Do you know what the Pareto principle is? Named after an Italian Economist of the early 1900s, the Pareto Principle is more commonly referred to as the 80/20 rule – 20% of our efforts will yield 80% of our results.
Why is this worth mentioning? It’s another way of reinforcing the notion that the most successful advisors generally have fewer clients – but the clients that they do have are wealthier. As a recent Investment News article headline read “One key to being a million-dollar producer? Dumping smaller clients….”
While the concept that advisor success is highly correlated to having fewer overall relationships has been around for a long time – and is in fact rather intuitive – a recent study by PriceMetrix Inc. of more than 1.3 million households adds some al meat to the argument:
* On average, small accounts (less than $100,000) make up 52% of an advisors business yet generate only 9% of revenue
* The average advisor makes only $350 a year (commissions and fees) on small accounts
* Only 24% of the book of the average million dollar producer is composed of small accounts
* The average advisor who slashed small accounts by 5% increased revenue by $43,000
Hey advisors – whether you subscribe to the 80/20 theory or not – these last two bullets are actionable items – dissect your book to see where you stand, and at a minimum, slash 5% for a nice bounce to your income!
The other logical conclusion of these numbers is that if you like serving smaller accounts and want to keep them as part of your business, you better make sure that you have the client servicing infrastructure to support it – because it’s going to be a lot of work! (By the way – the study also concluded that small clients are 108% more likely to switch advisors than they are to become $1 million accounts – ouch!)
Bravo, thank you for reminding us of what we learned in our early careers and gave into when the markets misbehaved!