It may come as a surprise to learn that loyal and satisfied clients are not necessarily the most profitable clients.
While they are happy with the service being provided – and do not plan to switch advisers – this doesn’t mean they will recommend you to their friends or family, new research has found.
A study by international consultancy Advisor Impact, called The Economics of Loyalty, shows that client commitment, or engagement, has the greatest impact on the potential profitability of the client relationship.
“Client loyalty has long been considered the ultimate goal of a service business,” the study notes.
“The assumption is that our most satisfied clients are our most loyal clients, and that loyalty, in turn, supports our business goals. And while we certainly do not disagree that loyalty is a laudable goal, we also believe that it is, ultimately, a hollow indicator of the quality of a client relationship.”
For the purpose of the research, loyalty is de fined as not only if the client has continued to work with an adviser, but if he or she has never thought of leaving the adviser.
Julie Littlechild, president of Advisor Impact, says the reason why loyalty does not equate to a quality relationship is that most planners are looking for people who are “enthusiastically in the relationship”, not just staying there.
The study, which surveyed 1000 American investors, each with a financial adviser and each of whom contributes to or makes the financial deci sions in their household, studies the scope, depth and quality of the relationship between a client and his or her financial adviser.
Clients were divided into four groups – con tent, engaged, complacent and disgruntled.
Of the respondents, 31 per cent were content, 33 per cent were engaged, 19 per cent were compla cent and 17 per cent were disgruntled.
The study identified a direct link between the potential profitability of the client relationship and the level of client commitment.
“What we saw with the research is as we moved from the four clusters we identified, we were able to see an impact on increased share of wallet, increased propensity to work with the entire family, cross-selling and then referrals,” Littlechild says.
According to the research, the average engaged client provided 2.3 referrals to their adviser, mean ing each engaged client is worth (depending on the size of the referral) more than 200 per cent of their own business.
“Share of wallet” tends to increase as clients move into the content category and is less impacted by client engagement.
“However, it is clearly impacted by moving from complacent to content, supporting the overall trend,” the study notes.
If engaged clients are more profitable due to their tendency to provide referrals, Littlechild says a primary goal of financial planners should be to move clients into the engaged category.
The foundations for doing this include: getting the service structure right; ensuring the offer that’s in place is really meaningful for the client; and finally, thinking about personal engagement.
“Tactically what that means is ensuring you are seeing your clients efficiently and able to focus on what’s important in their lives,” Littlechild says.
Fewer, better clients may be the best path to improve profitability and efficiency, she adds.
“In order to engage clients we have to be consis tently delivering a strong level of service,” she says.
“We have to start there, then recognise that we have to go deeper, look at the scope of relationship we’re providing. This raises questions, if noth ing else, as to the size of a client base that we can effectively engage. If you’re grappling with trying to service more clients than might be physically possible… you might ultimately be less profitable as a result.”
When leveraging client commitment into refer rals, the study found the mantra “just ask more” is the wrong approach.
The results show that the process of asking for referrals does not impact the likelihood of clients providing referrals – in other words, the reason cli ents refer is to do their friend or colleague a favour, not to do their planner a favour.
“There’s a very low percentage of clients that said, ‘I provided a referral because the adviser asked for a name’, versus ‘a friend asked for a name as they had a financial challenge’,” Littlechild says.
“[Planners] need to find a way to position themselves as a good resource for their clients and help them understand specifically what kinds of problems they can solve, so when they’re in a con versation they will recognise that.”
