EP 74 | Committing Client Segmentation to Your Business’s Core with Jon Mauney

Jon Mauney  11:00

I absolutely agree with you on the 80/20 principle. We see that all across the world, all things; it's no different in the RIA business. Few thoughts here. So, when thinking about how to value a client relationship, I think one thing that's important is to remember that you really need to be thinking in terms of lifetime value, and not necessarily in terms of revenue today. So, there actually may be a good reason to spend a little bit of extra time on that smaller client upfront, because either you expect them to grow into your target market, or maybe there are relationship entanglements; maybe it's the child of one of your primary clients or something like that. You have to take those things into account when you decide what type of service you want to give to them. As I said before, the best advisors are the ones that are best at building relationships with their clients. So it can be very, very, very hard and very jarring to go into a client meeting and say, I'm sorry, I can't work with you anymore, because I don't make enough money off you. That's a very difficult conversation to have. And it brings me to what I believe is the number one rule of client segmentation; that is, the best client segmentation is having some client segmentation parameter at all, so you can sort folks on the way in. It's much more difficult to segment your book after it's been built out and have to either break relationships or change tech stacks or move a client to a different advisor or a different firm or something like that. It's much more difficult to do that than it is to have a client come in the front door, explained to them up front what services you will be providing and how you'll be charging them, and put them on the proper program that is profitable for you and suits their needs. So, when we talk to a couple of different types — we talk to many different types of firms. When we talk to firms on the larger end, the multibillion dollar firms, generally the reason they're coming to us is because they have this big segment of their book that is just eating up their time from an operation standpoint, and they're trying to find some way to segment that business. Trying to some way to improve, find some way to improve profitability on that segment of the book. Everybody that we talk to agrees that they need to do this and most agree that Betterment is a great option for this, because we automate so much in the client relationship on the operational side of things. But boy, is it hard to do that initial transition. It's very, very difficult to sit down, especially you're talking 80/20 at a big firm; you're talking about sitting down with hundreds of clients and saying —

David DeCelle

Thousands, even.

Jon Mauney

— sitting down with so many clients, and essentially risking the business in some ways. So saying like, we've been doing a thing for some period of time, and we can't do that thing anymore — and trying to explain that is challenging. So it's important to get a segmentation strategy in ASAP, so you can start reducing the incidence of that in the future and do yourself a favor, basically.

David DeCelle  13:32

So I'm glad you brought up the point about, you still may want to pay attention to that $500,000 person as much as you are that $5 million person depending on some of the intangibles, like do they have the potential to grow. So I kind of want to walk you through my categories in which I suggest people segment, and I want to get your perspective on anything that I should add, or anything that you don't think is relevant. So the way that I have it set up is there's five different categories that you should use for segmenting your clients. One is going to be the revenue that they're generating. Okay, so one is the revenue that you're generating. One is their potential, which is what you just alluded to. So are they retired and they're going to be going backwards? Or are they 40, and they're continuing to add to their accounts for 20, 30 years? Okay, so revenue, potential, coachability. And when I say coachability, what I mean is do they push back on all your recommendations? Are you annoyed by them? Or do you actually enjoy having the conversations with them? So we have revenue, we have potential, we have coachability. The next one is referability. Have they given referrals or do you know whether or not they are open to giving referrals? Because that's obviously going to make that relationship that much more profitable if they're duplicating themselves over time. And the last one is incredibly intangible, but it's just, do you like these people? Because they can have $5 million, and it may be a drag every time you talk with them for whatever reason; maybe you don't relate on anything. So in those five categories, what I have folks do is in an Excel sheet, or however you want to do it, you grade folks in each of those categories on a one to five scale; five is great, one is poor, obviously the numbers in between, and then you add all those up. So there's a total potential score of 25. Okay, five times five. So 20 to 25, is what I would consider the A pluses; the 15 to 20 are the A's; the 10 to 15 are the B's; the five to 10 are the C's; and below five, why are they still in your business? What I found in helping folks do that, and then actually rolling it out, is the list looks a lot different than if you were to just organize it by the revenue generated. And it's kind of an eye opening exercise, but I want to pause there. So again, it's five categories, point system, rank them accordingly, intangibles, data driven as well. What are your thoughts on that? In addition to that, is there anything, like should we make the score out of 30 or 35, based on a couple other things that we should be taking into consideration?

