Do Financial Advisors Work With Customers Or Clients? (2024)

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces!

Today I want to talk about a simple but important word: clients. What does it really mean for someone to be your client? When we say someone is becoming a client, what does that mean? And when are they still just a customer? And as a financial planner, are the people we work with customers or the people we work with clients?

I know the idea of differentiating between customer versus client for some people will just sound like silly semantics, but the reality is that words actually matter. Just think about it for a moment. What do you envision when you hear the word client? Now, picture in your mind a customer, what does a customer look like? Do you have different images that are coming to mind when you start thinking about customer versus clients? As an advisor, who do you want to be doing business with?

Customers Buy Products [Time - 1:11]

I find most of the time when I ask this question, the image that comes to mind when I say customeris usually someone shopping at a store, such as a retail store and if you ever worked in a retail customer service job, you really know what I'm talking about.

My first real job was a cashier at Roy Rogers, the fast food fried chicken chain. I stood on one side of the counter and customers stood on the other side of the counter... the customers lined up and they ordered food, and I entered into the cash register machine, then I took their money, and then I gave them their change, and then I went and got them the food, and then I gave them the food and then they left. And then the next person came up to the counter and the process repeated itself over and over and over again.

And you know, the essence of it was that the customers were there to buy a product. Specifically, the food. The food behind the counter. They came up, they bought something, and then they moved on. From my perspective, I simply facilitated the product purchase.

Now, as a result of that, there's really not much connection that happens between businesses and customers – there's not really much of a relationship. Now, maybe if you're really good at your transactional job and you've got really good customer service, the customers they want to come and buy from you next time instead of someone else, and they come back and there are a lot of customer service oriented businesses that succeed because they keep customers coming back, but in the end, the customer buys the product. The transaction is for the product. The person who sells it is, even with great service, still just the person who sells it. An order taker the customer came to them or maybe a salesperson they brought the transaction to the customer, but it's about the product.

Clients Buy Advice [Time - 2:39]

Now, contrast this with the client. So what did you see in your mind's eye when you thought about a client? I find that for most people, you see someone working with like an accountant or a lawyer, the client is the person who engages a professional in some kind of advice professional services relationship.

And the key distinction here is that the client isn't buying a product that's sold through the professional, the client is buying advice –the client is buying the expertise and the wisdom of the professional. There might be something implemented at the end of the advice like the CPA completes tax returns or the attorney drafts some legal document, but the client doesn't buy a tax return or a legal document, the client buys advice from a professional. And I think the same thing applies to financial planning: customers buy financial services products... clients buy financial planning advice.

So, which one are you selling in your business? If you're selling you, yourself, your knowledge, your expertise, your wisdom, then the person you're working with is a client. And if you're selling a product –maybe one that your company manufactures or one that you broker independently or one that you implement based on the client's orders – at the end of the day, it's really not actually a client you're working with. It's a customer and you're facilitating a transaction.

Customers Are Transactional; Clients Are Relationships [Time - 3:53]

As I said earlier, this distinction of customers versus clients is really more than just wording and semantics. Because the connection that forms with a financial planner is very different depending on whether you're working with a customer or a client. Because customers are transactional –when you come in you buy a product, you're coming for a transaction. You have a need for a product to solve some problem, to fill some gap. As the provider, I sell you the products. As the customer, we engage in a transaction and you may come back to me and buy more over time and be a repeat customer (and by that I mean repeat the transaction with you), but you're still a customer. You're not coming back for me and my value, you're coming for the product that I'm selling you and I happen to be facilitating the transaction. Or, I'll give another way to think about it. With your customers, what happens if you don't have the product to sell anymore? Would your customers keep coming back? No, not if the product is essential and it's the actual value exchange. No matter how awesome you are at customer service, if you don't have a product to sell, you have no customers.

