“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

Advisor says: I have read your articles about advisor succession planning and heard you speak on the subject a couple of times. As a result, I certainly feel far better informed about what to consider and the steps to take when I am ready to sell or transition my business to another advisor. I also appreciate that anything I do now to prepare my practice in anticipation of my retirement will benefit me right away, as a result of having more consistent revenue, improved processes, transferable goodwill and so on.

My problem is that I am still a long way from the date I plan to exit my business but very close to the date at which I want to stop growing it. In fact, being completely honest, I have probably already reached my limit in terms of number of clients. What I’d really like to do is downsize my practice. How do I reconcile my desire for a smaller practice with the need for growth to maximize its value when I retire?

Coach says: I am glad you have found value in the ever-expanding dialogue about advisor succession planning. In my mind, it should be one of the highest priorities in our industry, given the rapidly aging advisor population and serious lack of new entrants.

Your message has reminded me that not every advisor wants (or needs) to build his or her practice to the sky. There is plenty of room in the industry for high-quality, compact businesses that serve clients well while providing comfortable lifestyles for their owner/operators. One of the benefits of being an entrepreneur is getting to decide how big you want your business to be. Increased size is almost always accompanied by increased complexity – sometimes to the point at which advisors spend more time managing the business than practicing their craft as advisors, which is seldom optimal use of their talent.

I must, however, challenge your assumption that smaller size and growth are antithetical and irreconcilable objectives. In fact, I have been involved in numerous situations in which the size of a practice was reduced (sometimes drastically) and the result was a significant growth in assets under management (AUM) and revenue.

Sound unlikely? It’s not, really. And you probably already know how it is done: replace a meaningful number of low-value clients in your practice with a much smaller number of high-value clients.

In more explicit terms, that means selling or transferring the “bottom X%” of your client base to another advisor who has both the capacity and interest in converting your low-value clients into high-value clients of that advisor’s own.

I am reluctant to describe any client as being in the “bottom X%” because it implies that somehow that person is no longer worthy of being your client. That is definitely not the motivation. This downsizing process is simply a matter of sound business sense. When your client base starts to exceed your physical and emotional capacity, everyone suffers. Service declines, proactive contact diminishes, opportunities are missed, systems become overloaded, resources are misdirected, energy dissipates and enthusiasm for the business fades.

So, how do you go about deciding which clients to let go? Here is my recommended approach:

step 1: segment your client base. I know you have probably done this already to assign service levels. But now I want you to do it with the view to determining whom you want to keep as clients, and not how much service you are going to provide. Although I often preach that there is much more to segmentation than simple numbers, start with revenue. You can adjust later for qualitative criteria.

List the annual revenue you receive from each client. If you have a large client base, it will be a bit of a chore and you may not be 100% accurate. Just try to be as precise as possible.

step 2: analyze the numbers. Rank your clients in order of revenue from top to bottom. You probably will find some natural “breaks,” such as a small percentage (5%-10%) that generate significantly more revenue per person on average than everyone else. The next tier (10%-20%) will generate “good” cash flow. The third tier (20%-30%) will average “acceptable” revenue. The balance will be markedly “below average.”

step 3: calculate your capacity. Multiply the number of weeks you work by the average number of hours to determine your personal capacity. Next, add up all the hours, on an annual basis per tier, which you put into managing your client relationships (reviews, service, client events, etc.) plus all the hours you put into non- relationship-management activities (marketing, compliance, strategy, research, etc.). Compare your personal capacity with your activities. Any time left over?

step 4: play “what if?” With knowledge of the number of hours you work, the number of hours you are committed to various activities by client segment and the average revenue per client in each segment, try various combinations to optimize your practice.

Here’s a real-life example for an advisor with whom we have worked that dramatizes the power of this process. After segmenting his 370 clients and analyzing cash flow, we found that:

– 20 “A” clients (5%) @ $7,500 = 30% of total revenue;

– 50 “B” clients (14%) @ $4,000 = 40% of total revenue;

– 100 “C” clients (27%) @ $1,000 = 20% of total revenue;

– 200 “D” clients (54%) @ $250 = 10% of total revenue.

Note that 70% of his revenue came from just 19% of his clients and 90% came from less than half (46%).

Next, we determined this advisor’s personal capacity to be 2,070 hours (46 weeks @ 45 hours). His commitments for non-relationship-management activities were 900 hours per year, leaving up to 1,170 hours for relationship management, which was allocated as:

– 20 “A” clients @ 13 hours/year;

– 50 “B” clients @ 8 hours/year;

– 100 “C” clients @ 3 hours/year;

– 200 “D” clients @ 0.5 hours/year;

– for a total of 1,060 hours/year.

The remaining 110 hours of “excess capacity” was a reasonable buffer for unexpected contingencies that we all know will arise in any practice.

Finally, this advisor’s objective was to reduce the size of his client base without suffering loss of income. Playing “what if” allowed us to discover that by selling or transferring all 200 of his “D” clients to someone else, then adding just four new “A” clients and six new “B” clients, the advisor soon would be generating the same revenue as before. Proceeds from the sale of his “D” block of business would offset the temporary decline of income through the transition period. What’s more important, the total number of clients would be cut in half, vastly improving this advisor’s emotional view of his business and, perhaps, even allowing him to reduce his workweek from 45 hours or take more time off.

I wish I could say, “We have an app for that.” But the truth is that we use a simple Excel spreadsheet to help determine optimal capacity within a practice. If you’d like a copy, just send me an email.

Note, as well, that as a practical matter, this process seldom goes as smoothly as suggested. There are always exceptions to be made: some “D” clients will be kept for personal reasons; and some “C,” “B” and possibly even some “A” clients also should be transferred out. You also might not find a suitable buyer for your list of excess clients. (Although, in today’s market, that is less of a risk.)

As noted earlier, there also is an urgent need in the industry for new, young advisors. And what better way to start than with an existing client base that can be paid for on an earnout basis while under the tutelage of a veteran advisor?

George Hartman is managing partner with Elite Advisors Canada Inc. in Toronto. Send questions and comments to ghartman@eliteadvisors.ca.

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