We have observed how financial advisors commonly segment and service clients using a tiered model. Drawing on our experience with thousands of advisors over the last two decades, we find that the Pareto principle, or 80/20 rule, often applies to their businesses. Typically, 80% of revenue comes from roughly 20% of the clients or, in this case, households. For instance, an advisor managing 100 households might adopt a service model that results in three distinct tiers:
Tier 1: Ultra-High-Net-Worth (UHNW) Clients
This top tier is usually limited to a few households, perhaps 1 to 3. These UHNW clients often have intricate business, estate, and tax planning needs. Their portfolios are usually allocated across multiple accounts and are built bespoke for each client. They are manually managed to reduce tax drag, incorporate personalization, and align closely with their financial plans. This highly customized service model necessitates more frequent portfolio management compared to other clients and additional internal and external resources.
Tier 2: Comprehensive Financial Planning Clients
The second tier might consist of 15-20 households, focusing on comprehensive financial planning. While their portfolios can be bespoke, they are often customized versions of a target model that aligns with the clients' risk assessments. Typically, these portfolios are reviewed at least quarterly to implement manual rebalancing or tax-loss harvesting.
Tier 3: Lower AUM Clients
The third tier, encompassing about 80 households, includes clients with managed assets below a certain threshold. This group might consist of legacy households, beneficiaries of Tier 1 and 2 clients, and Henry’s (High Earner Not Rich Yet). This tends to be qualified accounts without tax concerns and is often allocated to model portfolios.
Challenges of the Tiered Service Model
The tiered model, while common, presents common challenges. Highly manual processes for multiple client segments create capacity constraints. This limits the number of clients and AUM that an advisor or team can realistically manage. These constraints become particularly painful during periods of extreme market volatility. For example, in March of 2020, advisors experienced significant frustration trying to manage portfolios during the sharp, brief V-shaped market drawdown and recovery. Relying on a manual trading process created capacity constraints that led to very different client experiences depending on whether rebalancing and tax-loss harvesting occurred a week or two apart. Delivering different portfolios and results for similar client accounts creates the need for more preparation and research prior to meetings to understand what is driving returns.
Evolving the Service Model
While the limitations of a tiered service model might seem obvious in hindsight, it's easy to see how such a model could develop over one or two decades of building a successful, client-centric business. Fortunately, advisors have options to evolve their service model. Implementing a single process to deliver financial planning and portfolio management is now achievable. Technology enables advisors to unlock capacity and reduce operational complexity by automating critical but time-consuming tasks. This evolution can create better outcomes for both the advisor's practice and the clients they serve.
