Case study: A scientific approach to asset management client tenure
You always want average client tenure to go up, right? Wrong. As economic clouds gather, asset managers are focusing on how they will keep their clients. In this article, we explain how asset management client tenure data works and, based on a composite of case studies, we give you part 1 of 2 of a 5-step framework for managing tenure.
At Accomplish, we manage the Behavioral Benchmark and, for 18 months, we have been using it to measure, interpret, and predict asset managers’ ability to encourage clients to ‘choose them for another year’, aka tenure, loyalty, or longevity.
In our opinion, which we explain below, tenure is the ultimate client behavior. It features in three out of the five case studies in our current blog series and, indeed, we are encountering significant interest in the topic.
But, bluntly, your organization can only be half-serious about retaining clients unless it measures and interprets the age of their relationships. Without this, your retention strategy will involve guess work.
That’s where the Behavioral Benchmark performs an essential function and, at Accomplish, we are pleased to share this 5-step framework for managing the dynamics of tenure data.
What is client tenure and why is it important?
Client tenure is the average age of all client relationships in your book of business – typically measured per segment, e.g. institutional.
In the Behavioral Benchmark, it is one of a small number of strategic, dollarizable, lagging indicators that asset managers often choose as one of their strategic behavioral objectives. This is because measuring tenure helps them step back from day-to-day relationship management and, instead, consider the overall health of their book of business.
In our experience, tenure’s importance stems from the fact that its benefits (below) combine to multiply your organization’s promotional efforts and increase your strategic freedom of action:
- Greater client advocacy – loyal clients are more likely to suggest product improvements and to say good things about your firm, both of which are powerful additions to your in-house distribution capability.
- Annuity-like revenue – the greater reliability of revenue from longer-standing clients lets you plan and invest with greater confidence. In plain English, fewer unwelcome surprises. In finance-speak, your expected future cashflows will have a higher net present value #financialnirvana
- Significantly reduced cost of sale – sorry salespeople, but you are expensive, and if (as it is generally accepted) it costs only one-fifth to retain a client compared to winning a new one, then managing tenure is a significantly cheaper substitute to relying on new sales. Of course, your organization must also grow, so the logical conclusion is to set a tenure target and give it the same attention as you give your growth targets.
How asset managers should measure client tenure
To manage something, you first need to be able to measure it.
Put bluntly, your organization can only be serious about retaining clients if (along with other aspects of a retention strategy) it measures and monitors the age of their relationships. This is because, without measurements, you will not know if your strategies are working … or even grounded in the real world.
To calculate average client tenure, B2B asset managers should divide A) the total age (in months) of their client relationships, by B) the total number of relationships.
Firms in the Behavioral Benchmark typically source the data from either their finance, billing, or CRM functions, and it results in an average age of between 60 and 120 months, i.e. between 5 and 10 years.
Visually, we round to the nearest month, but your financial colleagues will need the decimal places for when they convert the months into currency amounts.
Interpreting asset management client tenure
Interpreting is all about concluding whether your measurements are good, bad, or in between and, as you will see shortly, tenure data moves in ways that may, at first, surprise you. Don’t skip this step though because, without it, your retention strategy may not be fact-based and may, therefore, be less likely to work.
‘Good’, ‘bad’, and ‘in between’ are comparative statements so you need something to compare your results against. Because ‘coming back for another year’ is a strategically important client behavior, the asset management Behavioral Benchmark was purpose-built to serve this need.
Using the benchmark’s data, start by considering your baseline and how it compares to the industry average for your client segment in the regional market that interests you.
Next, consider whether, over the period, your organization has been in growth or defend mode. This brings us to the question of whether you always want average client tenure to go up.
- If you have been growing by increasing your client relationships, then you should expect a lower client tenure relative to the benchmark. This is because every new one-month-old relationship will dilute your overall average.
- The opposite happens if you have been defending assets from the risk of outflow: you should have a higher average tenure because you have prioritised retaining older relationships.
- If you have been balancing both growth and defence, they will net off against each other and you should expect your tenure to be somewhere in the middle of the range of industry results #tenurenirvana #counterintuitive
Lastly, you should take into account the maturity of both the regional market and the length of time you have operated there. Both will influence your baseline. For example, we see lower average tenure results in Apac than in EMEA or the Americas. And if you have recently entered one of those regions you should expect the average tenure of your relationships to be lower than the benchmark average.
To bring this to life for you, here are some micro case studies of real moves we have seen firms make in the Behavioral Benchmark from one quarter to the next.
|How their average tenure moved over 3 months||Interpretation (on a net basis)||Conclusion|
|Increased by 3 months.||It was possible that growth and defence netted off exactly, but the more likely scenario played out: they had neither won nor lost clients.||In between|
|Remained level.||They gained young clients that ‘diluted’ their average tenure.||Good|
|Decreased.||They either: |
- Gained young clients.
- Lost older clients.
|Further investigation needed (see below)|
|Increased by >3 months.||They lost some younger relationships.||Bad|
If you need to investigate further, here are some additional analyses that may illuminate your situation:
- Break down your tenure by country or by relationship manager.
- Examine the differences between mean, median, and modal averages:
- Are there any thresholds or step changes that may be specific to your business?
- Do you have any key client dependencies that may be skewing your results?
5-step framework for managing client tenure
This has been the first of a 2-part composite case study. Together, they will outline a 5-step framework for asset management client tenure:
- Define strategy.
- Set targets.
- Monitor and adjust.
In a few weeks, we will publish the second instalment that will cover defining a science-based retention strategy, setting targets, and monitoring and adjusting course.
A series of behavioral benchmarking case studies
We hope you found this case study useful. It is part of a series that demonstrates the value of embedding client behaviors into your targets and strategies. Here are the other topics that we have timed to inform your 2023 business planning:
- Align your BI with your business planning.
- Improve your sales conversion.
- A scientific approach to client tenure.
- Annual plans now include regional client behavior targets.
- Discover your weaknesses before clients tell you.
Contact us if you would like to know more about key asset management client behaviors like getting them to say ‘yes’, to return for another year (tenure), or for another product. After all, actions speak louder than words.