Cost to Serve, the most important KPI you aren’t using
Most advisers will tell you that their least profitable customers create the most work, but I have not met any who can identify how much. Cost to Serve is a simple model that for a given client cohort, uses the workload to calculate two key metrics:
To calculate you need to measure workload, operational processes costs, and profitability and then hold your breath and peek into the results, they will shock you! We ran this analysis for a tier 1 platform provider and found 49% of the workload was generated by clients with less than 6% of AUM. This means that the long tail of clients with small amounts invested was being cross-subsidised by the wider – target - client base.
To assess the effort, touchpoints, and commercial implications on an advised journey is relatively simple and often overlooked, yet it can be used to drive greater efficacy and profitability of even smaller client pots.
By understanding the Cost to Serve each customer or segment of customers, firms can identify areas where costs exceed revenue and work on reducing them. This might involve streamlining or automating processes, changing the fees charged or even retiring customers where the charges and value derived don’t stack up for either party.
The last few months have seen considerable changes in advised space: new entrants such as Halo Wealth, and white-label propositions such as Hubwise, Fundement, SECCL et-al can offer attractive propositions and platform fees with a modern tech stack and an enhanced customer experience to boot. Margin pressure will make Cost to Serve a must-have metric to reduce costs and boost profitability and for some, just stay in business.
Recent work we have completed has shown a Cost to Serve a range of £1.5k to £4k (largely dependent on the organisational risk appetite).? If we assume an advised fee of 50bps and a £1,500 charge for an annual review, occasional (quarterly) update reporting;
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Client B is almost “break-even” but Client C (we see a lot of this type of pot in our assessment/migration work with clients) is a commercial drain.? We have seen books averaging around 28% of this demographic, one recent book had close to 50%.
Driving two key changes based on Cost to Serve, empirical data can realign and refocus on “net revenue”;
Realigning and focusing on the Cost to Serve metric will increase the value your advisers can add to the higher revenue client demographic while maintaining appropriate and suitable guidance for lower-value clients that over time could develop to meet the target criteria.
Cost to Serve metric is a powerful tool for firms to optimise their operations, improve profitability, and enhance customer experience. By understanding the true cost of serving customers, businesses can make data-driven decisions that generate value, and drive efficiency and growth. Everyone is a winner:
?We would love to hear from you if you’d like to learn more about how our Cost to Serve model and approach could be implemented.
Thanks to Mark Mortimer for inspiring and co-authoring this article.
Intermediary Partnership Manager
1 年Nicley put Dave, seeing and speaking to lots of advisers, this topic comes up quite abit so your article will definitely reinforce thinking.
Non Executive Chairman of Soderberg and Partner WM LTD.
1 年Great article Dave. At Hundreds and Thousands we are having lots of conversations with advisers about how to serve their clients with small portfolios. In my experience the break even for firms that have considered this properly is between £1400 & £1600 of revenue PA. It’s tricky - most don't want to cull but equally most don't want to spend time developing a new advice model for this demographic.
Pensions expert
1 年Interesting article, definitely something to think about in the context of consumer duty and value for money
Director at ifaDASH
1 年Excellent article David Howard! whilst serving clients is at the heart of what firms do, commercialism and that level of transparency is a pre requisite for a successful firm, love comments too from Hugh J., thanks for sharing
CEO @ Seccl (B Corp certified) - technology that helps more people to invest - and invest well
1 年Interesting piece David Howard and thanks for the mention. We’ve seen examples where Seccl-powered firms are enjoying 50%+ improvement in non-adviser costs. Opportunities for adviser firms to find a new level of effectiveness to drive scalability / capacity / profitability (according to business objective) AND improve the client experience are increasingly clear. There’s obviously work involved in getting there but the upside is huge.