the 'super pleasing' box.
This is where advisers spend time servicing existing clients with 'known needs'.
This ensures the adviser is always there when an opportunity presents itself.
Great service leads to referrals and new clients.
Nurturing box If an adviser has existing clients that have not been seen for a while they will fall into the 'nurturing' box.
Advisers should focus on revisiting these clients to catch up on their needs.
They will be more amenable to doing business through an existing relationship than with someone new.
Furthermore if they have been neglected for a while, their financial circumstances could have changed, which may throw up more opportunities.
Courting box The problem with trying to gain new clients is that it is costly and time consuming.
If there is a target client with a 'known need' - they should be 'courted'.
This can involve a lot of expense and time and may not lead to business.
Broadcasting box The most expensive and time consuming of all strategies is 'broadcasting', whereby advertising and mailshots are used to attract prospective clients who are not known and require time to assess.
So, if we take into consideration the time, effort and expense involved gaining new business, it is clear that our resources would be better spent on servicing and maintaining our existing clients.
We all need to look to the example of Bob, the axe man, and step back from the coal face to see if there is a more efficient and profitable solution for our business needs.
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