Most advisors don’t do it but estimating the lifetime value (LTV) of your clients can provide useful insights into which clients are the most profitable.

A simple way to assess the LTV of a client is a two-step process: first, estimate the total revenues you expect to earn from the client. Then, subtract the estimated cost of servicing the client from the estimated length of time the client will remain with your practice.

Another method of assessing LTV is to take into account the referrals that may be generated by a client. Notes George Hartman, CEO and co-founder of Elite Advisors Canada in Toronto: “There is a multiplier effect, in terms of revenues that can be generated from referrals, substantially increasing the LTV of a client.” And when you consider that the primary source of new business for most advisors is from referrals, this aspect of assessing the LTV of a client takes on greater importance.

As a result, clients with the largest assets under administration might not necessarily have the greatest LTV, suggests Sajjad Hussain, vice president and private wealth counselor with Fiduciary Trust Canada in Toronto.

Here are some considerations for assessing the LTV of your clients.

Client revenues
You will typically earn revenues from clients based on the assets you manage for them. For instance, an A client may generate $5,000 per year in revenues, says Hartman. Over a 10-year period, that client would generate $50,000 in revenues. Says Hartman, “You have to look beyond first year revenues.” Look at the revenue stream of the client over a period of time or what you estimate to be the client’s lifetime, he recommends.

Revenues from first-tier referrals
Don’t forget to include the value of referrals. “Go back and look at your records on a one-on-one basis and determine who they have referred to you,” suggests Hartman. “You don’t have to be precise,” he says. Then calculate the revenues generated from those referrals. This amount should be added to the revenues generated from the initial client.

Revenues from second-tier referrals
Over time, clients who join your practice as the result of a referral will themselves generate further referrals. If you add the revenues generated from the initial client to the revenues generated from the first- and second-tier referrals that follow, you will arrive at a good estimate of the total lifetime contribution of the first client to your practice.

Revenues from family and related services
Hussain suggests that adding the business of a client’s family members will also enhance the LTV of that client. You can also generate other sources of revenue from these clients for related services such as estate planning, trusts and insurance. This increases the LTV of the client.

Estimating costs
The lifetime cost of servicing the client must be discounted from the lifetime revenues generated to arrive at the LTV of the client. However, the expenses related to servicing a long-term client would be significantly less than bringing on a new client, suggests Hussain. The question then becomes, how much would you be willing to spend to attract clients with a potentially high LTV, says Hartman. He suggests that you should not be afraid to spend money to attract clients with a high LTV.