What is your OCR?Article added by Ed Morrow on December 11, 2009
Ed Morrow

Ed Morrow

Middletown, OH

Joined: October 29, 2005

OCR does not mean only optical character recognition -- the process of scanning text and converting each image into an electronic character or number. It has far more significance for personal financial advisors. What OCR stands for is "old client revenue." By this we do not refer to elderly clients, but the average revenue per client other than in the first year.

First year client revenue is reflected by NCR -- new client revenue. That number helps the advisors justify the time and expense occurred to acquire the new client. OCR reflects the income that will be derived afterwards -- and is the justification for the expenses to retain the established client.

Identify practice shortfalls. The average OCR number often reveals a major problem for financial advisors -- that they are servicing and valuing clients who are far less productive than they had previously supposed. Let's take a look at the process of obtaining these numbers and what they reveal. One experienced financial planner conducted this examination. He has been in the business for 15 years, but about ten years ago he parted company with a major broker/dealer that enforced a non-compete clause in his agreement. So, despite 15 years of experience, he had only 10 years of clients.

These clients numbered 186 at the beginning of last year and 180 at the end. He lost six clients due to corporate transfers and an out-of-state death. The gross revenue from all sources for the established clients was $144,000.

The OCR analysis. During the last year, he added 15 new clients. When performing this practice examination he was surprised at the number, having felt that it was adding almost twice that many new clients. In fact he was adding only a bit more than one new client per month. His total NCR from these 15 clients was $48,000 -- including planning fees, life and long term care commissions, mutual fund commissions and portfolio management fees. $48,000 divided by 15 equals $3,200. This is the amount (NCR) he can expect to receive from each new client, during the first year.

The NCR analysis. However, he did another calculation. He separated the 180 established clients into the top one-third (60) of the clients who produced $120,000 for an average of $2,000. However, the bottom two-thirds (120) produced only $24,000 of revenue -- or an average of only $200 per client. This is an application of the Pareto principle of 80/20 which, would say 20 percent of the clients will generate 80 percent of the revenue. Pareto indicated it was 80/20. You can use different numbers, but you'll get similar indications.

When he and his staff discussed this, they realized they were expending nearly the same effort for the 120 clients representing the bottom two-thirds of his practice that produced only 16 percent of the income as they did for the top third that delivered 84 percent of the established client income.

Valuing recent clients. Furthermore, he noticed that of the old clients, the most productive were those he whom had added within the last two or three years. Obviously he was adding more profitable clients -- but not enough to sustain his desired level of growth.

Because this advisor is located in a smaller community and there was no one else to whom he could delegate these older and less productive clients, he made several decisions:
    1. Classify them as C clients. The first step was to change their rating in his Practice Builder Client Relationship Management system. When any of those clients called in, they would be serviced by the least highly compensated of his two staff members.

    2. Mark the folders. All category C clients were moved into files with a manila color and placed in a separate cabinet, placed next to this staff member.

    3. Classify the most valuable clients. His remaining clients were all moved into new colored folders
    • Green: New clients (needing special attention)
    • Blue: Category A established clients
    • Purple: Category B established clients
His A clients were those who had a OCR of $2,500 or more, and the B clients were those producing from $400 to $2,500. He realized that his time allocated to B clients also needed to be minimized: Therefore, his leading staff assistant was empowered to become their primary contact person.

New client acquisition. This enabled him to revise his goal for new client acquisition from the current level of 15 per year to his target of one per week. Since he usually took off four weeks for vacation or conferences, this meant 48 per year. The first year after re-classifying his clientele he fell short -- having added only 40 new clients -- but this was a significant improvement over his prior level. The result was the firms' income was dramatically improved. The 25 new clients produced over $80,000 of new revenue.

Retaining old clients. To help keep his old, less productive clients from feeling neglected and perhaps damaging his reputation, he decided to spend a reasonable amount of money to improve client communication.

His first step was to add a printed client newsletter, the Financial Insider published by Liberty Publishing. He had good photos taken of himself and both of his associates. For a small fee the people at Liberty combined all three photos with each of their names and all of the firm's information into a nice header for the newsletter.

This way, if one of his staff members leaves, he can just have the one photo removed and another inserted. This is better than a group shot, which is hard to pose and more difficult to replace. Adding the photos of his associates increases their status with the clients.

His newsletters are all sent out on a bi-monthly basis and his cost per issue is 79 cents since he is mailing out 250 copies, including some for local media, attorneys and accountants and a few for lobby use and with prospects.

He decided to send a season greetings card to all clients, but to focus his birthday and other special cards just to his Class A and Class B clients and spouses.

His OCR number for Class C clients, $200, clearly justified the client newsletter and season greeting card expense of about $8 per year.

To help route these people to the proper staff person he took the following steps.
  • Added the staff photos to the Masthead of the newsletter.

