There are two general reasons why an advisor might consider parting company with a client: first, because he or she simply has too few assets and, second, because the client falls into the “problem client” category.
The first reason relates to the hard reality of the minimum level of revenue you require from a client in order to run a profitable business.
We’re in an environment in which clients’ expectations for service and communication are on the rise. In response, successful advisors are ramping up the level of contact for even their smallest clients.
Let’s suppose that the minimum threshold of contact you provide is an annual meeting and a semi-annual phone call. When you factor in the time spent preparing for and following up on these conversations, ensuring that client files are current and returning calls throughout the year, you’re probably looking at a bare-bones minimum of four hours per client annually.
When advisors set income goals and factor in all their overhead costs, they inevitably find they need to generate at least $150 an hour — and often much more. That means even your smallest client needs to generate revenue of at least $600 annually. If some clients generate less than that, your most profitable clients are subsidizing your less profitable clients — never a good principle on which to run a business.
There are some cases in which it makes sense to hang on to small clients. They may have great potential or close family members who have serious money. Or you may particularly enjoy dealing with these clients, or feel that you are making a big difference in their lives. At the end of the day, this business is not entirely about money.
Bear in mind, however, that if you have too many marginal clients, they will become an anchor on your ability to move your business forward. If you talk to advisors who have carved the bottom 20% off their client base, you’ll hear about the time this freed up, allowing them to provide better value to their top clients and focus on attracting new ones. More often than not, advisors say, the forgone assets were replaced with more profitable clients in fairly short order.
There’s one other consideration — your peace of mind, knowing you are doing a superior job for all of your clients. There’s no more apprehension that you’ll run into someone who says, “I know one of your clients,” and you have to worry whether their friend is someone to whom you’ve provided bare-bones service.
The second reason to part company covers all of the things that put clients into the category of being “difficult.”
Perhaps the client has unrealistic expectations, whether on the frequency of meetings, the time frame to return phone calls or the kinds of returns he or she can make.
Perhaps the client is hypercritical and constantly second-guesses decisions.
He or she may be a compliance risk, with a pattern of claiming that instructions were misunderstood.
The client may be overly emotional or have tendencies toward bullying; he or she may verge on the abusive with your staff when things don’t go quite as expected.
Or perhaps there is simply a lack of fit in terms of philosophy or temperament.
Sometimes, difficult clients have significant assets, so advisors are reluctant to part company and are willing to overlook some of this behaviour. The problem is that these difficult clients inevitably undermine their advisor’s energy, confidence and focus. Often, they also have have a negative effect on the advisor’s team.
In conversations with advisors who have terminated relationships with problem clients, virtually all say they do not regret the decision.
In many cases, it was painful at the time. Advisors report, however, that once they had parted company, a huge weight was lifted. Their enthusiasm for the business was boosted, their morale and that of their staff heightened and the forgone assets were replaced — often much faster than anticipated.
This does not mean that you dismiss clients with significant assets in a cavalier fashion. Parting company with problem clients should not be the last resort, nor should it be done until attempts have been made to rectify the problem.
In some cases, the client may be so toxic that once you have thought this through, you simply want to leave the relationship behind you. In those instances, you may want to contact the client and say something like: “Joe, I’ve been reflecting recently on our relationship. I’ve come to the regrettable conclusion that I will not be able to meet your needs going forward and that you would be better served by another financial advisor.”
@page_break@Other times, the relationship may not be as far gone and can be salvaged. Sometimes, all it takes is a candid conversation that may start along these lines: “Joe, I’d like to talk to you about our future. We’ve worked together for a number of years now and you’re an important client to me. However, I’d like to talk frankly and get your thoughts about some aspects of our relationship that have become areas of concern for me. Unless we can bring some resolution to these, I regret that we may not be able to continue working together.”
You may walk away from this conversation the air cleared, having agreed to work together on a mutually acceptable basis. If that happens, you will need to monitor the relationship; even if there is an immediate improvement, there will be some risk of relapse once the impact of the conversation wears off. You may — ultimately — have to bite the bullet.
Or you may walk away agreeing to part company. If that occurs, it is important to minimize the acrimony, even if it means you have to take some of the responsibility for things having failed to work out.
As well, it’s critical that there be a firm deadline for the client to move his or her assets, because as long as the assets are on your books, you are responsible for the account.
Follow up the conversation in which the client has agreed to go elsewhere with a letter, thanking the client for the opportunity to work together, expressing regret that the client is moving on and reiterating the deadline by which you’ve agreed the client will move to a new advisor. Should the client procrastinate in hooking up with a new advisor, consider suggesting that the client move his assets into a discount brokerage account as an interim step. IE
Dan Richards is president of Strategic Imperatives Ltd., a Toronto-based consultancy that delivers training to financial advisors. He can be reached at richards@getkeepclients.com. For other columns in this series, go to www.investmentexecutive.com.