How to Measure Client Retention in Your Wealth Management Firm

Poor client retention is one of the top reasons financial advisors struggle to maintain and scale their operations. It’s also a factor in high advisor churn.

A report by Cerulli Associates found that over 72% of trainees failed to become advisors, and 40% of brokers will leave the industry over the next ten years.

There are several methods advisory firms can use to reverse this trend and keep talent. One way is to train advisors in client satisfaction and retention.

It costs up to five times more to acquire new clients than to keep current ones. Yet, 20% of clients leave their advisor within the first year of signing. And 25% leave after year two. For new advisors, poor client retention affects both their income and confidence. 

Teaching new advisors how to measure client retention offers firms an easy way to boost morale, troubleshoot problem areas, and give advisors a way to become proactive about the client experience. 

The basics of measuring client retention 

In a previous article, we covered how and why firms should measure client satisfaction and retention. We also detailed three of the main key performance indicators (KPI) advisors can start tracking immediately:

• Client retention rate
• Client retention cost
• Client satisfaction score 

However, there are advanced metrics you can use to gain more insight into the existing client experience. While advisors understand the importance of numbers, taking qualitative feedback is a helpful supplement to fully measure client loyalty and potential churn. There are also metrics for measuring the health of a specific client, as opposed to focusing on the client book average. 

We have compiled 5 additional client retention KPIs advisory firms can start tracking as soon as they sign a client.

5 ways to measure client retention 

1. Recurring revenue

Another helpful KPI for financial advisory firms is calculating recurring revenue. This metric is useful when compared to earlier periods, as you can determine whether your firm is growing, stable, or declining. 

For most industries, this is done every month. However, since most fee-based firms bill annually, it’s possible to tweak this formula.

To review your recurring revenue, you would use the following equation:

Recurring revenue = Number of clients over the year or month * average revenue per user (ARPU)

In practice, it would look like this:

Recurring revenue = 50 clients over the year * $10,000

Recurring revenue = $50,000

As many advisory software and tools now charge a monthly subscription, it may also be helpful to first divide the annual APRU by 12 for a monthly estimate. This way, you can use the numbers to review monthly cash flow. 

2. Client lifetime value

Client lifetime value (CLTV or LTV) represents how much revenue a firm earns from a single client until they leave. Understanding the average lifetime value of your clients can help you better understand when clients may be likely to leave. 

For example, you may find that the average client churn is at the 5-year mark. You can then use this data to refine your client engagement strategy for boosting retention. 

Calculating a client’s base LTV requires the following formula:

LTV = (Average revenue per margin x Gross Margin) / Churn

To break this down further:

• Average revenue per user: The average revenue per client over a specific period.
• Gross margin: This is the result of subtracting revenue costs from net sales. In the case of financial firms, net sales could be replaced with gross revenue, as they do not offer allowances, returns, or discounts. 
• Churn rate: The number of clients that left your practice during the same period.. 

3. Net promoter score

Net promoter scores (NPS) are used to measure client retention. You’ve likely seen the NPS scale before. This simple metric is calculated with a single question, usually attached to a follow-up email. The question is:

On a scale of one to ten, how likely are you to refer your advisor/recommend this financial product to a friend?

You can then aggregate all answers for specific questions to gauge your client base’s general feelings about their advisor or portfolio. Depending on the score, you can follow up with a more in-depth survey. 

4. Client health score

A client health score is essentially a self-designed metric that looks at the satisfaction of individual clients.

This KPI requires an organization-specific formula. Here are the steps to set your scoring system up:

1. List actions that both an engaged and dissatisfied client does. You may include frequency (i.e. emailing once a month)
2. Attribute a number of points for each action. Typically, positive interactions add points to a total score, and negative ones subtract from the total.
3. Then, calculate the total score based on what interactions a specific client partakes in.

After completing steps one and two, you have a scorecard you can use for any client.

5. Qualitative survey

One of the best, but often more time-consuming, ways to determine client satisfaction is through asking them directly. Periodically sending surveys, such as once a year, to assess how clients feel about the firm is a great way to glean insights to improve the firm.

To collect better data, it’s important to:

• Write clear, precise questions
• Keep it short
• Use multiple-choice or true/false questions

A simple, easy-to-complete survey improves completion rates. Even looking at how many clients complete or open the survey can indicate their level of engagement.

Qualitative surveys differ from check-ins, which assess client sentiment about the market and their portfolio.

Building a stronger advisory firm

Advisor churn is directly related to client churn. Luckily, it’s possible to track both. And teaching new advisors how to review client retention data can help firms keep more advisors.

Key performance indicators like recurring revenue, client lifetime value, net promoter scores, client health scores, and surveys offer insight into existing client loyalty and trust. 

That said, KPIs and client retention are only two aspects of a success. Discover new strategies for growth in our 30-minute, on-demand webinar on building a successful advisory firm.