This is the 22nd installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
Finding the right number of clients to create a profitable business without overextending a financial advisor’s capacity to serve them is essential for any advisory firm.
But newer registered investment advisory firms must strike that balance amid the pressure of building a new business that relies on strong customer relationships. Experienced advisors and other experts point out that the right client headcount varies widely across firms and depends on factors like the RIA’s client niche, menu of services, fees and assets per household. The availability of support staff and internal or external resources also plays a role.
Julie Genjac, who is a practice management coach to advisor teams as the vice president of applied insights for Hartford Funds, asks advisors “all the time” for a client headcount number that would generally apply to teams across the industry, she said. But the fact that “some teams really are more in the one-to-many model” while others “really tailor every service model to the household” means that there is no specific number that would be the right fit for most advisors, according to Genjac. Regardless, advisors must figure out how many clients they want to serve.
“It’s so hard to quote an actual number because the services are so vastly different,” Genjac said. “I haven’t been able to find a one-size-fits-all number in all of my coaching conversations.”
READ MORE: When should a financial advisor launch an RIA?
Cases in point
At Dexter, Michigan-based RIA firm Pearl Planning, the team led by founder Melissa Joy keeps the client-to-advisor ratio at roughly 100 to 1, with 302 customer households across the company’s three planners. She has seen some advisors manage as many as 500 to 600 client relationships with the help of their teams after having taken on the customer relationships of retiring brokers who did basic investment management. For advisors who offer deeper planning and a wide menu of services, the typical ratios will come in far lower, Joy said. As a multigenerational firm, Pearl counts a client’s children as part of the same household, and the right customer headcount represents a “hard question” for any advisory practice, she noted.
Pearl Planning
“We’re closer to capacity now than we’ve been in the past,” Joy said. “We’re really trying not to double and triple the number of clients that we work with and continue to assist our clients with accumulating wealth.”
Irvine, California-based advisory practice SageMint Wealth works with 190 households, including 135 that Managing Partner Anh Tran meets with regularly, she noted, citing the backing of the firm’s 20-year veteran client service manager who’s essentially a relationship manager, a head of operations and an administrative assistant. She has heard of some advisors with as many as 500 to 1,000 client relationships. For solo practitioners running their own businesses without external support resources, Tran suggested the highest headcount they could possibly service would top out at around 100.
“The difficulty is, when people are starting out, they’re taking all the clients because they have bills to pay. Once you’ve created a consistent income flow, then you might have a little more flexibility with the clients you bring on,” she said. It’s important that advisory firm founders weigh “the services that you’re providing” against “how much time and how many hours for you and your team” it will take to do so, Tran added. “You can kind of do the math in that sense.”
READ MORE: How can new RIAs grow — organically?
The numbers and how to calculate them
The available data shows that staffing and support capacity will decide how those numbers play out in advisory practices. Relationship managers who are advisors, senior advisors, partners or directors at the larger firms in the field can accept and service a bigger book of client households, thanks to entry-level associates and service advisors “who perform much of the planning, analysis, meeting preparation and other projects,” according to a report by consulting firm The Ensemble Practice earlier this year. The average client headcount for relationship managers across advisory firms of any size is 164, the report’s survey of 230 firms found. But other than the fact that firms with less than $500 million in assets under management reported a larger headcount than those with between $500 million and $1 billion, bigger firms had the more expansive client rosters and, generally, more revenue per client and team member.
“This high level of productivity is only possible through the use of leverage: the assistance of professionals with lower levels of experience and compensation,” the report said.
To be sure, the right number of clients will likely shift over time at any advisory firm. That’s why advisor teams of any size should think carefully about their segmentation of clients based on assets, revenue, needs or other factors. They should also have a service model for each grouping of customers, as well as written roles and responsibilities for each employee in delivering it, according to Genjac. To determine the rough amount of time available with the firm’s capacities, advisors may consider how long it would take to generate every meeting or other client touchpoint throughout a given year, if that customer never contacted them first. Senior leaders and top producers should be asking themselves consistently, “Is this the highest and best use of my time?” and going over the roles and responsibilities at least twice a year to ensure that the document is up to date with the firm’s capacity, she said.
“It’s a living, breathing document. I think it’s really important that teams don’t just say, ‘Oh, we back each other up,'” Genjac said. “Just because you can do it in five minutes doesn’t mean you should be doing it.”
READ MORE: Should financial advisors be dually registered or RIA-only?
Lessons learned along the way
Client segmentation, compliance requirements and business model will all factor into developing the optimal client headcount, Joy said. That latter category entails “having a really clear viewpoint” on issues like whether the advisors are W-2 employees or 1099 independent contractors and if they offer a “really deep bench of services for clients,” she noted.
Advisors will know they’ve reached beyond their capacities when “you’re forgetting who’s this, who’s that,” or they “don’t have time to do the deeper work,” Joy said. “The amazing but also challenging thing about our business is, everyone builds their firms differently.”
SageMint Wealth
On the other hand, many advisors make a mistake — one that Tran said she made as well — in “not hiring people soon enough.” Tapping a full-time head of operations “has really helped us flourish and taken us to the next level,” she noted. For newer entrants to the profession, there’s no way around grappling with challenges around staffing and the size of the client base.
“They’re probably doing a lot of work and not charging their clients enough. That’s always a contentious topic,” Tran said. “Otherwise you’re working for free, and you’re not making any money, and this is how you get burned out and you end up not having a career anymore.”
