From the January 2007 issue of Research Magazine • Subscribe!

January 1, 2007

When to Let Go

An advisor recently made an innocent online inquiry into the best way to release unprofitable clients. Immediately, the advisor was hammered by a slew of negative and even hostile message board responses. Other advisors accused him of being uncaring and unfeeling, of not looking out for the best interest of all his clients, and of being overly focused on making money.

What hogwash! Such a foolhardy and self-limiting "holier-than-thou" attitude trumpets at least two fundamental errors.

First, it ignores the fact that the inquiring advisor is running a business, and is in business to make a profit. Despite the old joke, if you're losing money on your clients, you simply can't make it up on volume. Your time, which is absolutely finite and limited, must be guarded jealously and used wisely. You must therefore spend it with those clients who generate the greatest revenue and profitability. To pretend that you should be doing anything else is simply self-delusory.

Second, if the advisor's Golden Rule is "Know and do well by thy client," the implication here is that even an advisor who properly releases inappropriate clients is somehow not doing well by those clients. But as I'll explain, letting go of inappropriate clients is almost always better for those clients, as well as for you and your other clients. There really is no conflict of interest here, especially when inappropriate clients are properly released and moved on to other, better-suited, advisors.

Who's Inappropriate?

There are two complementary approaches for determining which clients are inappropriate. Under the "positive approach," you define an ideal client profile -- typically a specific niche of high-net-worth clients to whom you add substantial value -- and then systematically determine whether your existing clients fit this profile. While account size and profitability are crucial, other key factors include age, location, type of career and industry, and shared client/advisor interests.

The "negative approach" enumerates clients to avoid, including these:

o Clients who are abusive to you or to your staff

o Clients with whom you share no personal chemistry and simply don't connect

o Clients who are part of the downside of the "Pareto Principle" or the "80-20" rule: They generate 80 percent of your problems and take 80 percent of your staff time, but generate only 20 percent of your revenue and profit.

o Clients who started with you long ago, but who have never added assets and are clearly unprofitable

Be true to yourself as you use both approaches to segment your existing clientele. While almost all advisors start by gathering clients with few qualifications (if they can fog a mirror and write a check that clears), advisors whose books today include every client they've ever had probably aren't doing that well. If you've been in business for 10 or 20 years, just as you should have upgraded your products and services over time, you should have upgraded your clientele as well. If you haven't, determine whom to let go.

Overcoming Reluctance

You may be reluctant to release even clearly inappropriate clients. Advisors who've long been with a client sometimes say, "I could never let him go; he needs me." If you have such an inappropriate client, ask yourself when you last met with him, whether you know what his most pressing needs are, or even how many children he has. Typically, such long-timers aren't really clients -- they are customers who you did business with once, but who are now just names in a filing cabinet or database. The truth is, you aren't providing those clients with ongoing advice and services because you're no longer the right advisor for them. Not only are they inappropriate clients, but you're an inappropriate advisor. Keeping clients to receive on-going trail commissions without providing them with any service is not in their best interest, or yours.

These clients will receive more value by working with someone else, perhaps someone who is newer in the business or specializes in clients just like them. When such clients are turned over to a more appropriate advisor, the typical response is "Thank you for referring me elsewhere." They are quite happy to get the services and value they need from the right advisor.

Must you get rid of all of your inappropriate clients? Sometimes you might want to keep a client simply because he or she is a friend. The key here is to employ a step-by-step process whereby you screen and decide upon each current client, thereby keeping inappropriate clients only by conscious exception, not by default.

What about family members or friends of large clients? Could you offend your best clients by terminating or not accepting their referrals? Such clients will usually understand why their friends or children are inappropriate or difficult to handle, and that forcing you to hang onto them imposes an unfair burden. The best way to handle this scenario is to nip it in the bud. You probably aren't going to be able to pay very much attention or give very good service to such family members or friends anyway. You're damned if you do and damned if you don't take them on, so you might as well be damned if you don't and "just say no" in the first place. If, however, your large client insists, you can either consciously capitulate or decide that a client who forces your hand in this manner is himself or herself inappropriate, regardless of size.

Finally, some advisors are reluctant because they don't know how to release inappropriate clients. As I will describe in a future article, this can be done effectively. There are four strategies for releasing inappropriate clients:

o "Quiet file" them; unfortunately, this rarely works, because most inappropriate clients don't just "fade away."

o Hire another advisor to service them; this too rarely works, because unprofitable, disproportionately time-consuming, or otherwise inappropriate clients tend to remain that way.

o Transfer them to another advisor in your office; as with hiring another advisor, this doesn't change the problematic nature of inappropriate clients.

o Sell them; this is the best and recommended option, but must be done carefully.

Release and Rejoice

Releasing inappropriate clients has many benefits. First, it frees up substantial time for you and your staff, allowing you to focus on better serving existing ideal clients and attracting new ones. Second, it sends a strong message to existing appropriate clients that you are committed to running your business specifically to meet the needs of clients just like them.

Third, it dramatically improves your self-image and quality of life. By working with top-flight clients to whom you can add substantial value, you'll feel energized and inspired. Finally, it's better for released clients, because an advisor who is geared to their level of assets and activity can now provide an appropriate level of attention.

If keeping inappropriate clients is your idea of charity, you're far better off doing real pro bono service by volunteering to mentor disadvantaged teens or classes for the truly down-and-out. Once again, the key to success is to be successful on purpose. If you wake up after 20 years in the business with a book half full of people you haven't spoken to for years, then not only are you not providing these folks with the products and services they need, you're simultaneously hurting yourself, your staff and your other clients. You're far better off actively managing your client base, releasing inappropriate clients, and providing real service and value to those who fall into your ideal client profile.

Patricia Abram is a senior managing principal with CEG Worldwide.

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