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Hosted by Financial Advisor Coach, Ray Sclafani, "Building The Billion Dollar Business" is the ultimate podcast for financial advisors seeking to elevate their practice. Each episode features deep dives into actionable advice and exclusive interviews with top professionals in the financial services industry. Tune in to unlock your potential and build a successful, enduring financial advisory practice.
Ray Sclafani (00:00.334)
Welcome to Building the Billion Dollar Business, the podcast where we dive deep into the strategies, insights and stories behind the world's most successful financial advisors and introduce content and actionable ideas to fuel your growth. Together, we'll unlock the methods, tactics and mindset shifts that set the top 1 % apart from the rest. I'm Ray Sclafani and I'll be your host.
Unleashing organic growth, the essential truths every financial advisory firm must embrace. One of my favorites is Kevin O 'Leary. You probably know him as Mr. Wonderful from Shark Tank. While I don't always agree with his delivery, he never fails to ask the tough questions, the questions that a good board member might ask any financial advisory firm CEO. As of late, two of his areas of inquiry revolve around client
acquisition costs and the lifetime value of a client. And given our industry's increasing focus on organic growth, every firm owner should be taking time to ask and answer these two questions. If your leadership team is not orienting around these two topics related to organic growth, now is the time to do so. In fact, at the end of this episode, I'm going to provide you and your leadership team 10 coaching questions that will
absolutely help you get deep into this particular topic. Invariably, what you'll learn is that the resulting data points illuminate two essential truths. First, just how low the firm's client acquisition costs truly are. And second, just how high the lifetime value of each client truly is. In fact, understanding the lifetime value of a client, I'm going to call CLV moving forward.
not only helps you make more informed decisions about resource allocation and marketing strategies, but it also underscores the importance of client retention and the economic impact each client relationship has on your firm. How impactful you might ask? Well, take a look at some of the key CLV statistics and insights from my good friend, Michael Kitsis's nerds eye view, as well as data coming out of advisor perspectives. Three points I want to make. First, revenue and
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profit contribution. The average lifetime value of a client with a million in AUM, a 1 % fee, assuming a 20 to 40 % profit margin and a retention of the client relationship for 20 years will generally range somewhere between 40 and $80 ,000. 20 years is the typical client duration for a firm with 95 % annual client retention rate. The total lifetime revenue from that client is going to be about $200 ,000. That's 10 ,000 a year for 20 years.
and that assumes no market movement. Now that's a big assumption, but most expect the market to increase over the next 20 years. So these estimates are relatively conservative. The second point, impact on retention rates. Simply improving client retention rates can significantly boost each client's lifetime value. This seems really obvious, but it's important to highlight the impact of every bit of retention success, including retaining clients multi -generationally. And the third point,
is about marketing and acquisition costs. Despite the high client lifetime value, firms typically only spend about 2 % of revenues on marketing. Now, some of the recent studies is showing a tick up, a bump up in some of the spend, but for example, to grow 10%, a firm with a hundred million in assets under management must add about 10 million in net new assets, bringing in a hundred thousand in new revenue and lifting the client lifetime value from 400 ,000 to 800 ,000 or more. So,
Historically, that firm's only going to spend around $20 ,000 annually on marketing to acquire these clients. That's a big delta. So firms with client acquisition costs really dialed in comfortably are confident spending somewhere around 5 to 7 % of gross revenues on marketing, aware that future revenue and client lifetime value more than justify the investment. It's crucial for firms to efficiently and effectively spend on client acquisition
if the goal is to grow organically. Relying on growth from the capital markets or solely through acquisitions is a less durable strategy. Our industry will increasingly focus on organic growth to measure a firm's success, especially when calculating its enterprise value. Now let's peel this onion back just a bit further called organic growth. The best in our business measure net new assets, excluding growth from the capital markets and from acquisitions.