  • Added both their photos and backgrounds to his Web site.

  • Sent each of the category B and C clients a brief letter introducing them again to the staff associate and suggesting that she was available to assist them with any service or inquiries.
While this delegation did not totally eliminate all of his time with category C clients it was about 95 percent successful. What was really effective was that these clients did not feel deserted or neglected. In fact they enjoyed having a staff member assigned to help them.

Special treatment. Category B and A clients all received a special appointment book that he purchased from a vendor. He also wanted to encourage more referrals, so he invited his Category B clients all to come in for a review and to be presented with a document file cabinet, which cost $49 for the attractive cardboard cabinet and a nice record input brochure.

For his Category A clients he presented them with a solid cherry trusted advisor document case with hanging folders at a cost of $189 each. The clients were very impressed with these cabinets, and he immediately received some very valuable referrals. When asked if he considered the $189 cabinet a bit excessive, he responded, "Each of these clients produces in excess of $2,500 of revenue every year. In that light I don't consider $189 too expensive -- it's just a good investment in client retention."

Personalized update memos. Of course client communication is not all about newsletters, cards and gifts. Periodically, it means sending an item of financial relevance. Many planners send a mid-year planning memo that encourages the client to review their situation before the pressure of the close of a tax year. They also send a year-end tax memo that is, of course, tax focused. Each of these memos is time sensitive and must be revised every year.

Another excellent client contact is an annual planning memo. This should be sent in February to clients. It offers them the opportunity to indicate changes of status, finance and family make up. It often reveals new funds that can be invested or lifestyle changes that effect insurance needs.

These three memos should be sent with a simple, personal cover letter on the advisor's stationery. Such a letter might also have a copy noted to the primary staff assistant, to encourage direct contact with that person. These cover letters may be the same for all clients, but since they are personally addressed that is not the impression created.

Whenever there is a major piece of legislation, usually tax-oriented, a similar memo should be sent to all category A and B clients.

Establishing contact frequency. Many advisors set up a consistent pattern of contact with their clients. This should be based on the revenue flow and the nature of the client's circumstances. For example:
  • Category C: Newsletters and bulletins only.

  • Category B: Scheduling of an annual review meeting on an anniversary month other than December. Each client receives a pre-appointment letter and call from a staff person to set up the review. A written agenda assures that all critical topics are addressed.

  • Category A: Quarterly meetings (unless the client suggests a different frequency). Each is preceded by a letter and then a staff follow-up to confirm the date. At the end of each meeting the next date is usually set -- at a 90-day interval.
Among other topics, each meeting includes a review of investment position and consideration of any changes. These reviews are excellent opportunities to ask, "Who do you know that we could be sending some information to about our services?"

Summary. By limiting the time spent with Category C clients the advisor can focus on bringing in more high productivity Category A clients. This type of analysis does not need to be precise to be effective. It just needs to be done. The advisor we described had several clients whose current productivity would have placed them into the B Category -- but he decided to classify them as A. Each of them had more capital to invest, had quickly rising income, or had demonstrated their ability through social influence to refer him to new more Category A clients.

The financial advisor's client management system should drive the client differentiation we have described. While this might be done in Outlook, Act or Goldmine, it has been programmed in Practice Builder (formerly Text Library System), which also contains the various update memos, cover letters, agendas and pre-formatted interview notes. It has the Drip Marketing capacity to send newsletters, periodic articles and other reports. The customizable client preference screen enables the advisor and all staff members to instantly recall and update the unique, personal aspects of every client, including adding their photo. The 207 customizable Key Codes enable a very flexible classification and tracking.

Using the OCR analysis helps the financial advisor identify clients and their true profitability and value. When associates recognize that a new client and an A Category client have a value of $20-$25,000 they will treat them with greater respect, understanding and attentive service.

Capitalizing client value

Since there is a reasonably high possibility of your losing a client (through death disability, transfer, retirement, move or simply to another firm) you should use an interest rate that reflects that factor.

Let's assume that you have three categories of client, A, B and C, and that you feel your average client will stay with your for the next 10 years, which is not incompatible with your current age and personal retirement plans. You can value clients based on future income.

A$2,500x 10 years =$25,000
B $1,500x 10 years =$15,000
C $200x 10 years =$ 2,000


Another way to value your clientele is to use capitalization -- what amount of money at a reasonable interest rate, discounted for losses, will produce a revenue stream equal to that of your client?

A$2,500/ 5% x 40% =$20,000
B $1,500/ 5% x 40% =$12,000
C $200/ 5% x 40% =$ 1,600


Using these calculations, a Category A client would have a value from $20,000 to $25,000. Doesn't this warrant a considerable effort toward client retention?

Using the OCR analysis helps the financial advisor identify clients and their true profitability and value. When associates recognize that a new client and an A Category client have a value of $20-$25,000 they will treat them with greater respect, understanding and attentive service.

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