Most advice firms can quickly tell you their assets under management, recurring revenue and headcount. But far fewer can identify which individual client relationships are profitable. Brian McLaughlin, co-founder of Pillar Client Services, shares the findings from a detailed analysis of a 578-client advice book and explains why understanding cost-to-serve is becoming increasingly important in the Consumer Duty era.
Most advice firms know their total AUM, their recurring income and their headcount. Very few know what a single client costs them to serve. We took a full client book, 578 clients and £143.8m of assets, and reconciled it down to per-client AUM, fees and cost-to-serve. The numbers surprised the partners who own the firm. They will surprise most principals reading this.
The headline number
At a fully loaded cost-to-serve of £1,500 per client per year, 61% of the book lost money. Not marginal. Loss-making. The fees those clients paid did not cover the adviser’s time, admin, compliance and systems needed to look after them.
The partners did not believe it until they saw their own data. That is the normal reaction. Firm-level profit hides client-level losses. A firm can report a healthy margin while six in ten of its clients erode it, carried by a handful of larger relationships.
Why the number is so high
Three things drive it. Books accumulate: clients who joined fifteen years ago on terms that made sense then are still on those terms today. Cost-to-serve has risen faster than fees, and Consumer Duty made the cost of servicing every client explicit and evidenced. And almost nobody measures it. Back-office systems reconcile income. A few of them reconcile income against the cost of delivering the service each client gets.
What this means under Consumer Duty
If a client pays an ongoing fee, the firm owes an ongoing service, and the regulator now wants evidence of it. The clients a firm loses money on tend to be the same clients whose reviews slip and whose files are the thinnest. The commercial problem and the regulatory problem are one problem.
A per-client view turns that from a worry into a list. Once you can see where each client sits, you have options. Re-price. Re-tier the service. Change how you deliver to the segment that costs more to serve than it generates. Part company where that is the right answer. Each of those is defensible. Knowing the position and doing nothing is not.
Lessons for advisers
Measure before you restructure. Most firms start by designing a new service proposition. Start with the data. The shape of your book should set the shape of your proposition, not the reverse.
Do not assume the small clients are the problem. Plenty of the unprofitable 61% were not small. Some held real assets but took up adviser time well beyond their fees, for reasons that were historic or simply never examined.
Treat the reconciliation as a standing process, not a one-off. A single exercise is out of date within a year. Build the per-client view into monthly management information and the answer stays current. The Consumer Duty evidence comes with it.
Expect the conversation to change. Once the partners saw the numbers, the question stopped being whether to act. It became clear which segment to target first, what to offer them, and what to stop doing. The data settled in the afternoon that two years of debate had not.
The wider point
The advice gap debate is usually about people who have never had advice. There is a second gap inside existing books: clients paying for a service the economics no longer support, in firms that cannot see the loss they are carrying. Close that gap, and the firm is better off. So is the client, who ends up with a service that matches the fee rather than a promise nobody is keeping.
Every principal I speak to assumes their own book is in better shape than this one. Almost none have checked. Checking is the cheapest decision a firm will make this year, and the one most of them keep putting off.
