Looking for value in clients

Looking for value in clients

10-08-2016 | Insight

Is it possible to apply value investing principles to the way an advice firm chooses which clients to work with? To understand how that might look, let's talk about the value of "picking" the right clients.

  • Stewart Bell
    Business Coach at Audere Coaching & Consulting

Advice firms rarely say yes to every new client forever. Most reach a point where they start to focus on generating greater profit or having more free time, instead of just increasing revenue.

When this happens, most approach it from one of two angles.

1. Increase fees and look to work with clients willing to pay more for their advice. The clients who do are usually those for whom the intrinsic value of the advice is greater than for most people.

2. Service more cheaply by getting specific about the work they do (and don't do) and for whom, then designing efficient processes to handle known scope. The result is the intrinsic value of the clients they advise becomes greater to their business than their competitors due to that efficiency.

The end result in both cases is greater profit, sometimes with less effort.

That's the concept, but now let's get practical.

If you want you seek value through client prospecting, where to look?

Let's start with being able to charge more. Here are examples of potential premium fee niches within the advice space.

  • Surgeons, barristers, airline pilots, FIFO, politicians, business owners and other occupation-specific niches are probably the most common premium niches. They have specific circumstances that challenge them such as insurance terms, tax treatments, retirement benefits or how they are or aren't allowed to invest their money. Specialist needs equal a value opportunity. In many cases (business owners in particular) they are also used to paying for services so are less resistant to the idea of advice fees and delegating. Executives fall into a similar sort of category, though advisers who work with these clients typically foster relationships with parent companies first.
  • Wealthy and affluent span multiple niches. However, the greater the wealth, the more likely the desire to either engage a single source for all advice or have multiple advisers. Either way, higher levels of expertise are frequently expected. Over the years I've come across a 'reverse sweet spot' of clients between about $1m to $5m net wealth who can often be much harder to manage and, if scope isn't defined, can easily end up being less than ideally profitable.
  • Athletes and media are niche groups that numerous advice firms have successfully targeted. The value comes in appreciating the unique challenges of a compacted career and lumpy income, as well as being able to manage relationships with agents as much as the talent themselves. To make this work you also need the right network and credibility.
  • Women at 51% of the population is not a niche. Instead this is more about drilling down into sub-niches such as female executives, pre- and post-divorcees, female entrepreneurs and others.

The second route is of course reducing servicing cost to achieve greater profitability. Here are examples of three niches that provide means to embrace this opportunity.

  • People who an increasingly common niche, focusing not on who a person is, but what they believe. Some clients want to work with firms who also believe a second GFC-style crash is inevitable, and wish to plan accordingly (even if it never actually happens). Similarly, niches exist for firms working with young entrepreneurs who consider themselves to be particularly successful, people who want ethical investment and those who want their financial wellbeing balanced with that of a greater spiritual game. The reduced cost of delivery here comes from standardising the offer, expectations and the way clients engage.
  • Ethnic niches - For example I spoke recently with an adviser who works predominantly with a Middle Eastern community in Sydney. In general his clients pay off home loans quickly and appreciate the value of insurance cover, meaning it's a niche that acts quickly and creates wealth fast. The more similar the needs of your market - cultural norms is one thing that can drive this - the more opportunity you have to cut fat from your offer.  
  • Future stars - This is probably the niche that is most aligned with true value investing. Some clients' occupation, family background or personal capabilities suggest big things in the future. Medical students, the children of affluent clients and startup business owners in the right growth industries such as tech, digital marketing, export, business coaching and property are examples. If you can provide value-add services that drive retention at a profitable price point early on, combined with a hybrid fee model, you have a classic ascending profit model. 

As with investing though, choosing a niche to find value remains about what's right for you.

There's no point choosing a niche where you lack the ability to access your target market (perhaps due to regional location, marketing capability or social reach), don't have the expertise needed (no point going after surgeons and barristers if you can't add greater value than specialist advisers already working the space), or your niche simply don't have the propensity to pay.

Like value investing, finding value in the client market is as much about exploring the data, following a set philosophy and gaining insight as it is about balancing gut feeling.

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What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
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