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Advisors know that it is increasingly difficult to differentiate themselves in the marketplace and maximize their resources. Balancing your love for what you do with what clients value most, while maintaining efficient and effective service models is grueling. Financial advisors want to make sure that every client is getting maximum value in the relationship, and growth for growth’s sake is not a healthy strategy. At the same time, like parents, advisors love all their clients equally. All these factors make understanding your client lifetime value (CLV) of crucial importance.
But how does one do that? How can you tell which prospects you should focus most on attracting and retaining and which ones are going to cost you more to service than the revenue they will bring into your firm?
Knowing your CLV is essential, and it can guide the decisions you make in the course of your career. CLV is a relatively new metric, but it is quickly gaining popularity among marketing researchers as a more reliable way to measure and evaluate the true value of a client relationship.
What is CLV?
CLV is the total worth of a client to the business, considering all aspects of the relationship between the firm and the client. It accounts for everything a business knows about a client and then calculates the average amount of revenue and profit the client will contribute throughout the lifetime of the relationship.
Though different marketing analysts may use slightly differing formulas of varying complexity, the following calculation will give you a quick, concise way to evaluate CLV (what marketers refer to as “historic CLV”):
CLV = Client revenue per year X average years of retention – total cost of acquiring and serving the client (cost of doing business)
Here’s an example. Suppose that a given client is generating an average of $20,000 annually in gross revenue. Now suppose that on average, you retain a client for 15 years. Over the client’s lifetime of association with your firm, the client will contribute a total of $300,000 in revenues. If you know that your annual costs for serving that client are $14,000, then the client’s CLV looks like this:
($20,000 X 15) – ($14,000 X 15) OR $300,000 – $210,000 = $90,000
Simple, right? Well, not really.
We know that in the financial advisory business, CLV is not that clear-cut. Sure, you can measure CLV purely from a revenue/profit perspective, but you would be missing important value factors like referrals, advisor experience, engagement levels, process and technology compliance, and respect for your knowledge. Assigning weight and value to these aspects will get you to a truer form of CLV. A more accurate formula for the advisory business might look more like:
This way of looking at CLV is especially helpful and can be expanded to include areas that are less quantifiable by assigning value to them. It quantifies the likely lifetime contribution of each client to your firm’s profitability.
Speaking of profitability and quantification, CLV is not only about revenue. Next, let’s discuss some other implications of CLV and the role it should play in your advisory business.
The role of CLV
CLV is vital for a financial advisor to understand because it leads to better decision-making processes in several key areas.
Client retention and resource allocation
The primary reason CLV is important is client retention. Generating more revenues from existing clients is less expensive than acquiring new ones. However, not all clients bring in the same amount of revenue, and measuring CLV allows you to know which ones are more important to your firm’s profitability. These are the clients you will want to focus on deepening relationships with in order to insure both excellent service and retention of valuable business. Knowing your CLV allows you to make better decisions regarding resource allocation with regard to the tradeoff between service to existing clients and new client acquisition.
CLV plays a vital role in spending and budget decisions.
Marketing plans
CLV also plays a significant role in determining your firm's marketing decisions. Once you know the importance of CLV, you'll be able to establish more strategic marketing goals and direct your tactics to meet them. You will want to target maintenance of high retention rates and lowering the cost of acquiring new clients. Knowing the type of clients with the highest CLV helps you acquire laser focus as you devise your marketing approach.
You can also engage your existing client base more effectively by directly reaching out to them or utilizing communication streams that they use most often.
Coincidentally, advisory firms don't spend a lot on marketing, especially for prospective new clients. If your CLV is significantly high, you can afford to invest more in marketing efforts to acquire clients. For example, if your CLV averages $40,000 or more per year, and you're only spending about $10,000 annually on marketing, boost your marketing budget. On the other hand, if your CLV falls near or below the cost of acquiring new clients, redirect funds toward nurturing the revenue being generated by your current client base.
Client journey mapping
One of the most important requirements for thoroughly understanding CLV is gaining a real-world view of the nature of your clients’ experience with your firm – a process sometimes called “client journey mapping.” The client journey refers to all the touchpoints a potential client goes through in their interaction with your company. Keep in mind that this doesn't just apply to the moment of their interaction with you directly, but also what happens before they become clients (i.e., how they found out about you) and what comes after (i.e., the feedback you receive on their view of the experience).
Building a client journey map is a helpful way to begin gaining the understanding you need. This will also help you and your firm better understand the client lifecycle.
For example, the first area potential clients usually interact with is marketing. This often happens in the “awareness” stage, when they're first introduced to the firm, perhaps through a digital advertisement or some other form of outreach. Eventually, if all goes well, the client meets the advising team, then perhaps the client service team, and so on. When you build a map of the client’s “journey” through their experiences with each segment of your firm, you can begin to develop a list of “touchpoints” that can influence the quality of the client’s experience and, thus, the CLV.
In some ways, client journey mapping is the mirror image of the client interview, in which your objective is to learn as much as possible about your client’s hopes, priorities, financial attitudes, and so forth. The client journey map, however, is focused specifically on the client’s interactions with your firm and is intended to help you learn how each touchpoint can be optimized to provide value for the client – a benefit that can then be translated into increased CLV, as the client feels greater value and increased loyalty for the firm.
Conclusion
CLV has quickly become an essential metric of growth in the financial advisory profession. The application of CLV when making decisions has shown that growth is not dependent on the number of clients you have, but the quality of your relationships with them. Thus, the metric of CLV itself doesn't only revolve around revenue but places importance on building high-quality relationships, too.
To take maximum advantage of CLV, you will need to have or acquire detailed knowledge of:
- average revenues generated per client;
- average duration (lifetime) of client relationships with your firm;
- average cost of doing business per client;
- a “client journey map” customized for your firm and your typical client; and
- a matrix of value for the things that are not only most important to your clients but also how they affect your advisor experience.
The more you know – about your clients and about their impact on your firm – the more able you’ll be to improve client experiences, enhance CLV and build a solid foundation of sustainability for your enterprise.
Gretchen Halpin is the co-founder of Beyond AUM, which provides marketing, growth and technology solutions to financial advisors to drive business success. Over the course of her 25-year-career, Gretchen has founded more than five businesses, in addition to serving as the chief strategy officer for one of the financial services industry's leading wealth management firms. She has been featured in Financial Advisor Magazine and Forbes for her insights and has served as a speaker at the National Association of Personal Financial Advisors conference and Financial Advisor Magazine’s Invest in Women conference.
Read more articles by Gretchen Halpin
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