Jon Mauney  16:27

I absolutely agree with the approach. I think that thinking about the categories on which you should grade a client, and then grading them, and then following a process is very important. I would sort of reframe what you've described as essentially creating a process by which we can measure economic value and not just accounting value. It's very easy to sit down and measure, look at revenue right now, what is the annual recurring revenue of this client. Or even look at assets, which is, of course, going to be highly correlated to revenue, and then ranking your book by that and saying, let's get rid of the bottom. But in that process, you're missing the economic value of the client. And the economic value does include that lifetime value, and it includes intangibles like you said; do I like this client, and that sort of thing. I think one thing that gets really difficult on that intangible side of things that you mentioned is how do you get rid of a client that you ranked as a five, that you liked. Even if they are a low revenue, low potential client or something like that; it's just sort of a thing that it's difficult from a human perspective to actually sit down and have those conversations to say, I'm sorry, I can't be your person anymore. But, in any event, I don't necessarily have opinions on doing it any differently. I think the categories are generally correct. But all of those things can really, if you wanted to make it very analytical and bake it down into numbers, all of those things go into a lifetime value calculation. And that lifetime value, based on not just pure dollars of revenue and pure dollars of expense, but includes that economic value in there of how much do I dislike talking to this person? Or how much do I like talking to this person? And it's hard to assign a dollar value to those kinds of things. But you're essentially doing the exact same thing that I said. Come up with the lifetime value of this customer, of all your customers, of all your clients rather, rank them, and figure out what you need to do in order to make a change.

David DeCelle  18:02

Yeah, and I do want to respond; you mentioned, what happens if someone's a five in terms of likeability, but they're scoring poorly in other areas. I think you have, I guess, technically three options; I say technically, because technically, you can just get rid of them. But to your point, it becomes difficult if you really like them for whatever reason. So the other two options are just accepting the fact; there's a lot of power, I think, in awareness of what's going on. And if it's, okay, at least I know that I'm coming in here to have a good time and do what I need to do to put them in a good spot. But I'm not going to make myself uncomfortable and ask for referrals, because they don't give them; I'm not going to expect this to be a multimillion dollar opportunity, because they're just not at that stage. Just there's power in awareness, I think, to make you feel better about the situation. I think the third part is, it kind of goes back to what I was saying at the beginning with now you can make sure that for that person, or at least for future people, you are defining what that service is that they're going to receive. Have you been over serving this person, because you want it to feel like you are doing something and then realize that you can't squeeze water out of a rock, so to speak? Or, can the things that you're doing for them, that's turning it into something that's not profitable, use something like what you guys offer, which is automate the non-human components of the business so that you're freed up to just enjoy them as humans, which is why they're in your business anyways, because they're not profitable as it is so how can you at least try and shift the numbers in your direction? But at the very least, I think there's power in awareness.

Jon Mauney  19:45

I absolutely agree, and just going through the process is important. So you at least know what you've gotten yourself into, and you can be more educated about what you're getting yourself into in the future — as you take on more clients and that sort of thing. I think it's sort of, hopefully I'm not stealing your thunder on transitioning, but it's sort of brings the question of, okay, you're having the conversation; how do you fix the problem? So you don't want to get rid of the client; how do you have the conversation to put them in a program, or whatever you may call it, a process that actually does change their calculation, because that's an option, right? When you do that LTV calculation, that lifetime value calculation, you're thinking of it based on, essentially, forward looking revenue minus forward looking costs. And the two ways to improve that with all the other sort of edgy inputs as well. But the way you change that calculation is figure out how to make more revenue, or you figure out how to reduce costs; one of the two. On the revenue side, you could charge more; you could sit down the client, say, this doesn't work for me, I have to charge more. That's a difficult conversation. I think it's one that advisors should regularly have; but it's a difficult conversation nonetheless. The other option is to figure out how to reduce costs, and reducing cost is going to result in a change for the client, one way or another. It's either you're going to provide fewer services for them, you're going to change their platform, you're going to say, I'm going to stop trading on your account at Fidelity, I'm going to move you over to Betterment. Here are the benefits of Betterment, and that sort of thing. So there's a conversation that needs to be had, and coming out of that conversation is a change to one of those two things. And again, if you can't change one of those two things, you either need to accept the client at a loss, or you need to cut them loose or find someone else to deal with them.

