What your clients are REALLY worth to you
Practice Management & Professional Services & Strategy

What your clients are REALLY worth to you

May 20, 2022
by Tony Vidler  CFP logo   CLU logo  ChFC logo

How much do you really think a good client is really worth to you?


Most financial advisers will easily work through the basic formula of the average fee/sale per client multiplied by the number of transactions they have with you each year, and then multiplied by the number of years you expect to work with them.


That gives you a pretty impressive number pretty quickly, as long as you know (or can very accurately estimate) these averages.

(NOTE:  I think most advisers dramatically over-estimate the number of years a client will stay when it comes to averaging for this formula. Many talk of an average of 20 years, when I suspect the average would be far closer to maybe 8 or 9 for the typical adviser).

Is this the total measure of what good clients are worth to your business?

How many referrals to other great clients could you realistically get from a happy client over the expected lifetime of the business relationship?  What extra value can be attached to your brand, or business value, from your clientele being great advocates?


How about a working example for a typical adviser who looks after their clients well and provides great value….

Let’s assume that the average client pays ongoing fees of $500 each year (not all that much really) to you, and on average your customers require new advice every 3 years or so at about $2,400 per time.  So that’s another $800 p.a. on average – meaning that the average annual revenue is about $1,300 p.a. for a happy client valuing your advice in any given 3 year period.


So what the client is really worth to you at first glance is about $9,000 + whatever your initial fee or commissions may have been for the initial business.  This assumes that they are maybe even a little below “average” and work with you for about 7 years.


If you provide great service and advice they will be working with you for longer, so let’s use the assumption that most advisers make at this point: they will work with us for 20 years.


So using the same assumptions as earlier the lifetime value of this client begins to look like something closer to $26,000.  Excellent!  Clearly delivering great service and maintaining a great service relationship will be well worthwhile to the practice!


However if that happy client refers other good clients to your business then their value to your business exponentially increases.  It is not as simplistic as using the same formula above for each additional referral, because over time (if your expected business time frame remains the same) then each new client in subsequent years has a lower incremental value, and it would be wildly inaccurate to attribute every new customers own “lifetime value” to the referring client .

But the acquisition cost per referral will be lower than most other forms of marketing, so that saving should in fairness be attributed to the lifetime value of the original referring client.

A typical advisory firm might spend on average around $400 in actual marketing costs per new client in each year.  If we used the same assumptions (client stays for 20 years) and each referral saves us $400 in marketing cost, and we can get just 2 really good referrals from each client, then there is another $16,000 in fairly attributed lifetime value of the referring client.

The client is really worth something closer to $42,000 to the firm in this case.

There is one more thing though….

What about the impact of these higher value clients have on your overall business valuation.


Playing around with the “rule of thumb” multiples used in the market here at the moment suggests that any adviser business with 500 clients, averaging $1,300 p.a in revenue (as above), which is well organised and good quality will obtain a valuation of somewhere between $875,000 and $975,000.   This valuation would pretty much apply to any advice business which has the same recurring revenue numbers and is of good quality….so there is no adjustment for it being of “higher quality” than average in this rule of thumb assessment.


However, premium value is attached to those businesses where there is strong loyalty, constant referrals, and turnkey business operations.  Such business get higher valuation multiples.


A relatively small adjustment to the valuation multiple in this example could result in a business value of something closer to $1,600,000 – a difference of $625,000 in this example.


That can be the difference for a retiring advice firm business owner between having a great boat to play on in their good retirement, or just having a retirement.


While I’m using a very simplistic valuation methodology here, the additional premium attributed to a business which has better systems and more loyal clients of higher value is worth pursuing.  Call it goodwill, or intellectual property, or brand value…..whatever the label it is an additional premium on the business valuation from having a better-than-average client value for a longer period of time.


Those clients really are worth a lot more than just a multiple of some renewal or AUM fee.  Investing in great communications and service, and building a great ongoing referral strategy within that client base will not only generate more clients and revenue while you are working in the practice, but they can make a massive difference to what sort of options you have for life after leaving your own practice.


Those clients really are worth more than most advisers think.


You might also be interested in this related article:

7 Warning Signs That The Prospect Is Not Right For You
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