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If you have many clients as a financial professional, you might have wondered if “thinning your book” is a good idea. If you have only a few big clients, you might be worried about your client’s mortality, thinking about expanding your client base. There are pros and cons for each strategy.
The Case for Having Many Clients
This may be the business model you have chosen as an insurance professional. Financial services firms interacting primarily through call centers have many clients too. Let us assume you are a local financial professional with 1,000+ clients in your book of business.
Pros:
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Revenue is spread widely. If you have many, many clients you have a steady stream of revenue. It likely evens itself out throughout the year. If sone client does less business, perhaps another does more.
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You can develop smaller clients into bigger clients. If your objective is hunting for very big clients, you will find there is plenty of competition. It can be difficult getting in front of them. If you take on smaller clients, you can encourage them to grow as you get to know each other better. They bring in more money.
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The loss of a single client is not catastrophic. If you have 1,000 clients and they all do about the same level of business, if one departs the hit to revenue might be a tenth of one percent.
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Discounting need not be a big issue. If a single client asks for a discount, the amount you are granting does not change your overall revenue picture that much.
Cons:
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Anonymity. If you have 1,000+ clients you cannot possibly get to know them all. You won’t know much about their hopes and dreams, the glue that solidifies relationships.
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Lack of stickiness. If your business is built on providing one product like stock trading or certificates of deposit, it is easy for clients tio switch to another provider if they feel they can get a better deal.
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Issue of responsibility. Everyone needs attention. If the client’s account is under your production number and an investment you recommended blew up, they may argue you were not giving their account enough attention.
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Degree of attention at peak periods. Sometimes everyone wants attention at once. If the stock market is volatile, everyone might be calling. As the year end approaches, many people might want to lock in losses on the last trading day.
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Reactive, not proactive. You might have a procedure for answering calls and addressing client issues brought to your attention, but it is hard to introduce a new idea to 1,000+ people on an individual basis.
The Case for Having Fewer Clients
Some financial professionals might have built their business serving as few as one family. You have heard the expression “family office.” Private bankers can fit this description too. Instead of being “some things to all people” you are “all things to some people.” In a less extreme example, you might choose to have 50 to 250 clients.
Pros:
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Depth of personal relationship. The fewer clients you have, the more time you can spend 1:1, getting to know them better. You can learn about their hobbies, charities and other personal interests.
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Multi-generational business. If the relationship is long term, younger family members might grow into the family relationship with you. It is explained to the next generation by the family that you are the family’s advisor.
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Growth through referrals. If you do a great job for your clients and anticipate needs, they will likely talk you up with their friends. Members of their social circle are likely on the same economic level.
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Enhanced stickiness factor. When you are “all things to some people” you are also providing insurance, lending services and interest bearing accounts in addition to investment advice. Moving the relationship become more complicated.
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Larger asset size relationships. Fewer relationships usually means larger relationships. The greater asset size allows for additional diversification along with access to alternative investment requiring certain asset thresholds and sophisticated investor status.
Cons:
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Risk of losing a client. If you have five clients and they all do the same amount of business, losing one client relationship can reduce revenue by 20%.
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Pricing pressure. When a large client asks for a discount, the risk of potential client loss is significant. If you have five clients nd one wants a discount, it reduces income from 20% of your revenue base.
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Difficulty in replacing relationships. If your client relationships are very large, there is often a very long lead time required to identify and cultivate a new one.
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Risk of perceived outgrowth. You perceive yourself as an expert, but how much expertise does the client think you possess? If their wealth grows significantly they might decide they need a high profile firm exclusively serving the ultra HNW segment.
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Personality clashes. With a small number of clients, how you get on with people becomes much more important. If someone in a family takes a dislike to you, they can make life uncomfortable for other family members.
There is a case to be made for each business model. Which works best for you?
Related: Compliance Bogeymen: The Importance of Following Rules