Patrick Brewer  21:12

Hey, Model FAs. I know you're enjoying this conversation, but I wanted to take a quick break to talk to you about the Model FA Accelerator. This is a unique collaboration between us and you, where we help you build a financial advising practice that you can be proud of. We focus on the foundational concepts around how to pick a niche or a specialization, how to price your services, how to construct an offer that people are going to buy, and then how to market it and sell it in a way that'll get people to sign on the dotted line and become clients of your firm, all while giving you the information to scale, and set up workflows and operational processes that will allow you to reclaim your time and build a practice that doesn't run you. So if you'd like to hear more about that, go to www.ModelFA.com/accellerator or www.ModelFA.com. Hover over Work With Us and click on Accelerator. Hope to see you in the program.

David DeCelle  22:02

I think some of the options are getting rid of them — and we're saying this in a direct way, we don't mean to be heartless when we say get rid of them, by the way. So you can either find them a new home, let's say, externally; you can find them a new home internally. So this is, like imagine if you brought on an advisor and once you felt comfortable in doing so and built trust with them, and they have their competence built up and confidence built up, you're seeding them with 80% of your business. That's a fantastic way to, A, keep them busy, get them to learn, and dish off the folks that, quite frankly, you don't really want to replicate. And if they do, then it's going to be in that person's wheelhouse, because they're working with a bunch of those folks anyways. So perhaps that book of business can be more profitable over time, if you have someone's salary incentives here, but they got the revenue up to here, because of the fact that they're bringing on some more folks that fit similar metrics, while spending all your time in the top 20. So you not only decrease your workload, but you're having fun along the way, because those are the people that you want to hang out with. And as you're able to duplicate those folks, obviously the business is continuing to grow. So for those of you who are listening, start to think to yourself, A, have you ever segmented your clients? I would say that most advisors that I come across haven't. So if you're sitting there like, uh-oh, I haven't done this, that's totally okay. It's, are you going to do it now, is the question, but you're certainly not alone in that sense. And then the question becomes, if you have done it, how have you gone about doing it? Is it purely just based on revenue? Or are you taking into consideration what Jon's mentioned before, about the potential and lifetime value and some of the other likeability, coachability, recoverability metrics that we had discussed? So you brought up something, too — I forget exactly how you worded it, Jon, but something about how advisors, it tends to be like a big project for people. And if you haven't done it, and you already have a business, it's going to be a big project, and I would suggest that you do so ASAP. But you alluded to, essentially having this as part of your onboarding process, where you have the criteria already built. So tell me a little bit more about that and why people should do it on a person by person basis as they're coming into the business?

Jon Mauney  24:25

The urgency around that has to do with not continuing to increase your problematic business. The sooner you get a process in place, the sooner you can start sorting new prospects into the proper solution that offers them the level of high touch or low touch service that they need, and also ensures that they, as a part of your business, are a profitable part of your business and not a drag. Ultimately, that's what we're talking about. We talk to firms that come to us with a problem, and folks that say we need to figure out what to do with this 80%, and that sort of thing. I'll say there are — once you do make the decision — there are several different ways to go about it. And we've seen what works and what doesn't work. I'll start with what has the lowest success rate, and I'll move up to what has the highest success rate. The most common — and again, we're talking about mainly larger books of folks that have gotten to the point where they have this drag, and they need to segment a significant portion of their book. We also work with a ton of smaller firms that work from us from day one, or at least the first few years, and have grown their book totally organically within Betterment. Those folks don't have that problem, because we automate so much of their stack; I'm talking the small RIAs, under 200 million, that have large parts or even all of their business on our platform. On the larger end when you are talking about segmenting; three different ways. The most common conversation we have, when we are talking to larger RIAs, is they're in a build versus buy conversation right now. They're already on Schwab or Fidelity or TD or something like that. They've got processes down, they've got an operations team, but that operations team is just inundated with doing work for low margin clients and that sort of thing. They're trying to figure out what they can do in order to fix that situation. Option one for them is build it in house, and that means hire people; hire people just to do the job, whether that be hire advisors to manage those relationships, hire more operations people in order to do the things that you need to do on the trading front or on the money movements front and that sort of thing. And I will tell you that, from my perspective, it takes a few years to figure it out, but that fails; that almost always fails. Reason being, they've already scaled their company up to hundreds of millions or multi billion dollars, and they have added operations folks in that process, yet are still having this problem. So even making a focused offering, but keeping your same tech stack is probably not going to solve the problem.

