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Time Tracking Software and Client Profitability

Industry veteran Nicholas W. Stuller reviews the pros and cons of client-level time tracking for advisory firms.

By Nicholas W. Stuller

I have been working with financial advisers for nearly 30 years and over that time the topic of profitability both at the firm level and the client level has been discussed with increasing regularity. However, what is interesting is that despite being in a labor-based service business, it appears that the wealth management industry as a whole does not actually track its time to determine if or by how much an individual client contributes to a firms’ profitability.

It might be time for financial advisers to get more granular about the time they spend on clients.

The wealth management industry is a relatively new one compared to other professions like law. We all know that law firms track their time and, in many cases, track it so efficiently that every 10-minute increment of time is logged, be it a phone conversation, making copies or drafting a court brief. The move to efficiency — and billing for every second — is not surprising given that the legal profession is an industry that is hundreds of years old compared to consumer wealth management being less than 100.

As of this writing, it appears the calculation of client-level profitability is still based on simple math and averages, as witnessed by the conversation between noted adviser and authority Michael Kitces and Carl Richards in their April 8th 2021 conversation “Transitioning Good Clients Who Simply Can’t Be Served Profitably”. Moreover, industry benchmarking reports do not account for individual client profit levels because advisers in general do not track them. For example, the most recent reports on profitability and efficiency from consulting firms Deloitte and also from CapGemini do not mention tracking time spent on a client to help determine profitability.

Industry reports, white papers, consultants and advisers have been discussing what to do with clients that are not profitable for them any longer, but without actual data to measure the time spent on an individual client, how would an adviser know with certainty that a client is actually not profitable? By that measure it could be possible that clients you assume are profitable may very well be unprofitable.

The practical issue is that more and more advisers are considering terminating relationships with clients, or are increasing their asset minimums or hourly or project fees to maintain their firm-level profits as they grow. While overall using averages can work, the decision to terminate a relationship or change fee structures for all clients might not be the best way to make such decisions.

The Benefits of Client-Level Time Tracking

There are many benefits to tracking the time an adviser spends on a client. These benefits apply to all advisers regardless if the adviser is focused on asset management and charges a percent of money under management or if the adviser offers comprehensive wealth management services which includes a detailed financial plan.

First, the easiest scenario for beneficial use of time-tracking software is for financial planners that bill by the hour. Their use case is identical to attorneys. You estimate a plan will take 12 hours, and you track the time working to that 12 hours. By knowing exactly how many hours you spend, you can assure the project is profitable. Over time, you will get better at estimating the hours it takes to do a “typical” financial plan.

For planners that offer fixed-fee engagements, the way to use time billing software is the reverse as the above scenario, the software is in “countdown” mode, meaning if you sell a planning engagement for a flat fee of $5,000 or even $5,000 annually, every instance of time spent is logged into the system until you get to $5,000 of time spent. Likewise with hourly planners, over time you will get better at estimating the real cost and real profitability of your client engagements.

For advisers that exclusively manage portfolios, it may not be intuitive that tracking time on a per-client basis makes sense, especially if you have holdings that span all clients, do block trades, etc. However, every adviser has clients that take up time and that time can creep up on you. For example, some clients may have ESG requirements, want a favored stock in their portfolio, call and discuss the expense ratio of a fund, or want you to evaluate the private partnership that their cousin is pressuring them to invest in. The list of distractions and requests can get lengthy.

Regardless of what type of adviser you are, after a year of tracking your time spent on each of your clients you will see patterns you could not see before, you will have proof positive of who is time-consuming or who is not.

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This client-level data will become invaluable to you in many ways. First, it will either factually corroborate your gut on who is indeed not profitable, or show you who actually is losing you money. 

Second, if you are in growth mode like most advisers, you can then work on “cloning” your most profitable clients. Are pediatricians your most profitable client type per the data? Then work on getting more of them. Also, if you are hiring more advisers for your firm, having this data will help with recruiting, onboarding and managing them and you’ll have the proof of ideal client types to share with them. 

Finally, if you are looking to sell your firm or raise capital for expansion, showing investors that you really know your clients to this detail will assuredly make it easier from a capital raise perspective.

Think Like an Attorney

If you are inclined to investigate time tracking software for your advisory firm, you are going to have to think like an attorney because while there is a software package for every conceivable type of law practice, there evidently is not for advisers. There are many vendors including Mycase, Smartsheet, Clicktime, and even Quickbooks has time tracking software.

The Challenges

Tracking time on a per-client level is not easy to begin doing and staying in the habit of doing going forward. I have been an employee at firms that required it, I have started and run companies where I mandated data entry by the team. It takes discipline, consistent management and of course the right software to be put into place.

The biggest challenge in instituting this is getting everyone to actually start doing it (and yourself if you are an owner who is also an adviser). Habits are hard to break, and team members do not care for anything that could be remotely construed as micro-management. Communicating why you are doing this, the benefit of it, and how you will help them do it is paramount.

The next biggest challenge is setting up whatever system you use with the appropriate codes for work that you do for clients so that you can actually measure and track what is done for who and how long it takes.

Once everyone is onboard, the system is in place, and it is deployed then comes the management of the system. One recurring problem I witnessed regardless of the firm I was at, was that some percentage of team members will have their own way of using the system, which nearly always is a problem. For example, I used to encounter folks that would enter their time spent on a client at the end of the day-a big no-no-which means they forgot their time often, as memories fail. Ensuring they start the clock when they start, and stop the clock when they stop is very important.

Why Bother?

Yes, this all sounds like a lot of work because it is. It also inserts new and additive procedures into your organization which is almost never welcomed with open arms.

However, the only inventory a service-based business has is time, and you should track that precious commodity, in fact your only asset, because as a business person you inherently know it is very valuable.

Would you invest in a company that makes a physical product that literally has no inventory control system? Of course, you would not. You should treat your own business just like an investment you make for yourself or you make for your clients. Over time, it will be worth it.

About the author: Nicholas W. Stuller is a 30-year veteran of the financial services industry and Founder and CEO of MyPerfectFinancialAdvisor the premier matchmaker between investors and advisers using personalized data, proprietary algorithms, and deep industry expertise.