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The decision to "fire" a client is painfully difficult. An advisor-client relationship is like a marriage, with periods of good days and bad. Many planners are reluctant to disengage with difficult clients due to a sense of responsibility. As Michael Kitces wrote in his blog, "Clients who are difficult to work with are also those in greatest need – and in virtually all other helping professions, it's a requirement of the profession to help everyone in need, not just those who are the most pleasant to work with."
Nevertheless, I learned during my years as a Certified Financial Planner and registered investment advisor that there are at least six reasons to fire clients:
1. Making unreasonable demands. Some clients expect an unbroken series of successes and blame their advisors when the market turns down. Some respond with abusive calls and constant complaining because they believe that harassment of the advisor will improve their situation. When clients start making frequent (and nasty) calls, let them go; the fees aren't worth the trouble.
2. Wanting everything for nothing. Clients can make unreasonable demands, treating their advisors as employees rather than counselors. One West Texas oil man expected me to leave the office and chauffeur him to his appointments whenever he came to town. Another would become angry when I declined to spend the evenings clubbing with his friends. Good relationships are based on professionalism and mutual courtesy, not constant favors.
3. Being slow to pay. All businesses are dependent on adequate cash flow. Clients who are consistently tardy with their payments stress the business and increase costs with extra administrative and collection efforts. In the worst cases, they may require the business to borrow money to cover short-term cash needs.
4. Not listening to you. Despite your efforts to provide useful advice, some clients either procrastinate or ignore your recommendations. Despite my warnings of high risk, a young tech executive insisted on trading in the commodities market after hearing about fantastic returns from his golfing buddies. I suggested he find a new advisor. Six months later and $150,000 poorer, he moved to a third advisor.
5. Being unresponsive. Over time, relationships ebb and flow. Despite great beginnings, circumstances can lead to less and less contact between advisor and client until the latter becomes a name in your book of accounts. After unsuccessfully trying to rekindle a relationship – evidenced by the client's failure to respond to emails or phone messages and consistently fails to provide needed paperwork on time – it is time to formally end the relationship and recommend the client find a new advisor.
6. Showing a basic lack of respect. Some people are just jerks, focused on themselves without any compassion for the people around them. If you feel a knot in your stomach whenever you hear from a certain client, escape by resigning the account and suggesting that he or she find a new advisor. Life is too short to have to deal with people like that.
Most consultants do not like working with difficult, unpleasant clients. In fact, not being forced to work with unpleasant customers is a big reason why people open businesses.
Unfortunately, planners must work in an environment of uncertainty, especially in the short run. As a consequence, any client can be disappointed and become unpleasant. For most, the situation passes and the relationship returns to an even keel. In the final analysis, only the financial planner can determine when to end the relationship – and even then, a planner usually wrestles with his or her conscience to determine whether there is a moral duty to serve difficult clients.
Business realities of a financial planning career
Like other professionals who are compensated for their time and expertise, the income of financial planners is the product of the number of compensated hours worked (or its equivalent) multiplied by an hourly compensation rate. An advisor who averages $100 per hour clearly makes more than one who earns $50 per hour if both work the same number of hours. Thus, advisors who wish to increase their income must either increase the number of compensated hours or the average amount of compensation per hour.
The formula is further complicated because most planners must devote a portion of each day to marketing their services to new clients, an activity for which they receive no compensation. As a practice grows with more clients, the ratio of marketing to service declines – new planning professionals might devote 90% of their days seeking new clients, while established professionals in a mature practice spend 90% of their days serving existing clients. At the latter point, most advisors should consider the nature and scope of services they wish to provide and assess the number of clients they can serve effectively.
Business strategy often dictates that to get your practice to the next level, you must focus on clients of a certain size (or larger). Research by PriceMetrix indicates that the correlation between net worth and client retention is positive. For example, a client with a net worth of $500,000 or more is almost 10% more likely to stay with an advisor than other clients with a lower net worth. Furthermore, those advisors with the higher client retention rates grow the assets under their management and revenues at a faster rate.
As a consequence, the practical method to grow revenues is to winnow away the smallest and least profitable clients, with one caveat: Even small clients can influence others and may be a source of significant business – so be sure you understand all aspects of the relationship and the likely consequences before "firing" them. A good rule of thumb to follow is firing only those accounts whose financial and goodwill benefits to you are less than any aggravation you feel with them.
A client who pays low fees but is low maintenance may be better to retain than the client who pays higher fees but drives you and your staff crazy with frequent phone calls and hand-holding.
The (hopefully) painless way to end a client relationship
Neil Sedaka wrote about the difficulties of ending a relationship in 1962 with his song "Breaking Up Is Hard to Do." While Sedaka was referring to a teenage love affair, financial planners often find client break-ups equally traumatic. Hard feelings – and even contentious lawsuits – can result, especially if an advisor is insensitive to a client's emotions and likely reaction.
If you are contemplating "firing" some of your clients, the following steps will ease the break-up and ensure a minimum of follow-on damages:
1. Consider the state of the market and client results
During down markets – when investors have likely lost money in the short term – clients are often looking for someone to blame, whether justified or not. The financial planner is an easy target, especially if the relationship is ended by the planner.
If you decide to end client relationships during declining markets – especially if the client has lost money – documentation of your communication and professional behavior is critical. After reviewing the circumstances, you may decide to defer the termination until a better time.
