It’s Time To Look At The 80/20 Rule A Little Differently
December 14, 2016 By Signator Investors
If you ask someone if they know what the Pareto-Principle is, they may or may not know the answer. However, if you ask them if they know what the “80/20 Rule” is, I’d be willing to bet most people have at least a basic understanding. Named after an Italian Economist of the early 1900s, the Pareto-Principle is more commonly referred to these days as the 80/20 rule. The basic understanding is that for many events, roughly 80% of effects are caused by 20% of the causes. For example, in the world of financial advisors, 80% of your revenue is typically derived from 20% of your clients.
Over the years, when working with advisors to create marketing plans and define client offerings, inevitably the 80/20 Rule comes up in discussions. And although there are some outliers, most advisors’ businesses do tend to fall within the 80/20 Rule. Most advisors also seem to understand this to be true, and for those who don’t, they usually see it as the case after we perform a basic client segmentation and AUM/GDC analysis.
So why is it worth mentioning the 80/20 Rule when most advisors seem to have a good grasp of it? Well, because I think many advisors are only looking at this from one end of the spectrum. They’re very appreciative of that top 20% of clients and understand the importance of keeping those clients happy. However, they don’t look at the other end of the spectrum; those clients who are not providing the lion’s share of revenue and are probably unprofitable for your business, especially when you factor in your hourly wage and the resources you spend on them. A 2014 study by PriceMetrix Inc. of more than 1.3 million households adds some additional context:
* On average, small client accounts (defined by less than $100,000) make up 52% of a typical advisor’s business yet generates only less than 9% of the revenue
* The typical advisor makes approximately $350 a year (commissions and fees) on these small accounts
* The average small client account is 108% more likely to fire an advisor, then they are to become a $1million client
* The typical advisor who transitioned 5% of their small client accounts out of their practice, increased their revenue on average by $43,000 the following year
Am I telling you to dump your small client accounts? Absolutely not. But what I am telling you to do is this:
1. Segment your book and figure out exactly who is in your top and bottom 20%
2. Address the bottom 20% by determining if you can make them profitable or not. Do they have assets somewhere else? Can they provide quality referrals/introductions? etc. If you can’t make them profitable, perhaps you bring on a Junior Advisor to work with them or you transition them to a new advisor who is better suited to serve them (t’s a win for the client, a win for the new advisor and a win for you).
3. Never lose focus of your Top 20%. After all, this is where the majority of your business’s organic growth will come from.
In conclusion, think of the 8020 Rule as the 80/20/20 rule from now on. Appreciate your best clients, while addressing your not-so-best clients.
Peter Wright is a Practice Management Consultant with Signator Investors, Inc. Peter has over 18 years of experience as a Product Wholesaler and Practice Management Consultant.