From the September 2008 issue of Investment Advisor • Subscribe!

Less Is More

To become a wealth manager, you may want to start with fewer clients

There comes a time when advisors decide to take their practices to the next level. While their client base has grown and includes a number of high-net-worth clients, and they're ready to move up to wealth management, something's holding them back, and they never seem to find the time to provide superior value to the firm's top clients.

Many advisors find themselves run ragged by clients with small portfolios and large needs. Client phone calls, e-mails, and drop-in visits eat away at their day, leaving just morsels of time to spend on clients who already are--or could become--more profitable. Driven by a commitment to high levels of service, advisors find that it's simply impossible to meet everyone's needs.

It's time these advisors take the plunge. By actually reducing the number of clients, they'll gain precious time they can reinvest in their top clients, an investment of time that will aid retention and foster valuable references. Like the first time you jump into the deep end of the pool as a new swimmer, trimming your client list can be a terrifying proposition. But like that first watery plunge, the exhilaration and satisfaction you feel afterward will keep you coming back.

"At the time, I was really uncomfortable," said an advisor from Vancouver, British Columbia, with 20 years' experience. Three years ago, this advisor (who wishes to remain anonymous for compliance reasons) decided to prune his client base in order to focus on wealthier clients. He recalls driving home on a dreary afternoon after mailing 130 clients a letter stating that he would no longer be their advisor and thinking, "This is a huge mistake! What have I done?"

Today, he says it was the best move he ever made.

This advisor, like hundreds of others I've counseled on moving up to wealth management, faced a dilemma. In 2005 he had 450 clients, his business was growing, and he and his team were busier then they could imagine. They all found themselves working longer and longer hours, yet still never catching up.

Activity is not a substitute for genuine growth. What's more, as this advisor found, sometimes in order to serve the mass of clients, you end up short-changing wealthy clients who are paying full fare.

"When we made the change, it opened our eyes to how much more we could do--how we could blow away our wealthier clients with a higher level of service," the advisor recalls. Now, he reports that he's not only working as hard or as many hours, but his team is having more fun. Last year was the firm's best ever for both assets gathered and total revenue. By the end of May 2008, the team had already surpassed its 2007 assets-gathered record.

Three Steps to Disengagement

Out of duty to all your clients, you must first realize that all of them need to pay a level of fees commensurate with the service they require. It's not a good sign of business health if revenue from your best clients is subsidizing service to others.

If clients are not inclined to pay the fees you require for the service you provide, then consider disengagement. I define disengagement as completely cutting your tie to a client and transitioning them to another advisor with a service model better suited to their needs. The path to disengagement typically involves three steps: segmentation, transition, and disconnection.

Step 1: Segment Your Book

I first ask advisors to work with their team to segment their book based on recurring annual revenue and the effort spent serving the client. Some advisors--like Lori Watt in Waukesha, Wisconsin--have developed an even more complex scoring system. Watt, a Raymond James-affiliated advisor with Investors Advisory Group, uses five criteria: recurring annual income, time spent, referral record, potential to help the firm (networking possibilities, referrals, portfolio growth, etc.), and lastly, likeability. She's been in the business since 1980, founding her own firm in 1985. "If they aren't nice people, it almost doesn't matter how much money they bring," she says.

Advisors should use a common sense approach to segmentation and to help decide which clients to let go. If a low-end client has strategic value, take that into consideration. That client may be connected closely to a target client, acquiring assets in the near future, or be a referral source to prospective clients.

Whatever criteria you choose, eventually you'll end up with a tiered list. I break them down into quartiles (see chart on page 107), with "D" clients representing those who are non-profitable with small account balances, and who have little or no ability to move up over time.

The decision to let clients go generally happens in waves. In the first wave, an advisor might take the bottom 20% to 25% of the book, which may only represent 1% to 5% of revenue. In the next quartile, examine the effort you expend. Begin by identifying clients on which you expend the highest effort but yield the lowest revenue. Provided the firm is making enough money, when you bring in a new client at the top of your book, then you can let go a number of your low-performing clients, or simply choose to stay revenue-neutral. The goal, however, is to reduce the number of clients, so that you can deliver amazing performance--the "Wow" factor--to those who remain. (Part two of this series will explore how to do just that.)

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Step 2: Prepare the Transition

Once you have identified the clients you wish to disengage from, you need to select another advisor who can service these clients. Forget limiting your actions to only your legal or professional obligations; your clients expect you to put their fiduciary interests ahead of your own. They will appreciate your going the extra mile to ensure they receive appropriate financial counseling.

Many advisors are tempted to retain a partial interest in the future revenue from these clients. However, in order to limit the call on your attention and responsibility going forward, you should fully disengage from all connections.

There are many solutions to the question of where to put these clients. Some firms are large enough where the senior advisor can reassign the clients to a junior associate. Some advisors have found third parties either outside their firm, or within their company but in another office who willing to take on new clients.

John Barrett, an advisor in Milwaukee with Northwestern Mutual who is 37 years old and the father of three boys, eliminated more than 1,000 clients. He first whittled his book of business to 120 clients and finally to 56 by finding a 24-year-old newly minted CFP at a local bank to take on his transitioned clients. A recent college graduate in finance, the CFP went from $0 to $350,000 in annual production overnight and has since grown the business.

Watt in Waukesha took a slightly different tack. With five other advisors within her firm, she was able to use a team-based approach where she handed off many of the smaller clients to junior members of the team.

"We found those 'C' clients we wanted to keep and repositioned their portfolios into a leveraged account using pre-packaged solutions," she said. Doing so freed advisors from portfolio management so they could provide personal client support.

Downsizing still meant eliminating nearly 150 'D' clients However, since doing so in 2005, the firm has grown from $100 million in AUM to $225 million today. The client base has also grown, but only by 55%, compared to the 125% growth in AUM. The firm's average client wealth totals between $225,000 and $325,000, but the firm owner's average client wealth more than doubled over the three-year period, from $340,000 to $715,000.

Now the firm owner and her team of five advisors are keeping track of their time in five-minute increments. She plans on tracking time through an entire review cycle to discover how much of their day they're spending on clients and on which clients. The data will drive decisions to either release more clients or revise the fee schedule.

"Prior to this process, we were doing well," the owner said. "However, I really felt that we needed to have a more disciplined approach to grow the business. We couldn't just take everyone in."

Step 3: Disconnect

Ultimately, the advisor has to sever some relationships. I've found that a letter works best. For most clients, you'll simply tell them that you are moving toward wealth management and that you must now charge a minimum fee. Tell them that it doesn't appear they'll need that level of service, so you have arranged to move them to another advisor. The letter should be short and to the point.

The advisor from Vancouver who wondered what he'd done to himself, says he received just three calls the week after mailing his letter. One was a loud, "How dare you?" Another demanded to stay. A third client just wanted to hear it firsthand. Later, another half-dozen clients called to wish him congratulations.

The advisor's client list shrank from 450 to 250, but his assets under management nearly doubled, from $160 million to over $300 million.

"My advice is, 'Close your eyes and jump,'" this 44-year-old advisor says. "If you really want to improve, you have to do things that are uncomfortable."


Steve Moore is president of Moore Solutions and has 10 years' affiliation with Russell Investments, advising the Tacoma, Washington-based firm in the area of advisor and registered representative practice management. A former NFL coach, he can be reached at steve@mooresolution.net.

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