Ray Sclafani (04:55.466)
Additionally, these firms are now beginning to bifurcate net new assets added from existing clients and what is coming in as net new. While it's pretty known that two thirds of new assets coming in annually come from existing client relationships, it's important to begin to measure these net new relationships and the assets and revenue they bring to the firm. By managing your real acquisition costs effectively,
and understanding your actual net new asset growth, you can reinvest in services that enhance client retention and satisfaction, thereby increasing lifetime value. Let's talk about the role of client lifetime value in decision -making. Quantifying and understanding a client's actual lifetime value provides tremendous motivation to prioritize client retention. After all, clients, existing clients,
is significantly less costly than acquiring new ones and focusing more attention on high value clients can dramatically enhance firm profitability. Identifying precisely which clients contribute the most to your firm's profitability allows you to make smarter resource allocation decisions, potentially resulting in deeper relationships and increased referrals and introductions from loyal client advocates and their other trusted advisors.
Understanding client lifetime value also allows your firm to craft more strategic marketing plans, targeting high value clients and nurturing existing relationships to help improve retention rates. Simply put, the higher your client lifetime value, the more you can afford to invest in vital annual marketing expenditures. Many advisors claim strong organic growth. Few
actually achieve it, relying instead on the performance of capital markets and acquisitive growth to drive revenue growth. Keep in mind, however, that accurately measuring client lifetime value involves understanding the entire client journey from acquisition to retention to serving their families multi -generationally. Enhancing client experiences at each touch point can lead to higher client satisfaction, increased referrals and introductions from client advocates,
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and ultimately improved retention rates. However, to truly understand how your firm maintains client relationships, you must carefully track client satisfaction scores and retention costs. High satisfaction scores directly correlate with lower churn rates and a higher client lifetime value. The most successful advisory firms growing organically and not just acquisitively and not relying on the capital markets,
have a demonstrated track record of significantly enhancing profitability and long -term success by focusing on retaining high value clients, improving client satisfaction, and strategically investing in marketing of new client relationships. Better understanding and leveraging client lifetime value will help you make more informed decisions that align with your business goals and client needs. Ultimately driving growth, intentional growth, profitable growth,
and sustainable growth, as well as the stability in an increasingly competitive market. With each episode, my intent is to provide open -ended, future -oriented coaching questions so that you and your leadership team can dive deep into the particular topic discussed in each episode. Because this episode is so unique and requires deep learning and analysis, there are actually 10 coaching questions with this episode. First,
Understanding client acquisition costs. I've got two coaching questions for you. First, how do your leaders report the detailed breakdown of your current client acquisition costs, including marketing, sales efforts, and onboarding processes? Second, what specific strategies have you implemented to optimize and reduce client acquisition costs while maintaining high quality client engagement? Okay, next.
Section client lifetime value. I've got four coaching questions for you How do you currently calculate the lifetime value of a client and what key factors do you consider in this calculation? Next what initiatives are in place to increase the lifetime value of your clients and how do you track the success of these initiatives? Next how do you ensure that your spending on client acquisition is justified?
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by the lifetime value you expect from your clients. And last, what metrics do you use to assess the balance between client acquisition costs and the lifetime value of your clients? And how often do you review these metrics? Okay, next section, let's talk about client acquisition and retention. I've got three questions for you. First, how do you envision evolving your client acquisition strategies to increase efficiency?
and enhance the lifetime value of each client over the next five to 10 years. Second, looking ahead, what innovative approaches can you implement to deepen client relationships, improve satisfaction scores, and ultimately increase client retention, as well as referrals and introductions from loyal client advocates and their other trusted advisors? And lastly, what retention strategies
Can your team demonstrate that significantly increases client lifetime value? Okay, last section, investment in marketing and technology. What future investments in marketing and technology do you believe will be crucial to sustain and amplify your organic growth approach? And how do you plan on measuring their effectiveness? Well, thanks for tuning in and that's a wrap. Until next time, this is Ray Sclafani. Keep building, growing and striving for greatness.
Together, we'll redefine what's possible in the world of wealth management. Be sure to check back for our latest episode and article.