what is the pareto principle 
the pareto principle is a concept that specifies that 80 of consequences come from 20 of the causes asserting an unequal relationship between inputs and outputs named after economist vilfredo pareto the pareto principle serves as a general reminder that the relationship between inputs and outputs is not balanced the pareto principle is also known as the pareto rule or the 80 20 rule investopedia mira norianunderstanding the pareto principlethe principle was developed by italian economist vilfredo pareto in 1906 and was dubbed the pareto principle by joseph m juran in the 1940s pareto observed that the majority of the wealth 80 was owned by a minority 20 of the people according to what pareto observed 80 of the land in italy was owned by 20 of the population after surveying other countries he found the same applied abroad for the most part the pareto principle is an observation that things in life are not always distributed evenly 1the pareto principle can be applied in a wide range of areas such as manufacturing management and human resources it suggests that the efforts of 20 of a corporation s staff could drive 80 of the firm s profits the pareto principle is even more applicable to businesses that are client service based it has been adopted by a variety of coaching and customer relationship management crm software programs it can also be applied on a personal level time management is the most common use or the pareto principle that s because most people tend to thinly spread out their time instead of focusing on the most important tasks in terms of personal time management 80 of your work related output could come from only 20 of your time at work advisory practices that have adopted the pareto principle have seen improvement in time management productivity and overall client satisfaction special considerationsthe pareto principle seems simple but is hard to implement for the typical financial advisor the principle suggests that since 20 clients are paying 80 of the total fees they should receive at least 80 of the customer service advisors should therefore spend most of their time cultivating the relationships of their top 20 clients however as human nature suggests this does not always happen most advisors tend to spread out their time and services with less regard to a client s status if a client calls and has an issue the advisor deals accordingly regardless of how much income the client brings to the advisor advantages and disadvantages of the pareto principlethere is a practical reason for applying the pareto principle simply it can give you a window into who to reward or what to fix for example if 20 of the design flaws in a car are leading to 80 of the crashes you can identify and fix those flaws similarly if 20 of your customers drive 80 of your sales you may want to focus on those customers and reward them for their loyalty in this sense the pareto principle becomes a guide for how to allocate resources efficiently while the 80 20 split is true for pareto s observation that doesn t necessarily mean that it is always true that s because it is based on anecdotal evidence rather than scientific analysis for instance 30 of the workforce or 30 out of 100 workers may only complete 60 of the output the remaining workers may not be as productive or may just be slacking off on the job this further reiterates that the pareto principle is merely an observation and not necessarily a law the principle has also led to advisors focusing on replicating the top 20 of their clients knowing that adding a client of that size immediately affects the bottom line pinpoints who to reward and what to fixprovides a guide on how to allocate resourcesmay not always be accurate as it is derived on anecdotal evidence rather than scientific analysismay lead advisors to replicate the top 20 of their clientsexample of the pareto principlefinancial advisory businesses commonly use the pareto principle to help manage their clients the business depends on the advisor s ability to provide excellent customer service as its fees rely on its customers satisfaction however not every client provides the same amount of income to the advisor if an advisory practice has 100 clients according to the pareto principle 80 of the financial advisor s revenue should come from the top 20 clients these 20 clients have the highest amount of assets and the highest fees charged 