The benefit of having large clients is apparent to everyone. Large clients carry prestige, bring assets and generate a lot of income for the firm. And often they provide access to inner circles that contain opportunities for more large clients.
Large clients also bring their share of pain, however. The attention they demand can strain your resources and crowd out your bread-and-butter business. Further, catering to outsized clients can disrupt processes that were not designed for working with them.
Worse yet, large clients with unpleasant personalities often become even more wretched when they gain more wealth or power. Such clients are inclined toward rudeness and unreasonable expectations. Instead of a partner, they seek a 24/7 nursemaid. They tell you who to hire and who to fire. In their minds, they are always right. They have no interest in your explanations, and even less interest in working with members of your staff whom they deem beneath them. How often must you suck up the abuse, or tell your staff to ignore the tyrant’s words because the client is too important to the firm?
Beware: Your associates are taking note. They may become disillusioned seeing you cater to the large client at the expense of their dignity and their pride in their work. They may come to view their career with you as just a job, not a mission. What once was loyalty becomes fealty. This insidious development ultimately will undermine the culture of your organization. No amount of income from a single source of business can mend that breach.
Tales of Woe
Over my lengthy working life, I’ve met and worked with scores of wealthy and powerful people, most of whom exemplify courtesy, respect and passion. But from time to time, I’ve endured real schlemiels (insert your favorite expletive here), whose character flaws grew with every increase in position and money. Their nasty personalities suck your spirit, incite your ire and often force you to retreat in the face of their bullying. Whatever their manifold reasons for being schlemiels, their ability to torment others exceeds their ability to do anything else.
Two examples come to mind that illustrate the dilemma of a firm becoming overly dependent on a single big source of income that does not align with the firm values and model. In both situations, the giant client wound up causing harm to the business.
In the first instance, the outsized client authorized the staff of the firm to execute a specific transaction. Once completed, the client apparently had a change of heart and asked the CEO of the firm to unwind the request after the task had been completed. This was going to cost the firm money so when the CEO balked, the client responded in a hostile voice that the staff member had made an error and the firm should make good or it would cost them his business. While the documentation clearly supported the staff member, the CEO acquiesced and reimbursed the client.
In the second instance, the head of an advisory firm jury-rigged a client management and reporting process to suit the very large client. The manual nature of this unique approach meant the firm’s staff had to work extra hours, and it also resulted in more errors and a slower response time to the client. When the client complained, the managing partner of the firm called his staff on the carpet for angering a major source of revenue to the business.
While neither situation typifies ultra-wealthy or powerful people, they do highlight common circumstances in which the leader of a business puts himself in a bad spot between the demands of a client and the values and beliefs of his employees (and probably himself).
Objective observers, especially those with a moral streak, instantly know how these two situations should be handled. Assume for a moment that the head of the firm clearly knows right from wrong. But what if terminating the client would cause the loss of so much income that the firm leader would have to lay people off? Or cut their compensation? The leader is caught between compromising the values of his firm or causing pain to his employees.
With average or small clients, advisors readily terminate relationships that cost them money, put their firms at risk or harass their staff. But when one or two clients represent a mammoth portion of the firm’s business, management often drifts toward rationalization and appeasement of the client despite their better judgment.
The decision to do what is expedient may reduce conflict and generate money to the firm short term, but the long-term consequences to the business are almost always bad. Tolerance of abuse, deceit and blackmail for profit inevitably infects an organization with a germ that could be fatal. Further, this tolerance sets a standard of acceptable behavior that then is repeated by other clients, and ultimately by partners and staff themselves.
In the real examples above, many employees became dispirited, then angry, and then compelled to leave. My conversations with these employees revealed a deep disappointment. In the end, they felt that any effort by the firm to keep them in the fold would be too exhausting and too disingenuous to make them feel good about staying. So while the firms retained their “best” clients in terms of revenue, they may have lost their best people in the process.
Applying the Right Lesson
Client acceptance and client retention are two of the most critical aspects of running a financial services business. Filters for both should revolve around profitability, compatibility with your culture, an understanding of your approach to business and a relationship based on value, not on price.
I know of one very successful advisory firm that asks all who meet a prospect (in their case, all their partners) to score the individual on a variety of factors including how they treat others. Part of their discovery process involves observing the prospect’s interaction with his or her spouse or other family members, a history of their relationship with their other advisor, how they react to stress and uncertainty, their perception of risk and reality, and what they do when they are not working (an obsession with money is a red flag). The firm’s partners also evaluate how the acceptance or retention of each client will impact the way they work. They strive to systematize their processes while customizing their recommendations, thereby creating scale, ensuring quality control and delivering a consistent client experience.
Many firms are careful never to allow one client to represent more than 5% of their income, though even that can be high in some cases. These firms view the management of their business from an appropriate risk perspective. Managing the risk of client concentration allows them the flexibility to do the right things for their employees and business without a material impact on the firm itself.
In the case of advisory firms who work exclusively with ultra-high-net-worth clients, the implications are comparable, but the risks are more diversified because assets and income are not concentrated in a single household. So in those odd circumstances when an important client turns out to be a loathsome individual, the firm can boot him out of their lives.
Client selection and retention require a strong commitment to one’s strategic vision. When firm leaders are clear about their primary business and their optimal client, they can develop a client service experience to support this vision. Businesses veer onto a freeway of trouble when they rationalize their decision to take on a large client who has the potential to be far more disruptive than beneficial to the business. Giant clients are attractive targets, but for many advisors acquiring them is like a dog catching a car. Now what?