Announcing The Latest Kitces Research Survey: Client Acquisition Costs And Best Practices In Financial Advisor Marketing

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

The (Understated) Cost Of Client Acquisition In Financial Advisor Marketing

The classic view of how financial advisors should set their fee structure (and their asset or fee minimums) is to determine the cost it takes to deliver services to the client, including both the time cost of the advisor, and the (pro-rata share of) overhead cost of staff, and price accordingly. Thus if the advisor’s goal is to generate at least $200,000/year of revenue for their time, and cover $60,000 of overhead expenses, and only has the capacity to service 100 clients given the time it takes for each… the advisor had better be charging at least $2,600/client.

The caveat to this approach, however, is that it fails to consider the cost to get the client in the first place. In other words, how much does the advisor (or advisory firm) have to spend in marketing dollars to get the client to begin with? As if the cost of client acquisition isn’t considered, the advisory firm may spend most or all of its future profits for the client in the cost of just getting the client in the first place.

For instance, if the firm averages a profit of $1,000/client after the cost to deliver the services, but it costs $5,000 in marketing dollars to get the client in the first place, the firm actually has to retain the client for 5 years just to break even and reach the first dollar of net profits! And in the extreme, if client acquisition costs are too high, the cumulative lifetime value of the client may not generate enough profits to overcome the upfront cost (a concern that was often levied against robo-advisors who might not even make back their marketing costs to get clients on small accounts with low AUM fees). At a minimum, including the cost of acquisition often leads advisory firms to set fee minimums, just to ensure the clients will still be economically viable to serve in the first place.

In fact, it’s arguably the client acquisition costs, and how difficult it is for most firms to attract a large volume of clients, that has led so few advisory firms to work with middle market clientele in the first place. Not that they can’t be serviced profitably en masse, but that most firms can’t figure out a cost-effective way to market to get enough of them to reach those economies of scale in the first place.

And historically, most advisory firms haven’t spent much of anything on marketing. According to the most recent Investment News 2018 Pricing and Profitability benchmarking survey, the typical advisory firm spends no more than about 2% of its revenues on marketing. Most of which are just social events for existing clients (who perhaps, maybe, bring a friend to potentially refer). In part because financial advisors are often skeptical that marketing even “works.” And in part, because most advisory firms don’t have much free cash flow to spend on marketing in the first place. Which leads us instead to simply do “networking” and other referral-based activities (that may take time but don’t have a hard dollar marketing cost).

The problem, however, is that this ultimately just masks the true acquisition cost for financial advisors to get clients. Because even doing networking and other social activities to build relationships and generate referrals still has a cost. It’s simply the cost of the advisor’s time, instead of a hard dollar cost. But that’s still a material cost, especially since financial advisors often bill (or generate an effective rate) of $150/hour or more for their time.

Thus, if a financial advisor spends 2 hours/month going to a monthly networking meeting, plus engages in 8 hours of follow-up lunch meetings with various professionals they met in an effort to get referrals, and then spends another 4 hours meeting with potential prospects who are referred, all just to get one actual client… then the client acquisition cost for the advisor isn’t just $500 worth of networking event attendance fees and the cost of a few lunches. It’s also 36 hours of the advisor’s time as well. Which at $150/hour, means the total client acquisition cost isn’t just $500 of hard dollar costs, it’s 36 hours x $150/hour = $5,400 + $500 = $5,900 in true client acquisition costs to get that one client. No wonder financial advisors tend to move “upmarket” to more affluent clients over time!

Which is crucial to recognize, because it means that an advisor spending $10,000 in cash on a marketing event to “just” get 3 clients may actually be a more efficient marketing process with a lower client acquisition cost (just $3,333/client) than the traditional approach that has only $500 of hard-dollar costs but another $5,400 of time-based cost as well.

In other words, until the time cost of an advisor’s time in the client acquisition process is considered, alongside the hard dollar costs, it’s almost impossible to even figure out what, really, are the most cost-effective marketing strategies for financial advisors. (At least, for the advisors who have the financial means and choice about whether to spend their dollars or their time, on their marketing activities.)

New Research On How Financial Advisors Actually Get New Clients (And The CAC To Do So)

Given that for many or even most advisors, client acquisition costs are primarily a function of time cost, and not (just) hard dollar cost, there is remarkably little data on the true (time-plus-hard-dollar) client acquisition cost of a financial advisor. Even though it’s an essential input to grow an advisory business, and to price the firm’s services (and especially minimums) properly. Not to mention being crucial to figure out which financial advisor marketing strategies are really the “best” and most efficient!

Accordingly, we’re announcing the latest Kitces Research Survey on Financial Advisor Marketing and how financial advisors really get clients… to try and figure this out! Are time-based marketing activities to network and generate referrals really the most cost-effective way to grow an advisory firm? Does it turn out that strategies like seminar marketing or running educational events, with a higher upfront cost, really are cheaper in the long run for the firm? Do more “modern” digital marketing strategies using blogging and social media really bring down the marketing costs for an advisory firm? And do advisory firms that become known for a niche or specialization really have lower client acquisition costs by becoming known for what they (uniquely) do?

Moreover, to answer these questions...we need your input. Thus, whether you're actively marketing, or have struggled to market effectively, or have simply decided you're happy not growing and don't want or need to marketing anymore...every advisor's feedback counts!

So I hope you’ll take a few minutes to participate in our new Financial Advisor Marketing Survey. It will likely take about 35-45 minutes, but don't worry if you need to stop and start again - an email will be sent to you when you close out of the survey and in that email will be a link that will allow you to return to your survey at a later time. In exchange for all of your hard work, all participants will receive a free copy of the final White Paper that we produce, providing relevant information you can use to understand what financial advisor marketing should cost to get a client, which marketing strategies really are the most cost-effective for financial advisors, and simply what “works” (or definitely doesn’t work anymore) when it comes to marketing for new clients.

The Survey itself will remain open until Wednesday, May 22nd.

Thank you in advance for taking a few minutes to participate in this important financial planning research study!

So what do you think? What marketing strategies have you found to be cost-effective in your advisory firm? Is it proper to consider the cost of an advisor’s time in their overall marketing costs? If there are alternative marketing strategies that may be more cost-effective in the long run but have a higher upfront cost, would you pursue them?