As someone who has consistently advocated for RIA owners to focus on the profitability of their client relationships, I took special note of Ellevest’s announcement on Feb 26 to shutter its robo advisor and sell it off to Betterment. Interestingly, Ellevest will continue to serve clients with $500,000 or more in investable assets through their traditional RIA. This decision exemplifies a firm that underestimated both the cost to acquire and the cost to serve smaller client relationships. Far too many RIAs simply believe that “More AUM is better!” without analyzing the profitability of each client. It is essential to shift this mindset to ask, “Which client segment(s) do we want more of?”
During my years as a technology consultant, I often encountered RIA owners who expressed a desire to build a robo advisor, stating, “I need a way to serve my unprofitable clients.” To emphasize the absurdity of this statement, I would pause for an awkward amount of time and then ask them to repeat it.
“I need a solution for my unprofitable clients, so I want to build a robo advisor.”
I would then pose a thought-provoking question: “Why would you want to invest your hard-earned money into a technology platform designed to serve clients that are, by your own calculation, unprofitable to your business?”
Many of those “unprofitable” clients were not separate, stand-alone clients but the children of larger clients served by the firm. When properly consolidating these accounts under the larger relationship, we could assess the overall economics of the household and determine that even with the children added, these larger relationships were, in fact, profitable for the RIA to continue serving. However, for clients with no connection to other accounts, the critical question emerged (much like Ellevest recently asked about their own business): “Why keep these unprofitable clients on our books?”
For over a year, I have been touting research by Fidelity, which indicates that the average cost to serve a household relationship is $9,222. This figure represents the national average, while firms in high-salary regions, like Coldstream in the Pacific Northwest, experience even higher costs to serve clients. In a recent episode of The COO Roundtable podcast, I discussed various methods by which RIAs can calculate their own average cost to serve households. Whether you rely on your own calculations or Fidelity’s national average, it is imperative for every RIA to regularly review profitability at the individual client level. If a particular client contributes less than your cost to serve, you have a few options:
- Raise the client’s fee
- Alternatively, reduce the discount applied to your standard fee schedule, especially if you initially offered lower rates to attract smaller relationships
- Reduce the number of services offered as part of your AUM fee
- This adjustment can help decrease your overall cost to serve
- Engage less expensive team members
- Assigning these relationships to more junior advisors can help lower your cost to serve these clients
- Charge separately for services not covered by the client’s AUM fee
- For example, your firm may pride itself on the deep tax planning work you do for clients. That’s great, but you can only include tax planning work for clients whose AUM fee covers your cost to serve—if the AUM fee is too low, you need to charge a separate fee on top of your AUM fee for these additional services
- Follow Ellevest’s example
- Consider referring unprofitable clients to another RIA that may be better positioned to serve them profitably or to an RIA that is at an earlier stage and willing to take on these clients to reach a scalable AUM threshold
Let us shift our focus from the notion that “more AUM is better” to a more strategic approach that emphasizes identifying and nurturing profitable client relationships. By implementing the strategies discussed—from adjusting fees and service levels to optimizing resource allocation—firms can better align their offerings with their profitability objectives. Remember, the goal is to build a thriving business, not just any practice. With this reminder provided by Ellevest, embrace this opportunity to evaluate and refine your portfolio of client relationships, ensuring that every household contributes positively to your firm’s bottom line. The success of your RIA depends on it!
This article originally appeared at Wealthmanagement.com.