Putting Pareto to workArticle added by Ed Morrow on May 4, 2010
Ed Morrow

Ed Morrow

Middletown, OH

Joined: October 29, 2005

Most of us are familiar with Pareto's Law, which states that 80 percent of benefits will be derived from 20 percent of the clients. The principles, developed by Vilfredo Pareto, an Italian sociologist and economist, have been widely applied to various aspects of business and human behavior.


If approximately 80 percent of your revenue comes from 20 percent of your clients, ask yourself these questions:
  • Am I seeking new clients that match the 20 percent or the 80 percent type?

  • Do I ask for and receive references for 20 percent types?

  • Do I know how to turn a reference into a referral?

  • Do I have a process for handling a referral?

  • Do I stay with that process for at least a full year?

Another application of Pareto's Law is that 80 percent of your problems will come from 20 or less percent of your clients. Therefore, ask yourself these questions:
  • Are the problem clients no longer profitable, considering the time and effort required to service them?

  • How can I classify those problem clients (using criteria such as age, occupation and location) into an identifiable and avoidable group?

  • Am I rigorously avoiding the addition of any more problem-type clients?

  • Am I taking active steps to extensively document everything connected with these problem clients to defend against litigation?

  • Have I taken steps (where practical) to terminate these problematic client relationships?
Gaining value

Effective marketing is a critical component to every financial planning practice. This is true regardless of the form of compensation, the size of the firm, or the age of the practitioner.

The cost of living for the financial planner and the planner's staff inexorably increases, certainly at or above the general rate of inflation. But some planners, whose income has been reduced while getting started, require a greater increase factor in order to catch up to the standard of living that is justified. The cost of goods and services to operate the practice also increases, and experience shows this exceeds the rate of inflation.

As a financial planner matures, he or she wants more effective tools and service capacities, not just a continuation of the prior capacity. Improvement in services and operation must precede improvement income.

Gradually, every planner will lose some clients through death, disability, retirement, pre-retirement, dissatisfaction or dismissal. This client fallout increases during times of adversity -- just when the planner needs increases not reductions. Many clients will grow, but some will just not keep pace with early expectations.

You may be thinking, "I understand about getting rid of the problem clients, but what about those who are just less profitable? Shouldn't I get rid of them and concentrate on just the top 20 percent?" The answer is to weed them out a little at a time, and proceed very carefully.

Some of these 60 percent will grow into top 20 percent clients. You can't be sure which ones will actually grow, but you know that it will happen for some.

A few will turn into the 20 percent problem clients who should be phased out whenever opportunities are presented.

Professionally, you have a responsibility to these individuals. They may need you a bit more than you need them now, but they are part of what built your practice. You can't dump them just because they're not top 20 percent clients.

There are two other compelling reasons to not shed the in-between 60 percent clients:
  • You have already established the relationship. They are profitable -- just not highly profitable. The toughest period, the initial engagement, is already behind you.

  • These clients are excellent sources of referrals. If carefully approached, they will cheerfully recommend you to persons who fit your top 20 percent criteria.
Taking action

Up to this point, we have been a bit philosophical. Let's put these theories into practice.
    1. Print out a list of your clients, placing family units together.

    2. Estimate the revenue you anticipate from each client (family unit) in the next 12 months.

    3. Estimate the number of hours of your time will be required for an average year of service for each client (family unit) in the next 12 months.

    4. Divide the income by the hours to get a profit factor ($5,000 / 50 hours = $100 an hour and $2,000 / 10 hours = $200 an hour). The latter client is actually more profitable, although the total remuneration is less.

    5. Separate the list, ranked by the dollars-per-hour score, into "Top 20 Percent," "Middle 60 Percent" and "Bottom 20 Percent."

    6. Examine the two lower groups and mark with an "A" those who have, in the past, referred you to persons who have become top 20-percent clients. If they've done it once, they can do it again. Mark with a "B" those who haven't done so, but who you have strong reason to believe will refer you to some 20-percent-type prospects.

    7. Are there any clients in the middle group that generate a large amount of revenue and who you are sure could be serviced much more efficiently if you revised your procedures? Mark them "C."

    8. You can now provisionally move all of these A, B and C clients into the top group to be re-evaluated next year.

    9. Now, carefully examine the remaining clients. Shouldn't you try to disengage some of them? Perhaps there is a new associate in your office or community who would welcome such clients.

