For more than 20 years, industry benchmarking studies have helped financial advisors understand how to manage the profitability of their businesses, and ensure that the costs to service clients are in line with the fees they’re being charged. However, remarkably little research has been done into the costs that must be incurred to actually obtain those clients in the first place and the cost-effectiveness of various client acquisition strategies that financial advisors use.
And it turns out those client acquisition costs are substantial! In our recently released Kitces Research report of more than 800 financial advisors who participated in a survey, the average total cost for a financial advisor to acquire a new client is $3,119 per client. Notably, though, a significant portion of that cost is the ‘time cost’ of the financial advisor themselves (an average of $2,600 worth of time spent, or 83% of the total cost of client acquisition), while only $519 is typically spent on hard-dollar marketing costs themselves. Which suggests that while early-on it may be cost-effective for advisory firms often to substitute advisor time for firm dollars when it comes to marketing efforts, especially for those who don’t have a lot of money to invest into growing their business in those initial years, that advisory firms may be overly reliant on an advisor’s (less-and-less-cost-effective) time to grow the business, rather than allocating marketing dollars to grow the business in a more scalable way.
The significant upfront cost to acquire a client is especially salient for financial advisors with recurring revenue models, as the cost to acquire a client may often be equal to or more than the entire revenue generated by the client in the first year – and the equivalent of several years’ worth of profits – which results in a “J-Curve” of client profitability (where aggregate profitability of a new client is negative in the early years and only turns positive over time). Which is important, as overzealous marketing efforts can cause a steep negative J-Curve dip, which in turn can cause the firm to overextend its growth capacity and ‘grow broke’ even if otherwise on a long-term path to profitability. Though on the other hand, the depth of the J-curve of advisor profitability, when coupled with firms that often have 20-30+ year-average client retention (at 95% to 97% annual retention rates), suggests that most advisory firms may be grossly underspending on marketing relative to the astonishing lifetime client value of an individual new client.
To maximize marketing spending – and minimize Client Acquisition Costs (CACs) – our Kitces Research Report identified the most cost-effective (measured by the actual CAC) and cost-efficient (measured by the revenue generated from the client relative to CAC) marketing strategies in use by the financial advisors surveyed, which included both ‘traditional’ methods (e.g., client referrals, networking, and Centers of Influence), but also underappreciated alternatives (albeit with more upfront cost) including SEO, writing a book, webinars, marketing lists, and paid third-party website listings. Interestingly, the most cost-effective strategies differed for firms with the highest marketing efficiency (books, direct mail, paid web listings, marketing lists, and SEO) versus the most efficient strategies for firms not as ‘marketing-inclined’ as others (paid advertising, paid solicitors, seminars, and general networking).
Examining marketing strategy efficiency relative to advisor adoption rate also reveals that some of the most commonly used strategies are actually among the least efficient (e.g., social media, blogging, and client appreciation events), whereas some of the lesser-used are still very efficient (e.g., marketing lists, radio, solicitors, online ads, and paid websites). This suggests an inherent inefficiency when it comes to marketing strategies chosen by financial advisors. The biggest driver behind this inefficiency appears to be the strong advisor preference for strategies that rely on the advisor’s time (versus hard dollars invested in the strategy), and an overweighting on strategies that produce a high quality of leads over those that produce a scalable quantity of leads or are actually the most cost-effective (which may help to explain why larger firms are outgrowing smaller ones, as they are able to accommodate scalable hard-dollar marketing strategies that smaller advisors might not otherwise be able to afford or be willing to invest into).
Ultimately, though, the key point is that while there is a wide range of marketing options available for advisors, effectiveness and efficiency are important criteria that need to be considered to ensure that resulting growth is sustainable, as initial costs may be recouped only after a client has generated revenue for the firm over several years. In fact, with an average CAC of $3,119, this Kitces Research Report suggests that perhaps the primary reason that advisory firms struggle to serve mass affluent clientele and the broader population is not because it is cost-ineffective to service them, but that it’s too cost-ineffective to market and gain a scalable number of them as clients in the first place! Though on the other hand, with recent reports suggesting robo-advisors have ‘just’ an average acquisition cost of $500 - $1,000, it seems clear that an opportunity exists for advisors to reduce the overall cost of their marketing efforts (and/or for third-party providers to scale their own lead generation services for advisors)… which may both improve the profitability of advisory firms, and allow them to grow more scalably and reach a wider range of clientele.
