From the February 2007 issue of Research Magazine • Subscribe!

How to Let Go

In a recent article, I explored the importance of identifying and then releasing inappropriate clients. This article will cover exactly how to let those clients go.

Let's take a quick step back. If you want to build a successful business, you must commit to being successful on purpose. Find the time to think about your practice as a business, including rigorously evaluating where you are now, where you want to go, and how to close that gap.

Unfortunately, most advisors have many inappropriate clients in their books. These clients are inactive, unprofitable, or problematic (troublesome, quarrelsome, divisive, disproportionately time consuming). Releasing these clients will free you to work with clients who are profitable and enjoyable, who both better fit your ideal client profile and are inherently a pleasure to work with.

To successfully release inappropriate clients, focus on your process. You must first acknowledge that you have such clients; then identify who they are; then consider the various methods for releasing them; and then do what it takes to make one of the recommended methods work.

Methods for Releasing Inappropriate Clients

The table on the next page shows five methods for releasing inappropriate clients. One method, while quite common, is simply not a good idea. Two methods are occasionally workable, but tend to have more downsides than upsides. One method is clearly the best option, and one method should only be used as a last resort.

A Common Poor Choice

Unfortunately, most advisors default to a method that I cannot recommend. These advisors "quiet-file" their inappropriate clients, sometimes actually moving files to a different physical or digital folder. They hope that by stopping all communications, the clients will fade away over time. But there are three problems here.

First, ignoring an unprofitable client doesn't make that client profitable. Second, if the client is divisive, quarrelsome, a time-and-services hog, or otherwise problematic (for you or your staff), that client will not just fade away, but will probably return time and again to demand your attention. Third, ignoring clients can put you at compliance and legal risk. A case can always be made that "quiet-filing" is equivalent to willfully ignoring your clients' portfolios, life changes and perhaps suitability, allowing them to languish and deteriorate. If you have a CFP or similar designation suggesting ongoing responsibility or an enhanced fiduciary duty, be even more careful here.

Intra-Office Servicing

The second and third methods both rely on another advisor in your office servicing your inappropriate clients. One way to do this is to hire a junior advisor. You explain to the clients that you have brought on this person to better assist them, but you retain ultimate control over the client relationship and the revenue stream.

There are several downsides here. First, you must find, hire, train, supervise, and pay the junior advisor. Second, and more important, nothing fundamental changes. While you personally will deal with the clients less, they are still inappropriate for your business. Since such clients will still often want your personal attention, all you've really done is make a bad situation more complex.

Alternatively, you can transfer the clients to another advisor in your office. Through an upfront purchase, revenue-sharing, and/or an earn-out agreement, you can retain some of the revenue associated with these clients; but again, if they were unprofitable or difficult for you to handle, why would that change for the advisor to whom they were transferred? Moreover, even after you transfer such clients, the problematic ones will still often want your time and attention. The one advantage here is it can build political capital, since branch managers are often eager to facilitate this kind of arrangement rather than see the assets go out the door.

Bundle and Sell

The best method is to package up and sell your inappropriate clients to another advisor outside of your office. For example, suppose you have 50 clients who total $3 million under management, or an average of $60,000 each. While these clients may be inappropriate for you, there may be another advisor at another firm more than willing to take them on (along with their assets). Such sales are becoming increasingly common, and a growing number of consulting firms specialize in facilitating these kinds of transactions. An earn-out will often be part of the deal. You might receive a certain percentage of the previous year's revenue associated with the sold clients, plus an amount equal to that over the next one to two years. While this strategy works best for those advisors in the independent channel, it can also work in the wirehouse and regional channel with the approval and support of your branch manager.

The downside here is that it takes time and energy to value your clients and then find an outside advisor who you feel good about and who is willing to pay a fair price. The upside is that this method truly takes your inappropriate clients off your plate, and should put them in the hands of an advisor who is better able to service them. As with intra-office transfers or sales, it's important that the transaction be well-timed, that the clients are informed about what's going on, that all necessary compliance issues are preemptively and thoroughly addressed, and that you continue to provide excellent service to the clients up until the very end.

Firing Clients When Necessary

In certain situations -- when none of the other methods are workable, when a client refuses to be transferred or sold, or when a client is outright abusive -- it may be necessary to formally fire a client. This last resort should take place in careful coordination with compliance and legal review. Mechanically, a registered letter can be sent informing the client that you can no longer serve as his or her financial advisor. The letter should briefly describe why you are terminating the relationship and urge the client to immediately transfer all affected assets to another advisor. With any luck, you will be able to transfer or sell all of your inappropriate and problematic clients before it gets to this point.

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Patricia J. Abram is a senior managing partner with CEG Worldwide; www.cegwordwide.com.

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