    10. Activate a nurturing system to intensively cultivate your top 20 percent and moderately attend to the middle 60 percent clients.
Your nurturing system

The way to keep top 20 percent clients happy and referring more persons like themselves is to develop a nurturing system. This should incorporate several features.
  • A client newsletter. Unless you are well staffed, it is probably more effective to purchase one. Newsletters are efficient, inexpensive, and create a positive image. The masthead should include your photo, logo, and your professional slogan, motto or mission. Every so often, you should enclose a response mechanism for referrals, and service and information requests.

  • Periodic mailings. Sending articles and information of value and interest to your clients on a regular basis -- at least every three or four weeks -- is essential. These articles earn respect and loyalty. They obligate prospects to see you and encourage these clients to refer you.

  • Periodic investment reports. You are probably doing this already, but do your clients understand them? A small, informal survey would be a good idea. "How do you like our investment report format? Does it present the information clearly? Is there any information you'd like to see us add?" And don't forget, "Is there anyone you can recommend who might appreciate this type of service?"

  • Periodic phone calls. Sometimes, you should call to convey information; sometimes, just to say hello and be friendly. These calls will bond clients to you and give them an opportunity to offer referrals.

  • Planning updates annually or semi-annually. These can be mid-year or year-end planning review letters. The return of your response from client with new information can be the basis for your next meeting.
Obviously, this level of contact is what is desired, especially by your top 20 percent clients. However, if the clients and prospect nurturing system is not automated, it isn't likely to happen.

The middle 60 percent clients should receive similar treatment, just not as intensive. They don't warrant the same expense or time investment as the top group, but they do justify good service. This will help them grow into top 20 percent clients and to refer you to more top 20 percent prospects.

You will probably need two software components to put this into action. They might already be part of your database or other program.
  • Contacts manager. This program prompts you for specific tasks and calls to be made, and is capable of delegation to other persons. It should contain a to-do capacity to schedule and delegate tasks, and track their completion.

  • Nurturing software. This program should contain the text for all the letters for the periodic contacts and all the articles (information of value) to be mailed to your clients. This type of program is called a client relationship manager (CRM) and often includes the contact manager features. You cannot afford to become bogged down with composing and editing hundreds of letters and articles each month.
Consider using interns

One financial advisor retained a college senior for the summer. The intern organized and keyed in all the clients and a good group of prospects. The firm then purchased a newsletter from a specialty publisher, in this case Financial Insider, from Liberty Publishing. This is a full-color, eight-page newsletter with well written material that is not product oriented.

The intern then called every client and said, "Mr. Smith asked me to give you a call to see if there is anything you need or would like information about." After chatting briefly and taking a few notes, the intern continued, "We are expanding the mailing of our ----planning newsletter, which we send to Mr. Smith's important clients and friends, such as yourself. Is there anyone you can think of who might enjoy receiving a copy?"

At least one-third of the clients offered names. After receiving the names, the intern asked just enough questions to locate the person for a mailing. Those prospects were entered in the marketing/nurturing system for automated follow-up. The program had mailing and phone sequences for different classes of clients and addressed the envelopes for the newsletters.

Ask for information

There are two types of requests. Each one can be reproduced on a small card that will fit into a No. 9 business reply envelop. Cost in about 15 cents each, in full color.

Request for referrals. Of course, you will not get returns from every client with every mailing. That is why you should use this simple "hands off" way of asking for referrals. If your client database is 200, then a 2 percent reply will provide four returns. Some will offer one name, others will offer two -- so a reasonable number is a 1.5 average -- for six names. If you present your services to just four of them and secure three new clients with an average compensation of $4,000 per client, your mailing cost of $200 $1 X 200) would yield $12,000.
  • Request for information. Actually, this is an invitation to sell them some additional products or services. However, it is less aggressive for you to solicit their request for information than it is to ask for the products they'd like to buy.
Back to fundamentals

Vince Lombardi always knew that when his team was in trouble, the solution lay in getting back to the fundamentals of blocking and tackling. Super Bowls were won by these basic skills -- not by trick plays.

The annual analysis for your client base is the first step in getting your practice in better shape. The redirection of a small part of your efforts to improve client contact will go a long way toward improving profitability and increasing your personal income.

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