The Check You Didn't Know You Were Writing
Most firms think their bottom tier is just unprofitable. The truth is worse. You're writing those clients a check every single year to stay.
Here's a conversation I have almost every month. An advisor tells me their smallest clients are "break-even, maybe a little light." Then we run the numbers together. Every time, the room goes quiet.
You know the 80/20 rule. Roughly 80% of your profit comes from 20% of your clients. Most firms respond by rolling out the red carpet for the top 20% and quietly hoping the rest take care of themselves. So what happens to the other 80%? They keep calling, keep emailing, keep showing up for reviews. And you keep paying for it.
Let's run the math
Take a typical C client. $250,000 in assets at a 1% fee. That's $2,500 a year in revenue. Feels fine, right?
Now look at what it costs to serve them:
Advisor time: 4 hours a year (two reviews, a few calls, the "quick question" emails) at $600/hour = $2,400
Staff time: 10 hours a year (paperwork, scheduling, service requests) at a $75 blended rate = $750
Overhead: tech, compliance, office, software = $900
Total cost: $4,050. Revenue: $2,500.
That's a $1,550 loss on one client. A margin of negative 62%. Now multiply it across 60 clients in that tier.
You're cutting a $93,000 check every year to keep your bottom tier on the books.
And here's the kicker. Those clients probably aren't getting your best work either. Your team is stretched, your A clients get less attention, and your C clients get whatever's left. Nobody wins.
How to flip it
Here's what I walk firms through when we tackle this.
1. Know your real number
You can't fix what you haven't measured. Most firms segment by AUM or revenue and stop there. Revenue only tells you half the story.
A real profitability analysis puts a true cost-to-serve, and treats overhead as a real economic cost (because it is). Then you look at actual profit and margin by segment.
What you'll usually find:
A handful of clients with a deeply negative margin
A few "C" clients who are profitable and easy to serve
Some hidden A clients (an inheritance coming, a business sale on the horizon, a client who refers like crazy)
Don't treat your bottom tier as one big problem. It's a mix, and you need to see who's who.
2. Rebuild the service model for that segment
Most firms try to serve a $2,500 client the same way they serve a $25,000 client.
Instead, design a service model that fits the segment:
One annual review instead of two, with a planning check-in by video or email in between (or instead)
Staff-led service for routine requests, with the advisor stepping in as needed
Technology doing the heavy lifting. Online scheduling, digital plans, automated reminders, client portals
Clear boundaries. Clients know what's included and how to reach you
Most C clients want to feel confident and know someone's watching out for them. They don't need a two-hour meeting to get there.
3. Reprice with intention
Once your service model is aligned, your pricing has to match it. That usually means:
A new minimum fee that covers your true cost to serve plus your target margin
A clean fee schedule your team can explain without a cheat sheet
A grandfathering plan with a timeline, so existing clients have a fair runway
Will some clients leave? Yes. And that's okay. A client who won't pay what it costs to serve them was never a client you could afford.
The flip, in real numbers
Back to that same C client. After the service model rebuild:
Advisor time: 1.5 hours at $600/hour = $900
Staff time: 6 hours at $75 = $450
Overhead: $700 (more automation, fewer manual touches)
Total cost: $2,050. With a new $3,000 minimum fee, revenue is $3,000.
That's $950 in profit and a 32% margin. A swing of $2,500 per client. Across 60 clients, that's a $150,000 turnaround. No new clients. No new hires. Just a firm that stopped writing checks.
Where to start
Ask yourself:
Do you know your true cost to serve each segment?
Is your bottom tier getting a service model built for them, or a watered-down version of your top tier?
When did you last look at your minimums?
If you can't answer those with confidence, let's talk. My profitability analysis shows you exactly where the money is leaking, and we'll build a service model and fee structure that fits your firm and your goals.
Your bottom tier can be profitable. You just have to stop paying them to stay.
Comments