The most critical time period in an advisor-client relationship is year two through year four, says PriceMetrix, which has released a new report outlining top strategies for client retention.

There are distinct stages of a client relationship, and so advisors should be aware of when they need to up their game to truly differentiate themselves from the rest, says Doug Trott, president and chief executive of PriceMetrix, which has released a new report outlining top strategies for client retention.

In the first year of a new relationship, advisors enjoy a “honeymoon” period during which they retain 95 per cent of their clients. After that, however, retention drops “dramatically” before leveling off, PriceMetrix, the practice management software and data services firm said.

Between years two and four, for example, retention declines from 95 to 74 per cent, so it is during this critical time that advisors should intensify their efforts to demonstrate their value to clients, Trott said.

“Whether you are planning for growth, succession or simply increased productivity, every advisor needs to have a solid grasp of which client relationships are going to last and which relationships are in jeopardy,” Trott said.

Speaking to Family Wealth Report, Patrick Kennedy, co-founder and vice president of PriceMetrix said: “We think that advisors should be mindful of the fact that it is in fact a two-way street; and that they should be evaluating the client almost as much as the client is gauging their fit with the business and the level/type of service. On the flip side, advisors should recognize that just because clients have agreed to work with them doesn’t mean it is a relationship set in stone. They really need to showcase what their service is about during this risky period, and let those clients walk that don’t fit with their service strategy or model. This includes ensuring the client understands that there is a ‘fair exchange of value’ happening between the two of them.”

Kennedy's insights echo those of Kevin Bishopp, director of practice management for Russell Investments' US advisor-sold business, last year. Bishopp believes advisors must deliver a “superior service” and relationship experience
in order to differentiate themselves - and not just a product or portfolio. His views related to Russell Investments' latest Financial Professional Outlook survey of over 250 US advisors, which looked specifically at client retention strategies. 

Impact of net worth

Meanwhile – and in line with previous PriceMetrix research – the firm found that advisors with larger client households do better than those who manage households with $250,000 or less in assets.

For example, the average household with $100,000 in assets has a retention probability of 87 per cent compared to a household with $500,000 in assets, which has a retention probability of 94 per cent.

However - interestingly - the probability of retention does not increase significantly as assets grow beyond this level, as a household with $1 million in assets has only a slightly higher retention probability of 95 per cent.

Pricing

In other significant findings, PriceMetrix found that advisors who price relatively low or relatively high are less likely to keep clients. Rather, the optimal price range lies between one per cent (of revenue on assets) and 1.5 per cent, the firm said.

“These results suggest that advisors who price their services too low may be undercutting the perception of their value among their clients,” said Trott.

On the other hand, those who price too high might create “insurmountable service expectations,” he added.

Account types

Meanwhile, PriceMetrix noted that different types of accounts also play a role in whether clients stay or leave. Fee-based account clients, for instance, are slightly more likely to stay than those with transactional accounts (a 91 per cent retention rate versus 89 per cent.)

By contrast, “hybrid households” - which have both fee-based and transactional accounts - are significantly more likely to stay, with a 95 per cent retention probability.

“What this indicates is that the industry-wide move towards fee and managed business should be reassessed,” Trott said. “From the standpoint of client retention, a strategy of moving to a hybrid model, encompassing both fee-based and transactional business, may be better for advisors than one type of account over the other.”

Other factors

In related findings, those advisors who manage multiple retirement accounts within a household are more likely to retain the client relationship. While PriceMetrix said that the retention probability for clients with one retirement account or none at all is virtually the same – at 85 per cent versus 86 per cent - the probability jumps to 94 per cent when the advisor manages two or more retirement accounts.

Meanwhile, older clients are “far more likely to stay with their advisors than younger ones,” the firm noted. A 30-year-old client has a retention probability of 82 per cent, for example, while a 40- and 50-year-old client has an 87 per cent and 90 per cent retention probability respectively.

“These data points should give pause to those advisors who might expect or hope that pursuing younger clients will produce long term client relationships,” Trott said.

He added: “While younger clients may have longer time horizons with respect to their financial plans, the data do not support the claim that they intend to spend many years with one advisor.”

By contrast, if an advisor has many clients in the decumulation phase of retirement
(when income distributions begin to exceed investment returns) it can be
important to seek out younger clients in their peak accumulation years
to help maintain a sustainable business, Bishopp said previously.