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. However, 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:

1.?????? Value demand: essentially things you do for your clients that add value, strengthen relationships and, in time generate referrals.

2.?????? Failure demand: is the opposite and is characterised by avoidable workloads that should be eliminated, automated or reduced - think of chase-ups, non-electronic processes, wet signatures etc.

To calculate you need to measure workload, operational processes and 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. Which means that the long tail of clients with small amounts invested were 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 doesn’t sack up for either party.

The last few months have seen considerable changes in advised space: new entrants such as Halo Wealth, white-label propositions such as, Hubwise, Fundement, SECCL et-al are able to 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 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;

·?????? Client A: Has ￡500k in SIPP, ￡120k in ISA and ￡30k GIA generates a gross revenue of ￡3,250, less Cost to Serve this leaves a “net revenue” of ￡1,750.

·?????? Client B: Has ￡150k in SIPP, ￡80k in ISA and ￡20k GIA generates a gross revenue of ￡1,250 less Cost to Serve this leaves a “net revenue” deficit of ￡250.

·?????? Client C (typical inert and low value client): Has no SIPP, ￡80k in ISA and ￡20k GIA generates a gross revenue of ￡500, less Cost to Serve this leaves a material deficit of ￡1,000.

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”;

1.?????? Review and streamline the advised process model – reducing effort and loading on advisers, balancing Customer Duty and Client experiences of course.? What areas of your current operating model drive cost that could be streamlined rapidly with minimal risk / service impact?

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2.?????? Looking at the value proposition for differing client demographics can also help reduce exposure to the clients with small pots and or generate unnecessary manual workloads. As an example, a less robust model of appropriate guidance rather than fully fledged advice may be more appropriate.

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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, drive efficiency and growth.

1.?????? Customers benefit from pricing and services matched to their usage. No cross subsidisation.

2.?????? Operations gain enhanced insight into efficiency drivers and opportunities for streamlining services to offer greater value at reduced cost.

3.?????? Advisers gain capacity to acquire and support additional customers that are closely matched to the target profile.

4.?????? Stakeholders see enhanced profitability and intrinsic company value.

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If you’d like to learn more about how our Cost to Serve model and approach could be implemented we would love to hear from you.

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Thanks to David Howard for inspiring and co-authoring this article.

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