David DeCelle  26:30

The only way it would stop is if they decided, hey, we're happy where we're at, let's stop growing. But obviously, as you grow, you're going to need more human capital, because there's only so much time in the day.

Jon Mauney  26:41

Exactly. And humans are expensive, and technology is usually less expensive to have your team. So we see that a lot. Betterment for Advisors has now been around for about seven years. And we regularly get firms that come in that we talked to three or four years ago and say, okay, let's do it your way now. So that's the option we recommend the least. The second option is figuring out how to keep the same advisor with their client, but move that client over to a platform like Better, because that advisor is spending too much time on planning, spending too much time on operations and things like that. But they don't necessarily want to break any relationships and that sort of thing. This has plenty of success. I mean, we don't necessarily hear very often about advisors losing clients in the process, but I definitely do understand that it's a risk. Changing up something with a client that you do want to keep, you just can't keep in their same economic profile, is definitely a risky conversation to have. So we've produced materials to help advisors have that conversation and that sort of thing; that works pretty well. The best thing you can do, especially as a large RIA, is to commit to the differentiation. We have seen the most success from firms, I’m generally talking like your multibillion dollar firms now, from building out a distinct brand within their company that is the offering for these folks; dedicating advisors to it; dedicating maybe some operational folks to it, but you don't have to go too deep. And then assuming that that advisor is going to scale their number of clients considerably higher than what you'd expect out of their core wealth management folks. A great example of this is a group that we work with called Commas. If you go to usecommas.com, they've got this wonderful brand, they put a lot of effort into it, they've got this great team of advisors that works with their ‘under a million,’ ‘under 2 million’ clients or something like that; but it's just a sub brand of their larger RIA, and they've had tremendous success. I mean, they're growing like weeds, they're moving folks out of their core wealth management to segment into their sort of sub brand. And they're also attracting new clients via this sub brand. And they know that they have the mean scale of the sub brand, because they use us; the cost to bring on a client is just a little bit of extra time for that advisor to make sure they can maintain that relationship. And they're doing quite well. So that was a lot there, but to recap, I would not recommend trying to just throw humans at the problem by keeping your same tack. I would more or less recommend incorporating a new tech stack in order to scale, but I would really recommend committing to the segmentation and committing to making that a core part of your business.

David DeCelle  29:01

I think too, it could either be a core part of your business that, for lack of a better way to put it, that lower portion of the segmentation if you can build the infrastructure, both with some human capital, but mostly technology, if that's of interest to you. Or you just commit to when you come across folks that would fit that criteria, not accepting them; just kind of like burning the boat, so to speak, and not looking back and be like nope, I'm only going after the two or the five million dollar folks. The challenge with that, and I've had too many scenarios in my life to not want to do something like that myself, is that there's been so many instances in my life where certain people have basically served just like lottery tickets. Whether it's, they finally get this new job, or their company goes public, or they get an inheritance from someone who passes away and it's like, oh, thank God that I stuck it out with them even though they weren't in a great position when we first started working together, because I'd never would have came across this opportunity otherwise. So just know that if you choose to just not accept folks entirely, you're going to be missing out on some of those opportunities and potentially having to fight for their business later on, as opposed to working with them in the meantime, in a streamlined and efficient way that doesn't require a lot of work.

Jon Mauney  30:19

Yeah, agreed. That's the argument for trying your best to accommodate folks. And in the interim, you know what, while you're in this lottery ticket period of like, a lottery ticket hasn't hit yet, but it might hit in the future and you want to keep them around just in case it does hit, you still got to find something to do with in the meantime, just case it does it; because it's a bleed on the rest of the business. That's time that you can be spent prospecting for those target customers. That’s time that you could spend enriching your relationships and make sure your retaining your existing, more profitable customers as well. We'll talk more about argumentation later.

