“Knowing yourself is the beginning of all wisdom.”

—Aristotle

Fee compression is felt by wealth managers and asset managers alike. Technology has created substantial disruption and it will continue. Amazon, Uber, Airbnb, Facebook, Netflix, Alibaba, Snapchat, Apple, Google, Waze, and so on. They all challenged the status quo. Commoditization by definition means you could only compete on price. Therefore trying to compete on price in the advice business is like Ritz Carlton trying to compete on price. Instead, focus on increasing value and prioritizing that value to different clients. A team with a $200 million book may have the opportunity to gain four to five times more assets through referral opportunities or by gathering additional client assets from competitor firms. Once you view the math from a big‐picture perspective, it may help you see the overall value of a single client. The future will force the advisor to look and feel more like a family office. Protecting your price starting by understanding the value of each client relationship. The research goes on to say that the following elements in the Harvard Business Review, September 2016, the cover “What Does Your Customer Really Want?” Product and services deliver fundamental elements of value that address four kinds of needs: functional, emotional, life‐changing, and social impact.

One way of evaluating and fine‐tuning your client base further is by studying it from a sociological perspective. American demographics are changing so rapidly that the future wealth advisor will need to fully understand the distinctions among many highly segmented groups of investors. Targeting specific subgroups within your client base, such as those who are ready to transfer wealth, sell their business, or expand their business, will prove vital to your future success. The wealthy want value, and advisors who don't understand that will lose market share. A wealthy client will not think twice to spend $500 on a bottle of wine, but will negotiate hard when purchasing a new car. In the absence of value, price will always be an issue. You are the product or solution, not the stocks and bonds or money managers you recommend or the financial plan you create. You will not win business when you underestimate your value. However, if you demonstrate competence, project confidence, and act with integrity, your clients will feel comfortable discussing their financial needs with you and will pay for outstanding service and customized solutions. They will not pay for cookie‐cutter solutions and incompetent people delivering inconsistent service.

The “Fee” Discussion

These are some of the explanations of the fees you charge. Many of the services are not visible to the client but it's your responsibility to be transparent about what they are and how they serve the client's interests. The services include:

• Creating a customized and comprehensive financial plan
• Asset allocation
• Manager review
• Risk management
• Tax efficiency considerations
• Performance reporting
• Rebalancing
• Overall account monitoring
• Customized estate planning services
• Insurance reviews
• Tailored college planning
• Banking and specialty financing
• Managing the client's philanthropic/giving strategy
• A team of experts dedicated to helping clients achieve their financial goals—personalized and proactive to meet client's objectives

Client Segmentation

Client segmentation is about identifying what type of client you want to service and how to deliver value to each segment. In order to fully appreciate why segmentation is important and works well we need to go back to 1897. We all have heard of the 80/20 rule. The person who defined this pattern was Vilfredo Pareto, an Italian economist examining patterns of wealth and income in nineteenth‐century England. His research showed that roughly 80 percent of England's wealth was in the hands of 20 percent of the people. His real discovery came in the consistent mathematical relationship between the percentage of the population and the percentage of wealth they possessed. He found that this correlation existed not only in England, but throughout Europe.

In 1949, Harvard professor George Zipf called the 80/20 rule the principle of least effort. He stated that 20 to 30 percent of productive resources like people–time skills will consistently account for 70 to 80 percent of the activity related to that resource. This principle is seen every day in wealth management. Typically, 20 percent of your clients generate 80 percent of your revenue. In some cases, it may be 30 percent/70 percent, but the general theory holds as true today as it did in the nineteenth century. Therefore, client segmentation is about creating efficiency, capacity, discipline, and consistent process and growing your practice. Most importantly, it's about giving clients exceptional service and an outstanding experience.

I see the best teams fully embrace this concept. Yet, the majority of advisors do not segment their client‐service model often because they do not understand the advantages to segmentation from both the client and business standpoints. Ultimately, client segmentation is about offering the highest standards of client experience and helping every client get the exceptional service they expect. It's finding the right balance of those clients being served in order for you to exceed expectations. Segmentation is as much art as it is science. The categories you use to segment your client base should include both objective and subjective categories. Revenue per client is an important component of segmentation but not the only one. For example, you may decide to segment based on:

• Client revenue
• Client assets
• Advocate—COI
• Likability
• Profitability
• Opportunity for future growth

Client segmentation can be achieved through various approaches but any wealth manager branding efforts should start early. Establishing account minimums sets ground rules and helps convey to a new client that you are a serious advisor and you both have certain expectations for the relationship.

