Why 50 clients is the new 100
Does an ideal number of clients exist? Some advisors may service a few dozen individuals, others several hundred. Is there a golden middle ground?
Before unpacking this freighted question, it’s good to remember an advisor’s historical role, which primarily was that of salesperson for investment or insurance products. Advice — when it was there to give — was incidental to selling brokerage services. Consequently, the advisor-client relationship was more akin to that of vendors and customers, where business was transacted and little else.
We now think of clients as people served in an ongoing advice relationship that lasts years, if not decades. How, then, should an advisor go about building a steady roster of real, active clients that can help ensure financial success?
A growing body of research suggests that no human being can mentally manage more than about 150 total interpersonal relationships. Since most of us reserve a few dozen of those slots for our friends and family, it’s not clear that any professional could manage a 100-plus roster of real, active clients. And yet it’s a common answer to the question of how many clients are needed to ensure financial success.
The truth is that serving 100 real clients in an ongoing planning relationship takes time. Different advisors serve clients in different ways. Some may focus on interacting via email and video chat, while others may follow a regular routine of meeting in person with clients two to four times per year.
An advisor may reasonably expect to spend 12 hours annually working with clients to provide ongoing advice. This might be delivered in four two-hour meetings throughout the year, plus one hour per quarter of intra-meeting work behind the scenes. For a more frequent, higher-touch service model it could mean one hour per month of ongoing email communication and check-in meetings. Ultimately, firms might even craft a client service calendar that includes a combination of client meetings, calls and educational events to specify the scope of advice services throughout the year.
Working 12 hours per year with 100 clients would add up to 1,200 hours, which is certainly manageable. Someone who works 40 hours per week all year, and takes off two weeks for vacation, works about 2,000 hours. That means 1,200 hours of client-facing time represents only 60% of the advisor’s billable time, leaving 800 hours — or roughly three hours per working day, or about two days per week — available for all the other activities involved in running the business. That may be compliance obligations, marketing or any behind-the-scenes support work for clients.
At a billable rate of $150/hour, those 1,200 hours of client-facing time add up to $180,000 of annual gross revenue for the advisor, even though he/she is only nominally paid for 60% of his/her working hours.
Of course, gross revenue is not necessarily a net amount that the advisor takes home, but prior industry benchmarking studies have noted that the most successful, technology-leveraged solo advisors take home as much as $0.87 for every $1 of gross revenue, which is increasingly feasible given the availability of technology tools and flexible virtual assistants for administrative support.
(The above presumes an independent RIA model that can be run in a relatively lean manner as a solo advisor, as contrasted with advisors on an independent broker-dealer platform, where many only receive 80% to 90% payouts on their gross revenue, with some wirehouse or employee-broker-dealer platforms offering payouts as low as 40% to 50%.)
On $180,000 of gross revenue, being able to net upward of 80% would result in advisor compensation of more than $150,000 per year, or about three times the U.S. median household income.
Notably, while it may take just 12 hours per client at $150/hour to generate a net take-home pay of $150,000 per year, that doesn’t necessarily mean that charging $150/hour is the most effective way to generate revenue.
A popular billing alternative is simply the AUM model. At a typical 1% AUM fee, this would necessitate average investment assets of just $180,000. The “just” is justified, given we operate in a world where there are nearly 30 million households that are classified as mass affluent, with a liquid net worth between $100,000 and $1 million. For these clients the advisor provides ongoing planning services along with investment management — though ostensibly the investment management function may be outsourced to a TAMP, given a solo advisor’s limited capacity to do hands-on investment management.
And in fact, industry benchmarking data shows solo advisor firms are already focused predominantly on serving this mass affluent clientele with an AUM-centric business model — and can do so very successfully.
Another option entails charging the client an ongoing retainer fee, either for an outright amount of $1,800 per year or broken is down further as a monthly retainer model for $150/month, which over 12 months equals $1,800/year. The virtue of the monthly retainer model is that it further opens a range of prospective clientele who might not have the available assets to pay an ongoing 1% AUM fee, but who have enough income to pay the advisor directly from their cash flow. These prospective clients may be younger professionals such as physicians and lawyers, with healthy incomes but also significant debt and/or limited savings.
