No practice will ever achieve 100% client retention over the medium to long-term but client retention is critical to practice success.
All clients will depart this mortal coil at some point in time, others will divorce or separate and still others will relocate to a new country, state, city or town. Some may even leave you because they don’t think you’re doing a good enough job or you charge too much or they feel unloved.
The emphasis on being able to deliver value for money, due to the Royal Commission and Code of Ethics, points to a situation where clients are more likely to question the value of ongoing fee arrangements and will be in a much stronger position to terminate their relationship with their adviser every 12 months. So, advisers will have to work harder to retain clients and be more focused on the unit economics of each of their relationships.
Client churn is inevitable. But that’s no reason to ignore its importance because the ultimate success of your practice relies heavily on retaining clients so you can extend their lifetime value and, ultimately, maximise the value of your practice. After all, at some stage in the future you will want to achieve a ‘liquidity event’ at the highest possible valuation.
Retention is also an essential precursor to both increasing share of wallet and generating genuine referrals.
Due to the relatively ‘sticky’ nature of client relationships in the financial advice industry, compared to other industries, client retention rates for average to well performing practices tend to sit in the range of 94% – 98%, which means an annual client churn rate of 2% – 6%.
If your practice is currently operating at a retention rate of 94% (with an implied annual churn rate of 6%), what would it mean to your bottom line to reduce the annual churn rate to 5%? Let’s run some hypothetical numbers using these assumptions.
- annual retention rate = 94%
- annual churn rate = 6%
- average client age = 55 years
- average annual revenue per client = $5,000 (ex. GST)
- average client life expectancy = 75 years
- you have 100 clients
Based on these numbers, you could expect to generate revenue of $100,000 (unadjusted for CPI) per client over their remaining lifetime (20 years x $5,000 p.a.) x 100 = $10,000,000 in total.
The implied average client economic lifetime, based on the current churn rate of 6%, is almost 16.7 years. This means that, unless you can reduce the churn rate, you will miss out on generating 3.3 years of revenue per client = $16,500 = $1,650,000 in total.
If you could reduce the annual churn rate from 6% to 5%, this would result in an implied average client economic lifetime of 20 years, resulting in being able to extend the economic lifetime of each client by 3.3 years and generating additional revenue per client of $16,500 = $1,650,000 in total.
None of these calculations take into account the attractive financial benefits of generating additional referrals as a result of extending client lifetime nor the savings linked to avoiding the costs of marketing activities to acquire new clients to replace those who have churned.
As you can see, this is no small deal and when it comes time for that long awaited ‘liquidity event’, every client you can prevent from prematurely churning has a significant impact on your ultimate pay day.
Client retention also brings other benefits such as:
- Opportunities for next-sell, cross-sell and up-sell of products/services that may command higher margins and/or lower cost of service. A number of studies have suggested that the acquisition of a new client can cost 5x – 10x more than maintaining an existing client, so client retention has a positive effect on costs and the bottom line.
- Greater likelihood of generating testimonials that can be used in your marketing activities to attract new clients.
- Retained clients may be less price/cost sensitive. A client who is loyal to your practice is more likely to accept a price increase than a new client, provided you can demonstrate value delivered.
Assuming each of your clients is profitable, it makes a lot of sense to extend the client lifetime as far as possible by minimising churn. Because when a client churns, your practice will lose everything it has spent to acquire and support that client up to that point, as well as all of their future revenue (direct and indirect).
If your practice isn’t consistently achieving higher retention rates year on year, then you need to figure out what you can do to arrest the leakage of existing clients because that’s having a direct impact on the value of your practice.