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A while ago I was doing some work with an insurance company and as we were digging through some of the data it transpired that there was a consistent natural attrition rate of about 5-6% of its customers, year after year. That rate was verified with a couple of other significant businesses, and it seems to be about “normal”.
These are the customers who simply no longer needed the products or service. No complaints or problems, or dissatisfaction with the provider. They are happy, but their needs have been met. The customers had just ceased their business, or moved overseas, or divorced, or whatever….there is a natural attrition rate within any client base simply because the customers needs or circumstances have changed.
This caused me to think about some of the “issues” such as “churn” – or the accusations of advisers shifting customers away from one provider in favour of another.
It seems that the typical adviser who is running an ethical business and working in the clients interests is doing reasonably well if they have a lapse rate of around 12% (as measured by the product suppliers). That is, everyone is relatively happy with this sort of attrition rate – although the accusations are continually bandied about in the industry that this proportion of business is “being shifted” by the advisers. Anything beyond that level is deemed “bad” apparently.
Clearly this is cannot be correct if there is a consistent natural attrition rate of (say) 6% p.a.
If the typical adviser is working with about 400 clients that means there are about 24 clients who move away each year on average, no matter how good the adviser is, or how delightful their service is. Yet, we are continually reading that this shift is an adviser-driven problem, and that these errant advisers with shifting clients should be run out of town.
Isn’t it conceivable that perhaps the institutions, or product manufacturers themselves also contribute to lost business?
Poor service, adverse claims experience, nonsensical paperwork which clients cannot understand….perhaps poor pricing, contract wordings, poor performance and bad publicity…..I guess that these things alone would generally contribute another 3% to the attrition rate. With some suppliers in my experience the actual impact would be much higher.
So there go another 12 clients through no fault of the adviser.
The advice business of 400 clients is down to something like 364 or so inside 12 months if these averages hold true. Of course we have better and worse years, so that can easily be 50 customers lost, or only 15 in reality. The point is, that is a lot of customers who took a lot of time and left anyway; and; the advice business now has to replace them.
Nevertheless, for those who remain we are obligated professionally to sit down and review the existing business and plans of the remaining clients in light of all the circumstances at the time of review. A fund or a policy put in place 3 years ago which was ideal for the client at the time could now be disastrous for them given changes in their circumstances, such as employment status, earnings or tax position, relationships or changes in health. Regulators expect the advisers to work in the client’s best interests, as do our own professional ethics, so we now find that of the 150 clients who have had a full review in the last year there are probably a further 22 or so (being 15% of remaining clients) whose circumstances have changed substantially enough to warrant a product substitution. If the adviser doesn’t substitute products they stand to be accused of ignoring the clients best interests, and are instead protecting either their own or the product manufacturers interests.
The end result is that it is absolutely understandable that any professional adviser can experience a persistency loss of perhaps 14-15% in each and every year just because they are doing their work ethically and dealing with human beings whose lives change.
The product manufacturers have a tendency to prefer to call this an adviser-led problem. Twisting. Churn. Business replacement…..
Of course those terms only get used by product manufacturers when business is moving away from them. When replacement business is moving away from another manufacturer and coming to them it is called “new business” and it is all ok. There are of course bad apples, and some advisers who make a living out of offering nothing of real value other than a minimal price saving for clients. They are in the arbitrage business perhaps, however the minimal price savings they can source are usually insufficient to present any discernible benefit for the client. They are twisters. They exist. They are well and truly the minority though.
The reality is the majority of advisers have an enormous issue in servicing and satisfying clients to begin with, and there is an inevitable loss of clients anyway. It is natural attrition. Beyond that, there is the professional requirement to re-consider past advice and recommendations and update the advice in light of changing client and market circumstances. To top it off, clients are consistently being marketed to by a huge number of alternative providers and advisers, with the very real risk of being seduced away by something which may or may not actually be better than what they are doing currently. But slick marketing continues to be used because it gets results, and so more clients move from the adviser practice despite the advisers best efforts.
How much of this business turnover in the industry is really to be laid at the adviser population’s feet? More importantly, could it be that “churn” is not actually an issue at all?
Consumers shifting rapidly from product to product, oftentimes on a whim or a piece of slick marketing, is in fact the new normal. It is how the world is now across multiple industries. So it is in financial services too.
Perhaps it is time to move the discussion away from “churn” as the problem, to learning how to interpret what is actually a normal business model in these new consumer-led, and regulator-scrutinised, times.