By Mark Palmerino
If you’re like nearly every financial advisor in business today, you have been fired by a client. It’s not a pleasant experience, and it can bruise the ego, but some clients will grow unhappy, whether justified or not, and decide to take their accounts elsewhere. The fact is you simply can’t please all people, all the time, despite your best efforts to do so. That’s the nature of running a professional services business.
But what about the other side of the equation: Have you ever fired a client? For some, if not most, advisors, the answer is no, especially in today’s environment, where tech evolutions are creating acute business acquisition pressures. For others with more mature practices, though, there’s a case to be made that less is more, and there are indeed reasons to part ways with a client.
Here are some instances where it does make sense to pare down your book of business for the sake of the practice.
Poor Economics. This is the most obvious example. Over the last several years, as the Department of Labor’s fiduciary rule was debated, introduced and then wound its way through the court system, many advisors were forced to confront whether they could continue to maintain certain client relationships. Even though the fiduciary rule may never get implemented, it highlighted the fact that some accounts are too costly and time-consuming to manage, especially when weighed against other, more valuable relationships that deserve more attention.
Obviously, this has the potential to lead to some uncomfortable conversations. But there are ways to find a solution that works for everyone, including transferring them to a junior advisor within the practice or a peer in the same area who may be better equipped to handle their needs.
Bad Chemistry. One of the perks of having a growing, mature practice is the ability to be a bit more discerning about client prospects. It’s often less about needing the business and more about whether you want it. Early in a career, that luxury is less likely to exist, which means as advisors age they could have a handful of clients with whom the chemistry has never been quite right. The relationship perhaps started out as a $5,000 IRA, and over the years, even as their accounts have grown, it has stagnated or, worse, turned tumultuous because of their unyielding demands.
Ask the very same questions about existing clients that you would of a new prospect. Do they share my values? Do we communicate the same way? Are they pleasant and agreeable? Do they appreciate my services? In the right circumstances, advisors should be able to work with people they enjoy, whether that applies to a colleague or a client. Even if it costs you revenue, sometimes it’s worth it to sever a relationship that causes continual anguish.
They Don’t Follow Advice. Coming up with a financial plan for a client, as we all know, is a meticulous process, and the slightest deviation can upend years of progress. Ignoring the plan, meanwhile, can blow it up completely. Consider a client who asked their advisor about buying a second home. The advisor says they can afford $400,000 and still be on track to retire in 2025, like they’ve been planning all these years. But instead of spending $400,000, they buy a house for $850,000, because they know what’s in their accounts, and ‘it’s there,’ they say.
The problem, of course, is that the extra $450,000 is coming from an investment account that will need to be replenished. What’s more, they’ll now have to pay capital gains taxes, meaning that they’ll likely have to withdrawal closer to $600,000, not $450,000. At that point, there is no plan, which means there is no relationship, which means you probably shouldn’t be collecting a fee from them.
Reputational Risks. Though rare, there could be an instance where a client does something that could harm the firm’s reputation. An extreme case would be an O.J. Simpson-like scenario involving a high-profile client. At the same time, clients typically don’t spell out their professional affiliations for the world to see (they’re not NASCAR drivers), so the likelihood that a financial advisor could get embroiled in a practice-altering controversy is somewhat remote. The bigger risk works the other way: There’s the chance a decision to fire a client could harm your reputation. Many advisors, even if they live and work in big cities, serve a small community of investors—all of whom talk to one another. A messy breakup with a client could create a damaging, false narrative about you individually or your firm as a whole. While there are valid reasons to part ways with a client, understand that nothing happens in a vacuum.
To paraphrase Harper Lee’s To Kill a Mockingbird, you can choose your friends but not your family. For some advisors, this probably rings true when it comes to their clients, as there’s probably a few they could do without but for economic reasons don’t have a choice.
One of the spoils of having a successful practice, however, is getting to work with people who make your life more enjoyable. Sometimes that means being more selective with new prospects, though in others it could mean paring down your existing roster of clients.
Mark Palmerino is partner with CCR Wealth Management, a Boston-area based firm.