This case study is based on the situation of a client of the Covenant Group. Names and details have been changed to preserve privacy.



Financial advisor John Lewis finally made the decision he had been postponing for more than a year. He decided to convert his practice from commission revenue to fee-based revenue, and to focus on wealth management for higher net-worth clients.

That meant:

> each client would have a detailed wealth-management strategy designed after a comprehensive financial, investment, tax- and estate planning exercise;

> clients would pay fees, rather than commissions, for any work John did for them. That would include a flat fee for the plan, as well as an annual “wealth-management fee” based on the value of the assets John managed for them.

It also meant some of John’s existing clients would not “qualify,” so to speak, under the new arrangement — either by John’s choice or theirs. It was on this point that John was seeking advice: how to deal with clients who no longer fit his business model.

“This is almost always one of the most difficult aspects of making the switch to a fee-based practice,” I told John, “and I can see you are tormented by it.”

“I am,” he said. “It seems like such a cold, heartless decision effectively to ‘fire’ as clients people who have been with me for years. A number of them are responsible for my successful start in the business, and many have become more than clients.”

“I understand how you feel, John,” I told him. “We’ve worked with hundreds of advisors going through a similar transition in their businesses and they all face the same dilemma. Let me assure you there are ways to accommodate those special clients who don’t fit your new client profile, but whom you can’t bring yourself to send away.

“It would be wonderful if everything was black and white, and worked according to plan,” I continued, “but it just doesn’t happen that way. There will always be exceptions. We just have to find ways to avoid having the exceptions become the rule so they impede your progress toward having a fully fee-based practice.

“We’ll get to that small portion of your client base soon, but let’s start with the bigger picture. How many clients do you have in total now?”

“Four hundred and eighty households,” John replied.

“OK, and you completed the target client profile exercise?”

“Yes,” said John. “I set standards for assets, revenue, number of products and potential. I also applied some ‘qualitative’ measures, such as respect for my advice, willingness to refer me to others and overall ‘likeability’.”

“How many of your existing clients are clearly not the type you want?” I asked.

“About 100,” he replied. “They are people with whom I have little contact and with whom the relationship is based entirely on a product sale. I won’t have to be persuaded to let them go, although I’d like to do it in a way that doesn’t make them feel badly. Who knows? Someday they may meet the profile and want to come back.”

“Of course, you want to treat everyone decently,” I said. “So, those are the easily identified people at one end of your list. How about the other extreme — the clients you placed in the ‘very much want to keep’ category?”

“This was tougher because it started to get into relationships that are at a deeper level,” John said. “The questionnaire asked, ‘If the law changed tomorrow and you were only allowed to have 50 clients, which ones would they be?’ I had difficulty stopping at 50. There are at least that many more again that I’d hate to lose.”

“Of course, and the intention is not to suggest only 50 clients are worth keeping,” I said. “We want to deal with the obvious ones first, at both ends of the spectrum. Those in the middle are going to require more thought about how they are to be handled, so let’s look at them next.

“Subtracting the ‘top’ and ‘bottom’ of your list leaves you with about 330 households to consider, so let’s go through the exercise again. You said you easily could have added another 50 to your ‘want to keep’ list. That will bring the ‘unallocated’ group in the middle down to 280. Now, let’s return to the lower end: after you identified the 100 households that you were willing to let go without a fight, how many others were you torn between including in the bottom tier or not?”

@page_break@“If I was honest,” John said, “that bottom tier would have had another 50 or so names on it.”

“Good,” I said. “What you’re saying is that you have three client groups to address: your top 100 relationships, your bottom 150 and the 230 in between. Each requires a different approach in communicating your decision to switch to a fee-based practice. This will sound harsh but, in reality, you want the top 100 to go along with the change, most of the middle 230 and, possibly, a few of the bottom group, provided they can become profitable relationships under your new business model. Is that accurate?”

“Yes. I know I’ll lose some clients through this process,” John said, “but what’s the best way to improve my chances of keeping the ones I want?”

“You should have a three-pronged approach,” I said. “Up close and personal with the top 100, somewhat personalized with the middle group and virtually automated with the lower segment.”

I then outlined how some other advisors had notified their clients successfully about their change to a fee-based practice. The top 100 clients receive a letter that includes:

1.  An expression of appreciation for the relationship of trust they have with you.

2.  A description of the evolution of your business over the years — how you have moved toward a wealth-management approach from one based largely on products.

3.  An announcement that you and your team are fully committed to a fee-based wealth-management process because it is in the best interests of your clients.

4.  The implications of your decision, which are:

a.  Every client must have a comprehensive financial plan.

b.  Your compensation will be based on services you provide rather than transactions.

c.  Your fee schedule.

d.  As a result of being selective about those to whom you offer your services, each client will receive a higher degree of personal care and greater access to you.

5.  A promise to:

a.  Call them personally to provide additional information before any commitment is made.

b.  Meet at their convenience.

c.  Update their plan at no charge.

“Your objective is to get face to face with as many from this group as you can to show the value of your offer and cement the relationship,” I explained.

The middle group will also receive a letter with the same first four points. But rather than promising to call, meet and update their plans, you will:

5.  Invite them to:

a.  Complete the enclosed engagement agreement, which includes their agreement to the fee schedule.

b.  Contact you for further information before signing.

c.  Schedule an appointment to discuss further or to begin the financial planning process, if an up-to-date plan does not exist.

Finally, the remaining clients will receive a letter with the same first four points. But you will:

5.  Invite them to:

a.  Complete the engagement agreement, which includes their agreement to the fee schedule.

b.  Contact a designated person in your office for further information before signing or to arrange for completion of a financial plan.

c.  Ask you for a recommendation to another advisor.

“What has been the experience of others, with respect to client responses?” John asked.

“It’s been pretty consistent,” I said. “Most are surprised at how many top clients simply say, ‘Send me the forms to sign. I prefer this arrangement.’ Some clients even disclose that competitors have recently tempted them with similar offers. Many want to be reassured the change is in their interest.

“Of course,” I continued, “a handful will object. A face-to-face meeting and plan update are often sufficient to convert most, but you must accept that some will leave.

“For the mid-tier, our experience is about half will readily accept the offer. The balance will require time and effort on your part, with about a 50/50 probability of success. A few in your lowest group will sign on.

“Up to two-thirds of your client base will make the conversion to a fee-based arrangement by using the method described. The good news is those who do are your most profitable client relationships, so you accomplish two things: improve overall profitability per client and free up time to provide a higher level of service to remaining clients. How does that sound?”

“Great!” said John. “Let’s get started on those letters!” IE



George Hartman is a coach and facilitator with the Covenant Group in Toronto. He can be reached at george@covenantgroup.com.