This week we are introducing a new column to bust some of the common misconceptions about Fee-For-Service that we have encountered.

The first one, to get us started off, is one that pops up very often – the idea that “Fee-For-Service means I should cut down to a small number of clients and sell the rest of my book” that appears to be a prevalent theme amongst planners right now.

And look, we shouldn’t deny that, if you have a single planner with a book of 10,000 clients, even if you only spend 1 hour per client per year, there are just not enough waking hours available to service even 1/3rd of the book. It is ethically and professionally responsible, in such a case, to reduce the client base to something that is realistically serviceable.

But there is a self-propagating belief going around in financial planning circles that a good Fee-For-Service business means cutting down to a small number (80-100) of “A” clients and then offloading the rest.

While the logic is sound (remove unprofitable clients and focus fully on a profitable sub-group), there is 1) nothing inherent in Fee-For-Service that states this is necessary, and 2) by doing so, there is an extra level of risk that has now been added to the business.

How? Consider a practice with 80 clients. If even just one client was lost, that individual client would equate to 1.25% of the business’ income. On a 30% profit margin, that would mean an immediate loss of about 4% of the business’ profit – from a single client. Only takes a few for it to add up. And the opt-in provisions, without debating its merits, only make it easier, through poor service, or even just the client being on holidays during the renew period, to lose clients.

The most extreme case I’ve encountered is a planner with just 10 clients – all legal professionals and all referred to the planner by each other. No doubt a profitable and comfortable business, but imagine – all it would require is for one client to be lost for 10% of the business’ income to go out the door. And if the loss was due to poor service, it wouldn’t be a stretch for the other clients to walk and take their business elsewhere.

The other issue with the “Less is More” strategy is the question of, “How do you select the right clients to service?” Even if you are going from 1,000 to 100 clients, that’s still 90% being walked out the door. This presents several obvious issues:

• How can we be sure that the 100 “A” clients will be just as profitable and viable under a Fee-For-Service model? Most “A” clients are selected based on their profitably under a commissions model. But there are no guarantees that a client previously paying $10,000 on commissions will be happy to pay the same amount for a fee-based service.
• How can we be sure that the 900, non-“A” clients didn’t want or wouldn’t have been profitable under a fee-for-service business model? Perhaps out of the 900, there are some aspirational customers that, if only they were asked, would be happy to pay more for a higher level of service. Perfectly good clients pushed out the door.
• Finally, we have to consider that, having just been “dumped” there is a good likelihood that the 900 might never return to a planner ever again. (Would you if your planner just told you that they don’t want you?) From an industry point of view, is this really a good way to build up the image of the profession?

While there is obviously no “optimal” number of clients a planner should have, the automatic assumption that “Fee-For-Service = Less Clients” is not only a misnomer, but also adds extra risk to the business. For some practices, it will make sense, but the key is really to find the optimal number you can ably support with what you are offering. There is nothing wrong with having more clients on a simple service if they are happy with it and you can support it.

Myth – busted.

Until next week,

Lap-Tin