Clients, on the other hand, are relationships where the advisor actually provides the value and because the realities of getting advice from a professional means they have to get to know you first to understand the needs and circ*mstances –a relationship forms whether that's as an accountant, a lawyer, or a financial planner. And that's important because the client has to invest time into the relationship to get through that get-to-know-you phase. And it's a time-consuming phase, and sometimes even stressful for clients, especially around financial issues such as your money, which is the last real taboo. So, I've seen clients that share their deepest darkest secrets, their financial world, their past sins and mistakes, you know? Just so that we can get the data we need for their financial situation, which is not exactly fun actually for most people from the client end.

Now, the upshot is that once the client does share that information with you, a relationship forms. A connection forms and the client is investing themselves in the relationship, and it's a lot harder to go into business with someone else now, because, not only are you the one providing the value, but you're the one that knows their situation and the clients don't want to go through the stressful phase again and invest all the time with someone else. But the key point here is that the client is buying you.Even if you got rid of all your products and you didn't have any products at all, the client buys your personal value, your advice, your expertise, andyour wisdom. That's what makes it a real adviser-client relationship, and not just a salesperson-costumer relationship or an order taker-customer transaction.

Do You Treat People Like Customers or Clients? [Time - 6:13]

Here's what I want you to do with this... Think for a moment about whether the people you work with in your business are customers or clients? What's the value they buy? Do they buy your value, your knowledge, your wisdom, and your expertise, or do they buy your products where you facilitate a transaction? Now, think which one you want them to buy? What do you want your business's value proposition to be based on? Do you want the business to rely on the value you provide or the value that someone else's products provide where you're simply the conduit?

And now, even think about how you talk about the people that you work with, what word actually comes out of your mouth? Because, I actually know a number of advisory firms that talk about the people they work with as customers, and when you talk about them as customers, these people who transact with your products, you tend to treat them like customers. Not people you have a relationship with –people who value you for you people, people who buy your products so you want to sell more of their products. Which means that for at least some of you if you want to build more value in your business, if you want the people you work with to value you for you, the starting point is to call them clients. Use those words and not customers. Because, when you call them clients, ideally, you'll start to treat them like clients – i.e., people with whom you have a relationship, where the value is you not the products you sell.

The Value Of Real Clients Versus A (Customer) Book Of Business [Time - 7:38]

And, this stuff matters right down to the end. When you look at the value of a business when you try to sell it, it's very different. Are you selling an advisory business with clients, or are you selling a book of customer names? Because that's actually where the label like a broker's book of business comes from. The broker's book of business was literally a book that was a contact list of all the customers that they had done business with (i.e., that they had sold previous brokerage products too). And someone would buy the broker's book of business because it was literally a book with warm customer leads to sell more products to as the next broker that came along.

That's entirely different than selling a business with clients who have a relationship with the business and value the business. When clients value the business, it's not the products, but the people, that are important. And that's why when you look at how advisory firms are valued, businesses that have actual clients with an ongoing relationship generating ongoing revenue are worth two times trailing revenue.While a book of customers name –a "book of business" from a broker – typically only sells for a one times trailing revenue, because customers literally aren't worth as much to a business as clients.

As you build your business and as you build your advisory firm, consider what you really want to build. Where do you really want to anchor the value? What is your connection to the people that you do business with? And what do you call them: customers or clients? And is the name really reflective of the relationship you have with them? Do you call them your book of clients, but at the end of the day, it's really just a book of people that have bought products from you? Or are they really people that you provide ongoing value to where the value is you when they were clients in an advisory professional relationship, and not simply repeat product transaction dynamics?

I hope that's helpful as in food for thought about why even some of these small labels like customer versus client really matter in everything from the connection you form with them, what you sell to them, where you provide value, and what the business is ultimately worth at the end? This is Office Hours from Michael Kitces, normally 1 P.M. East coast time on Tuesdays, but with travel and broadcasting here from the...as you can see at FPA DFW conference. Thanks for joining us and have a great day everyone!

So what do you think? Do you use the term customers or clients? Does it make a difference?Please share your thoughts in the comments below!