2. Evaluate each client's contribution to your life and business
As you proceed to pare your account book, take the time to consider the different aspects of your relationship with each client:
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Personal. Is your contact strictly professional or partly personal? What are the potential ramifications of ending the professional relationship? Do you enjoy the company of the client? Is the client demanding, argumentative, or arrogant? Does working with the client wear you out or brighten your day? Some clients, even though they may not be as profitable, are worth retaining because they make you feel better about the work you do, or being in touch with them leaves you happy and in a good mood.
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Professional. Does your client respect your advice and judgment, follow your investment suggestions and cautions, and respond to your requests promptly? Is your client needy, requiring a lot of hand-holding? Does your client complain about your fees or blame you when the market falls? Is your client courteous to your assistants? Does your client need your advice despite an unpleasant manner? Is the relationship satisfactory in your perspective? Client relationships that distress or anger you are dysfunctional for both parties and should be ended as soon as possible. Realistically, unpleasant people can be tolerated if the fees are high enough and personal integrity is maintained. Nonetheless, there is a line that should not be crossed, especially if your clients are more trouble than they're worth.
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Financial. According to the Pareto Principle, 80% of your fees come from 20% of your clients. Ideally, your time would be allocated similarly – those who provide the greatest fees would get the greatest service. Every advisor has difficulty managing the 80% of clients that only produce 20% of their fees. Theoretically, you could eliminate the bottom 10% of your client base each year – freeing you to market to new clients, spend more time on behalf of your higher-paying clients, or simply relax – while only affecting 2% of your income. Gardeners know that thinning blossoming fruit with regularity produces better yields and a healthier tree. The same is true for a healthy financial planning practice.
3. Review proposed client terminations with your firm's compliance and legal departments
It is always smart to take possible legal ramifications into account when considering firing a client. Before terminating a client – especially if the relationship has deteriorated – be sure your account notes are up-to-date and complete. Confirm that you are not in breach of any contracts or promises made to the client before terminating a relationship. As a general practice, contact your firm's compliance and legal departments to ensure that you implement the divorce legally, cleanly, and with as little blowback as possible.
4. Communicate the decision personally to the client
Once you have decided to end the relationship, do it as quickly as possible. Set up a face-to-face meeting in your office, if logistics allow. While many people are more circumspect in their words and actions in an unfamiliar setting, invite your manager or a representative of your legal department to be present if you expect the meeting to be contentious.
During the meeting, you want to accomplish four main goals:
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Explain the situation. You are terminating your relationship with the client going forward. It is essential that you be direct, so there is no misunderstanding.
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Deliver the rationale for your decision. Emphasize that you've changed, and focus on your client's interests. For example, you might explain that you are no longer the best-suited advisor to help reach your client's goals because your firm's fees cannot be justified based on the size of the account. Or, explain that your client needs services that you cannot supply. Be concise and remember that it is not necessary for your client to agree with your reasons for the termination.
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Be professional. While ending a relationship can be emotional, keep your feelings in check. There is nothing to be gained by harsh words or recriminations. Listen to your client's objections if there are any, but do not engage in a debate.
5. Refer the client to other advisors
Since you are ending the relationship because your interests and goals are no longer aligned with the client's needs, recommend other advisors that may be more suitable. These advisors could include any of the following:
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Automated investment advisors. Also known as robo-advisors, these managers are especially beneficial for accounts seeking to reduce fees, those with fewer assets than $500,000, and clients who do not expect personal interaction with their advisors.
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Other advisors within your firm. In some cases, advisors and clients fail to "click" due to contrasting personalities. An advisor with an overloaded book who doesn't have the time to fully serve all accounts can decide to transfer them to up-and-comers who are in the midst of building their practice. If you recommend another advisor with your firm, be sure the new advisor knows the good, the bad, and the ugly about the client and is fully prepared.
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External investment advisory firms. If your decision is to transfer the client away from the firm, always recommend the best advisory firms that meet the client's needs. While your relationship is ending, you have a fiduciary responsibility to serve your client to the best of your ability.
6. Document communications
Following your personal meeting in which you terminate your relationship with the client, be sure to send a letter clearly stating that the relationship has ended with a request and deadline for the client to direct assets elsewhere. Don't ignore subsequent phone calls, emails, or letters from the client, since dodging such communications can lead to a lawsuit. In those cases, check with your legal and compliance advisors before responding to avoid any misunderstanding, and ensure that termination procedures are properly followed. Explain that while your firm may continue to hold onto investments if a client has not acted, no one will be managing them on the client's behalf after the deadline.
Final word
Firing unprofitable or difficult clients can be good for your bottom line, as well as for your psyche. Even though you may be a people pleaser by nature and want to keep clients happy, you will dilute your effectiveness by trying to meet everyone's needs. As a result, you may increase your stress while satisfying no one.
If you have problems dealing with unpleasant clients, compare the situation to a toothache. Pulling a tooth is difficult and sometimes painful, but the patient always feels better when the tooth is out. Doing nothing just makes the agony worse.
Jake Redger is an experienced Certified Financial Planner with a decade spent in the field. He’s dealt with the best and the worst in terms of clients and knows exactly how to frame the ending of a client relationship – even when it’s hard.
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