Tuesday, June 7, 2022

Financial Advisor Practice Size

There is a natural limit to the number of clients that any professional can service–financial advisors included. Technology and staff can help an advisory practice scale but there are only so many hours in a day. Client count, multiplied by average revenue per client, provides the revenue ceiling for an individual advisor’s business. At some point an advisor will have to transition their client base upmarket in order to increase revenue.

My suspicion was that the theoretical maximum number of clients that a wealth advisor could service would be around 100-120. I decided to do the math and see if I was right.

Assumptions

  1. 32 hours spent on planning for clients in first year ( Michael Kitces)
  2. 12 hours spent on planning for years 2-5 and 8 hours for subsequent years ( Michael Kitces)
  3. Client turnover rates ( E*Trade Advisor Services)
    • 0-1 Year: 20%
    • 1-2 Years: 25%
    • 2-3 Years: 19%
    • 3-4 Years: 13%
    • 4-5 Years: 8%
    • 5+ Years: 15%
  4. Client count is constant (any lost clients are replaced with new clients)
  5. Marketing is included in the first year planning figure
  6. There are approximately 2,000 working hours in a year and all are spent servicing clients

Based on the client turnover assumption, years five and on will be the most representative of the amount of work required to maintain the business.

Inherited Advisory Practice

A simplistic way of looking at this would be if an advisor inherited an advisory practice–thus every client being a new client for that advisor on day zero.

At 125 new clients the advisor would spend exactly 2,000 hours in the first year in order to end the year with the same number of clients. By year six they would only need to work 1,574 hours in order to maintain that amount of clients.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 25.00 5.00 6.00 4.86 3.93 3.17
1-2 25% 25.00 5.00 6.00 4.86 3.93
2-3 19% 13.30 2.85 3.42 2.77
3-4 13% 5.94 1.58 1.90
4-5 8% 2.08 0.85
5+ 15% 1.53
Lost Clients 25.00 30.00 24.30 19.65 15.87 14.14
Total New Clients 25.00 30.00 24.30 19.65 15.87 14.14
Retained Clients (2-5 year tenure) 100.00 95.00 100.70 105.35 109.13 58.71
Retained Clients (6+ year tenure) 52.15
End of Year Clients 125.00 125.00 125.00 125.00 125.00 125.00
32.00 Hours Spent On New Clients 800.00 960.00 777.60 628.83 507.96 452.56
12.00 Hours Spent on Existing Clients (Years 2-5) 1200.00 1140.00 1208.40 1264.19 1309.52 704.51
8.00 Hours Spent on Existing Clients (Years 6+) 0.00 0.00 0.00 0.00 0.00 417.19
Total Hours 2000.00 2100.00 1986.00 1893.02 1817.47 1574.25

If the advisor wanted to maximize for revenue rather than effort (which I believe most do), they could individually support 159 clients in year six but would have poor work/life balance (or need to hire help) for years 1-5.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 31.80 6.36 7.63 6.18 5.00 4.04
1-2 25% 31.80 6.36 7.63 6.18 5.00
2-3 19% 16.92 3.63 4.35 3.52
3-4 13% 7.56 2.01 2.41
4-5 8% 2.65 1.08
5+ 15% 1.94
Lost Clients 31.80 38.16 30.91 25.00 20.19 17.99
Total New Clients 31.80 38.16 30.91 25.00 20.19 17.99
Retained Clients (2-5 Year Tenure) 127.20 120.84 128.09 134.00 138.81 74.68
Retained Clients (6+ Year Tenure) 66.33
End of Year Clients 159.00 159.00 159.00 159.00 159.00 159.00
32 Hours Spent On New Clients 1017.60 1221.12 989.11 799.87 646.12 575.66
12 Hours Spent On Existing Clients (Years 2-5) 1526.40 1450.08 1537.08 1608.05 1665.71 896.13
8 Hours Spent On Existing Clients (Years 6+) 0.00 0.00 0.00 0.00 0.00 530.67
Total Hours 2544.00 2671.20 2526.19 2407.92 2311.82 2002.45

Five-Year-Old Advisory Firm

In this example we are looking at a hypothetical single-person firm with 20% of their clients being with them for under a year, 20% for 1-2 years, 20% for 2-3 years, 20% for 3-4 years, and 20% for 4-5 years.

This advisor could service 130 clients this year and could maintain that number of clients by working only 1,573 hours in year six. That allows for a lot of time on the golf course.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 5.20 4.42 4.29 3.66 3.15 2.69
1-2 25% 6.50 5.20 4.42 4.29 3.66 3.15
2-3 19% 4.94 3.71 2.96 2.52 2.45 2.09
3-4 13% 3.38 2.74 2.05 1.64 1.40 1.36
4-5 8% 2.08 1.81 1.47 1.10 0.88 0.75
5+ 15% 0.00 3.59 3.12 2.53 1.90 1.52
Lost Clients 22.10 21.46 18.32 15.75 13.43 11.54
Total New Clients 22.10 21.46 18.32 15.75 13.43 11.54
Retained Clients (2-5 Year Tenure) 107.90 88.21 76.71 70.20 62.62 64.00
Retained Clients (6+ Year Tenure) 20.33 34.97 44.05 53.95 54.45
End of Year Clients 130.00 130.00 130.00 130.00 130.00 130.00
32 Hours Spent On New Clients 707.20 686.73 586.14 503.85 429.79 369.40
12 Hours Spent On Existing Clients (Years 2-5) 1294.80 1058.49 920.55 842.42 751.44 768.03
8 Hours Spent On Existing Clients (Years 6+) 0.00 162.66 279.77 352.43 431.59 435.63
Total Hours 2002.00 1907.88 1786.45 1698.69 1612.82 1573.06

