(2 December, 2004) Valuing your clients…to boost your sale price

Client segmentation has long been an industry buzzword, with most advisers familiar with what it means to classify clients as an A, B, C or D type based on their net wealth. But this process has one major drawback — it focuses predominantly on what the clients are worth to the adviser.

Money Values managing director Robert Bain says there is another way at looking at segmenting a client base which looks at the attitude of clients and how that impacts the relationship the adviser has with them.

According to Bain, this could be the vital element required for advisers to boost the sale price of their business.

The key, Bain says, is for advisers to consider their clients’ attitude to money and how it affects their attitude to financial planning advice when segmenting their clients.

“What are the best types of clients based on their attitudes is what the adviser should consider. In looking at this I have found there are two types of clients sitting beneath the standard A, B, C style client profile,” Bain says.

“These types are the money managers and the money achievers. The managers want to be shown how to make more money and will use the financial planner to do that while the achievers are concerned with not losing any money while trying to grow what they have.”

Bain cites a real life example to show how these two types transcend the usual net worth client measures. He recalls a seminar in which a number of A class clients were invited to hear about a new investment opportunity. Despite most of them being in the high-net-worth category, few were interested in the venture which prompted Bain to reconsider his way of looking at clients.

He says that after looking at his clients’ attitudes to risk and money he could have invited a number of clients from across his business, not just the A class or high net worth clients, and would have had a better response.

“I found from this experience that not all the A class clients were the same and that across the A to D range there were similar investment characteristics and goals and I should have been looking to their interests and not mine. The use of the A, B, C ranking was something I had imposed on them,” Bain says.

“This approach means the use of different language for advisers and an adjustment in the thinking about the nature of the client-adviser relationship.”

Bain outlined this approach in a paper published by Credit Suisse Asset Management in its recently released ‘HyperValue - Managing the Future of Your Business’ report.

In his piece, Maximising Sale of Business Value, Bain says client segmentation is crucial at the time a financial planning business is put on the market.

He says the value of a business will be the most apparent if advisers provide “deep data into the core assets of the business, demonstrating key motivators and expectations of the client base and a clear view of how they can be retained.”

Bain also states this information should be organised in a format that allows buyers to see the components of value that align with their objectives and how that value can be realised in a sale.

“The real key to documenting the client base and scope of the core assets is to include personal dimension data not just financial and demographic data. The personal data is difficult to assess, quantify and record without a specific customer relationship management system.”

Bain says most purchasers want to see this information up front but only usually gain full access after a sale.

“Due to privacy restrictions, time constraints and the sensitivities in sales negotiations, much of the information that could articulate the nature and make up of the client base will only be available to the buyer after a negotiated sale or at best during due diligence when assessments of value by buyers have already largely been formed.”

The end result is the buyer’s assessment of the value of the business is often uncertain which many can interpret as risk, which in turn has an impact on the price offered and the terms of purchase.

Bain recommends that advisers consider segmenting clients by considering the client base in terms that are familiar to the planning process, identifying where the ‘preferred parts’ and ‘other parts’ of the client base value proposition lie and the completeness of the available data.

“Understanding the client means knowing what clients’ value, how they think, feel, decide and act regarding money and money management including but not limited to, an assessment of a client’s inclination (or aversion) to financial risk.”

On aggregate this information represents an effective client base profile which can be used to lift the value of the business but also provides the purchaser with a foot in the door to build rapport with clients, maintain service continuity and return on investment.

This last point is crucial as buyers will see their return on investment tied to expected levels of client retention according to Bain, which will be impacted by how quickly they can demonstrate they know the clients purchased with the business.

Even if retention is not a problem, buyers will also be able to identify key relationships and show the advisory relationship and services levels will be at least maintained, if not improved after the purchase.

However, Bain warns advisers should not wait until they a ready to sell before segmenting their client base, but rather adopt such a model as part of usual business processes.

“The question arises about whether the greater value is realised by treating the preparation for sale of business as a project prior to sale or transition, or implementing the processes early in the life and development of a practice with a view to adding value,” Bain says.

“It’s never too early to start creating value in your business.”