The Elite Advisor Growth Model

• Individual model:
  • Execution
  • Competency
  • Mindset
  • Purpose
• Business model:
  • Business development
  • Client experience
  • Wealth management
  • Practice management

Advocates, Clients, and Prospects

Another way to segment clients is to think of them in three categories: advocates, clients, and prospects. As the Pareto Rule reminds us, 80 percent of our business derives from 20 percent of our clients. Those who are grouped in the top 20 percent are your advocates and they will receive 80 percent of your attention. They are walking billboards for your practice and can create a steady stream of referrals for you. They hardly ever question your recommendations. Clients are those who give you a healthy portion of their business, and they accept and value your advice. Prospects maintain a small portion of assets with you and lack a meaningful relationship with your practice. Segmenting your current client base this way can help you focus your attention effectively and even tell you when to let certain clients go if they prove to be too time‐consuming or don't value your advice. Trying to please clients that simply don't value what you and your team deliver can be exhausting. Part ways, because you are detracting from your other clients.

If you manage your clients as you would manage a high‐profile portfolio of investments, then you would rightfully expect that your energies would pay off in the long run. However, as suggested by Gupta and Lehmann in Managing Your Customers as Investments: The Strategic Value of Customers in the Long Run, there are two sides to customer value: the value a firm provides to a customer and the value of a customer to a firm. The first part represents your investment of time, energy, and resources and the second part is the actual return on this investment. Gupta and Lehmann segment clients into four categories: stars, lost causes, vulnerables, and free riders.

• Star clients are those who derive high value from the products and services you offer. You gain from them profitability, loyalty, and a longer retention time.
• Lost‐cause clients are those who do not perceive great value in what you offer. Here you only gain when they transact on a large sale. If you are unable to migrate these customers to higher levels of profitability, reassigning or letting go of these accounts may be the best option.
• Vulnerable clients provide high value to the firm but do not receive value in return. They are vulnerable and prone to defect to competitors unless corrective action is taken quickly. These clients can be saved through better product offerings, additional services, and concerted support.
• Free riders are those who receive superior value from the products and services you offer, but provide little value to you. These customers exploit their relationship with you and your support staff, but return little ROI.

It Takes Two

Not every client–advisor relationship works or is worth investing in. Successful advisors know this and are able to navigate these difficult situations because they know themselves and they know and respect their own value as much as they do that of their clients. Acknowledging in these circumstances that you are not the solution is a solution in and of itself. If the advisor feels he or she cannot work well with a client, then the advisor should consult with his or her branch manager to see what action can be taken. Another advisor or another firm may be a better fit. If a client has unrealistic expectations or repeatedly asks you to discount your fees, he or she clearly does not value you and the services you provide. If you repeatedly oblige this client, then you are undervaluing your own business. But if you select your clients based on your business model and your philosophy, you are likely to achieve an incredibly high level of client loyalty and a subsequently steady stream of referrals. You are their solution, but also remember you can't be all things to all people.

It's a Multigenerational Business

The wealth management business is both art and science and the best practitioners draw on both to build and deepen client relationships. Very often, the client relationship is with the head of the household and does not extend to the spouse and children. Without having a strong relationship with all members of the family, you could be in jeopardy of losing the account if the decision‐maker passes on. You will likely scramble to keep these accounts despite years of solid relationship‐building with the now‐deceased client. This generation is the richest ever, forecasted by one wealth management company to peak at about $54 trillion in assets by 2030. These baby boomers will live longer, healthier, and live more active lives than their parents or any previous generation. Boomers began retiring earlier this decade and roughly 10,000 boomers are retiring daily. This transfer of wealth should be part of the overall business plan. Relationships take a long time to build; therefore, start building touchpoints with the clients' children on a regular basis.

Meeting family members early in the process is vital. Employing a multigenerational focus will help you maintain and grow your asset base. Advisors can address these issues proactively by developing a well‐rounded team that will cater to different aspects of the client's life, as well as to the family members. If you focus your team's time appropriately on the right clients, then you will recover the value of your investment and enjoy greater profitability in the long run.

I first met Sid Queler in 2015 when I held several programs throughout the country for his firm on growing the business. Sid is the head of business development at Atlantic Trust and has been in the industry for over 25 years. He leads a motivated team of professionals across 14 offices nationwide. Like myself, Sid is a family man and enjoys spending his time away from the office with his family. Here is a question‐and‐answer about growing assets under management (AUM).