More realistically, that advisor is going to want to put in more hours and make more money. If they can survive the long hours (or hire) for the first few years, they could support 165 clients with 2,000 hours of work in year six.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 6.60 5.61 5.45 4.65 4.00 3.41
1-2 25% 8.25 6.60 5.61 5.45 4.65 4.00
2-3 19% 6.27 4.70 3.76 3.20 3.11 2.65
3-4 13% 4.29 3.47 2.61 2.08 1.77 1.72
4-5 8% 2.64 2.30 1.86 1.40 1.12 0.95
5+ 15% 0.00 4.55 3.96 3.21 2.41 1.93
Lost Clients 28.05 27.24 23.25 19.98 17.05 14.65
Total New Clients 28.05 27.24 23.25 19.98 17.05 14.65
Retained Clients (2-5 Year Tenure) 136.95 111.96 97.37 89.10 79.25 81.04
Retained Clients (6+ Year Tenure) 25.81 44.39 55.91 68.70 69.31
End of Year Clients 165.00 165.00 165.00 165.00 165.00 165.00
32 Hours Spent On New Clients 897.60 871.62 743.94 639.50 545.50 468.86
12 Hours Spent On Existing Clients (Years 2-5) 1643.40 1343.47 1168.39 1069.22 951.00 972.47
8 Hours Spent On Existing Clients (Years 6+) 0.00 206.45 355.09 447.31 549.62 554.47
Total Hours 2541.00 2421.54 2267.42 2156.03 2046.13 1995.80

Those two examples converged on about 160 as the number of clients that a single advisor can support without any help. That is 33% higher than my initial estimate of 120 clients. However, an advisory practice is a business and with all that entails (operations, bookkeeping, conferences, etc.) the advisor wouldn’t be able to sustain 160. The actual number would likely be somewhere between 120 and 160.

Two-Person Advisory Firm

If the advisor in our second example (a five-year-old firm) hires someone to help with the planning process they will be able to scale the business further. In the Kitces article that two of our assumptions came from, he proposed that a hire could cover about a third of the work in the planning process. That would leave the advisor’s hours as follows:

  • 21.33 hours for new clients
  • 8 hours for clients in years 2-5
  • 5.33 hours for clients in years 6+

This hire would allow the advisor to service 195 clients this year.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 7.80 6.63 6.44 5.50 4.72 4.03
1-2 25% 9.75 7.80 6.63 6.44 5.50 4.72
2-3 19% 7.41 5.56 4.45 3.78 3.67 3.13
3-4 13% 5.07 4.11 3.08 2.46 2.09 2.03
4-5 8% 3.12 2.71 2.20 1.65 1.32 1.12
5+ 15% 0.00 5.38 4.68 3.79 2.84 2.28
Lost Clients 33.15 32.19 27.48 23.62 20.15 17.32
Total New Clients 33.15 32.19 27.48 23.62 20.15 17.32
Retained Clients (2-5 Year Tenure) 161.85 132.31 115.07 105.30 93.50 95.64
Retained Clients (6+ Year Tenure) 30.50 52.46 66.08 81.35 82.04
End Of Year Clients 195.00 195.00 195.00 195.00 195.00 195.00
21.33 Hours Spent On New Clients 707.20 686.73 586.14 503.85 429.79 369.40
8.00 Hours Spent On Existing Clients (Years 2-5) 1294.80 1058.49 920.55 842.42 748.04 765.14
5.33 Hours Spent On Existing Clients (Years 6+) 0.00 162.66 279.77 352.43 433.86 437.56
Total Hours 2002.00 1907.88 1786.45 1698.69 1611.69 1572.10

By working nights and weekends (or hiring a third person–an advisor who could meet with clients those first few years) this advisor would be able to provide service to 248 clients in year six.

Year Turnover Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0-1 20% 9.92 8.43 8.19 6.99 6.01 5.12
1-2 25% 12.40 9.92 8.43 8.19 6.99 6.01
2-3 19% 9.42 7.07 5.65 4.81 4.67 3.98
3-4 13% 6.45 5.22 3.92 3.13 2.66 2.59
4-5 8% 3.97 3.45 2.80 2.10 1.68 1.43
5+ 15% 0.00 6.84 5.95 4.82 3.62 2.89
Lost Clients 42.16 40.94 34.94 30.04 25.62 22.02
Total New Clients 42.16 40.94 34.94 30.04 25.62 22.02
Retained Clients (2-5 Year Tenure) 205.84 168.27 146.34 133.92 118.69 121.44
Retained Clients (6+ Year Tenure) 38.79 66.71 84.04 103.69 104.54
End of Year Clients 248.00 248.00 248.00 248.00 248.00 248.00
21.33 Hours Spent On New Clients 899.41 873.38 745.45 640.79 546.61 469.81
8.00 Hours Spent On Existing Clients (Years 2-5) 1646.72 1346.18 1170.75 1071.38 949.50 971.53
5.33 Hours Spent On Existing Clients (Years 6+) 0.00 206.87 355.81 448.21 553.01 557.53
Total Hours 2546.13 2426.43 2272.00 2160.39 2049.12 1998.86

Achieving Scale

Hiring, or leveraging technology, to reduce the number of hours spent servicing each client allows an advisor to grow their practice significantly. This explains why there is such a demand for talent in the wealth management industry and shows that the firms that are best able to leverage technology are going to have a leg up on those that are not.

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