Of course, an ongoing planning relationship can also mean clients will need assistance implementing various services products over time — not on a purely transactional basis, but on an as-needed basis as their lives change.
Accordingly, many advisors adopt a hybrid model of charging AUM or retainer fees while also generating some level of commissions from the implementation of either select investment products or appropriate insurance products — e.g., term life insurance, disability insurance or long-term care insurance. Presuming it’s done in a manner that still meets the advisor’s fiduciary obligation to act in their clients’ best interests, implementing product solutions can further support an advisor’s revenue to generate the targeted $150/hour or $1,800/year client. That way, the advisor is compensated for what their time is worth.
On the other hand, the advisor’s revenue for product implementation may be substantially reduced by a broker-dealer or general agent’s slice of the underlying commissions.
BATTING FOR 100
In the end, perhaps the biggest challenge is figuring out how to secure 100 clients.
It’s likely to be a relatively slow ramp-up. For new advisors who acquire one new client every month, it takes eight years to get to 100 — and that’s presuming no client turnover. If the advisor builds momentum over time, perhaps netting two new clients per month after the first two years, it still takes about five years. If in the first year or two the advisor is still establishing their niche, it could take six to seven years.
Fortunately, the advisor doesn’t have to reach a full client base to make a livable wage. As noted earlier, a target of serving 100 clients with 12 hours per year of service at $150/hour leads to cumulative revenue of $180,000 and net take-home pay that could be as high as $150,000.
For someone managing just half those clients, that’s still potentially $90,000 of revenue and $60,000 to $75,000 of take-home pay, depending on the extent to which expenses scale upward, as some advisory firm costs are still fixed overhead. That’s a livable wage in most parts of the country and a very healthy one in many areas.
Obviously, the more clients pay for services, the fewer years it takes to reach any given target level of income. Viewed another way, it may not even be necessary to try to reach 100 clients.
For instance, if clients are paying twice as much as in the earlier examples — say, $3,600 per year, or $300/month, in some combination of AUM and retainer fees as well as implementation commissions — it only takes 50 clients to reach the same revenue. An advisor working with retirees rolling over $500,000+ portfolios only needs 36 clients to reach the same level, presuming a 1% AUM fee. If the advisor can secure millionaire clients, it only takes 18.
Viewed another way, growing to 50 great clients now has an upside of $300,000 of gross revenue. Of course, securing bigger clients can be more difficult, as there’s greater competition, more complexity and it likely requires more time to establish trust and credibility. It’s also worth noting that clients who pay significantly more often expect more service, meaning the firm may need at least some additional staff support.
Nonetheless, at higher revenue levels there’s still ample room to hire staff and have more take-home pay. This profitability potential is among the primary reasons advisors who begin with a broad base ultimately raise their minimums.
In other words, the 50-client pathway is open to advisors who set a target for the value of their time as well as the amount of revenue per client necessary to compensate them. It’s then incumbent on the advisor to focus on lifting revenue by adding new clients that increase the average, and rotate out the smallest clients. Stated more simply, if the advisor is focused on building a practice around 50 great clients, it’s necessary to actively manage which clients get those slots.
In some cases, advisors may try to jump-start the process by buying an existing advisory firm or at least a book of clients, though this requires either significantly more startup capital or the willingness to take on significant debt to finance the transaction. Plus, if you have that much capital available, it may be more desirable to simply use it to cover personal living expenses while growing the client base directly.
The fact that you need just 50 great clients can be incredibly freeing. It means there’s virtually no client niche that’s too narrow. And while the path to 50 is not necessarily capital-intensive, it is a very slow build. Understand that crafting your client roster remains a marathon, not a sprint, but the rewards — both in dollars and time saved — can be substantial.
So what do you think? How many real planning clients do you need? How many can one advisor realistically serve? Does a 100-client roster seem just right, too low or too high? Could you build a business around 50 great clients? Share your thoughts in the comments below.