David DeCelle  30:48

I was just going to say, let's pivot over, because I think we've talked about how to segment, why you should segment, what to do once you've done segmenting. So I feel like we've covered it pretty good. So since you said argumentation, I think we've talked enough about client segmentation. So I do want to pivot. But I will say, and admittedly, when we came into this conversation, we kind of just had the topic. We didn't really have questions prepared or anything like that. So I feel like we covered all this stuff on a whim, so to speak. And it was fairly succinct, obviously, through conversation. So for those of you who have not yet segmented your clients, or perhaps have done so in just purely a top line revenue, data driven way, hopefully this inspires you to actually take action on this and add some of the other criteria that we had discussed. And if it makes sense to still serve some of the folks who end up on the lower end of that segmentation, just make sure that you're being smart about it in terms of the resources that you're allocating and the systems that you're using. I do want to pivot slightly, though. So one of the things that I asked all of our guests, and the whole idea is to promote learning within our industry, but also outside of our industry. So, not just reading the CFP book over and over again, or new tax codes or anything like that, I love to ask our guests what one of their recent favorite books is. Sometimes it's nonfiction, sometimes it's fiction. I've actually, I haven't heard of the book that you submitted, so I'm excited to hear a little bit more. So the book that you noted is called The Right Stuff. What's the deal with The Right Stuff.

Jon Mauney  32:19

So The Right Stuff is the story of the Mercury program, the first U.S. space program, late 50s and early 1960s. And it's my favorite book, just because it's the story itself. The author is Tom Wolfe, who's obviously a famous author, and he does a good job with it. They made a movie about it in the early 80s, which is also quite good. But, again, the reason it’s my favorite book is because of the topic itself; it's a fascinating topic to me, that there was this nationwide mission to put a man in space, and then eventually put a man on the moon, which gets referenced as well, that everybody rallied around. I think there was some point during the Apollo program where it was like five cents of every tax dollar was going toward NASA and the US space program, which is pretty insane to think about. But it's sort of a period of exploration in human history that's very, very unique. And just hearing the stories about the folks that participated in that, both the astronauts as well as support folks, and that sort of thing, has always just been such an incredible story to me. I read that book probably once a year, because it's such a good story.

David DeCelle  33:15

That's cool. And obviously, I haven't read it, as I mentioned, but from what you shared. So there are certain books that I love that there's specific topics, like mindset, and prospecting, and whatever. But I also like books where there's a particular story that you can kind of craft your own story or your own possibilities from that. So it's, what I'm hearing is, you allocated X amount of resources to a common goal, and there were many people working towards that common goal, and then poof, everything kind of worked out as they had envisioned, so I'll have to check that out and report back to you.

Jon Mauney  33:51

Yeah, I recommend it. If you only have two and a half hours, you can watch the movie; the book’s very good, though.

David DeCelle  33:57

Oh, there's a movie, but I have been on a book kick the last few years. So I'll probably listen to the book. If it's in an audio book.

Jon Mauney  34:03

It's an easy read, a quick read. I recommend it.

David DeCelle  34:04

Cool. Appreciate it. So before we sign off, we talked about client segmentation today. You alluded to some of the things that Betterment does for advisors. So if there's some folks on here that want to explore what it is that you guys actually do and how you serve them, how do they get in touch with you, how do they kind of reach out, where you want to drive some folks to?

Jon Mauney  34:26

I'd start by going to Betterment.com/advisors. It’s a dedicated product that we have at Betterment. Essentially, we think of three lines of business. There's our direct to consumer product. There's our advisor platform; it's a standalone platform for advisors to administer accounts on the Betterment platform with a white label client experience. And then we also have a 401(k) record keeping service that actually integrates with our advisor platform as well so advisors can manage 401(k)s on the Betterment platform. So, Betterment.com/advisors is the place you should start.

David DeCelle  34:53

Awesome. And for those of you who want to start the client segmentation process, but perhaps don't have anything to go off of, I mentioned those categories before. It's pretty basic, but it will get the job done. I have an Excel spreadsheet, so if you shoot me an email at [email protected], and just in the subject line, put in client segmentation Excel sheet, or even just client segmentation, I'll reply rather quickly with that template for you, that way you can get kick started. So I would encourage you, just like all of our episodes, don't just listen to this and move on to your next activity or walk into the office or wherever you're listening to this, if you can't take action on this immediately, set aside time in your calendar to do so. No point in learning stuff if you're not going to do anything with it. So we encourage you all to actually take action on this. And again, if you want to explore Betterment, go and check them out. But Jon, I appreciate the time today. I think this was a very valuable episode and probably similar to you, I have this conversation all the time. So hopefully, we're going to be able to share it a bunch; not just generally on social and things like that, but also kind of one on one, hand to hand combat, so to speak, as we're having conversations with advisors. I appreciate your time and looking forward to seeing how our relationship progresses throughout the coming months and the coming years.

Jon Mauney  36:15

Thank you, David. It was a pleasure. Thanks for having me.

David DeCelle  36:17

Awesome. Take care.