From the March 2013 issue of Investment Advisor • Subscribe!

February 25, 2013

Clients With Benefits: How to Protect Against Would-Be Moochers

Are friends and relatives entitled to a price break?

One of the downsides to running a personal service business is that friends and relatives often expect a discount. In the worst cases, they suggest you should provide advice for free. Often they do not have something of equivalent value to trade in return—so what could have been barter becomes a burden.

Perhaps it’s the economy or a frustration with low returns, but advisors report that increasingly they are getting the squeeze from people they know. These “friends” expect them to lead the way to many happy returns—without giving anything in return. They imply, “We’re blood, brother. I’d do this for you.”

On the other side of this dilemma are the enablers, advisors who believe that it is their obligation to discount their fees to close friends and relatives lest they be perceived poorly. Guilt or shame or the desire to be loved all contribute to the concession. Rarely do I hear advisors say the decision to give a break in fees was worth the pain.

So when an advisor recently asked me if he should give friends or relatives a discount, I casually surveyed other advisors to get their take. While not the most urgent of issues confronting advisory firms, each advisor said it was something they have struggled with. The topic was a familiar source of frustration, resentment and angst.

Not only did many advisors reveal that they do offer discounts for special clients, they also described a two-tier scheme for their regular clients: those who have been with them for a while and those who are new to the firm. While the friends and family quandary occasionally occurs, firms continuously struggle with the challenge of reconciling pricing with legacy clients. The solution requires discipline and courage.

Setting Boundaries

Advisors who had learned from experience provided me with some good ideas for engaging with close friends and relatives:

  1. If you are inclined to discount, be clear as to whom this might apply: centers of influence, best friends and immediate family members, for example.
  2. If you are not inclined to discount, or wish to limit this practice to a select group of people, develop a response to those who might have the cheek to ask for a break based on their relationship with you.
  3. Limit the number of discounted relationships so that it doesn’t hurt you economically.
  4. Treat these relatives and friends as you would any other client, with the same level of accountability on both sides, the same access to you and your staff for professional purposes, and the same discipline to terminate those who put you at risk or are abusive to your staff.

Be Clear

Creating a specific framework for giving a discount makes it easier for you to say no to those who do not fit into the special pool. Your parents or children obviously may qualify for some type of break, but beyond those situations, define parameters to avoid a policy of exceptions.

For example, centers of influence such as attorneys and CPAs may not have the accumulated wealth to qualify as clients, but because they refer valuable relationships it may make good business sense to give them a break.

Best friends and relatives, on the other hand, present a unique and awkward dilemma. You are exposed to some of their most intimate secrets, and this makes them vulnerable if not somewhat beholden to you. At the same time, your recommendations may push them out of their comfort zones—and sometimes may result in disappointment in the results. Are you confident enough in your process and these relationships to risk entering into professional agreements at any price, let alone a discount?

Just Say No

Generally speaking, advisors do not seek confrontation or conflict (though I’ve met some individuals who seem to enjoy getting in one’s face). So when a close friend or relative asks for a favor or some special help or a price break, many advisors find it easier to give in than to say no.

As with most things, preparing for this inevitable scenario works better than shooting from the hip. Experienced advisors suggest a matter-of-fact presentation of your charges. Avoid being defensive about how and why you price. When pressed for a discount be able to explain what you deliver for what you charge, acknowledging that your fees may be too high for some. In those cases, offering to refer them to somebody less expensive may be the best approach.

Haggling devalues what you do and undermines what you have determined to be fair and reasonable. For those who pull the “friend card,” just bear in mind that unless they have demonstrated equal generosity or kindness in some form, they are not behaving as true friends.

If the nature of the service to a friend or relative is short-term, such as helping them with their initial 401(k) asset allocation or a college funding analysis, be careful not to be sucked into an ongoing advisory relationship without first setting down the ground rules including the agreed-upon fees, the term of the relationship and how it would be renewed, and any other conditions you might have with “normal” clients.

Understand the Economics

For too long, financial advisors have lived by the 80/20 rule, a loose perception that 80% of their revenue comes from 20% of their clients. Put another way, 20% of their clients subsidize the 80% who don’t pay their way.

If you choose to have a pro bono or discount strategy for people to whom you are close—let alone for those who are in need—make sure your largesse does not dominate your income statement.

Forgetting the economic consequences for a minute, the real impact is felt in the way your firm delivers on its promise to all clients. When you and your staff are consumed by the needs of sub-optimal relationships, those that are most important to you begin to suffer.

Even if you can deliver a quality experience to your most important relationships, there is a tendency to grow resentful of clients who don’t pay you sufficiently for your wisdom, knowledge and insight. This is especially true if they do not show appreciation for what you are doing or how you are doing it. It becomes particularly galling if they fail to heed your advice.

The pricing of advisory services combines art and science. The science revolves around knowing your costs (all in) to deliver your services, and understanding what the market for comparable services is charging. The art involves articulating your value to clients without apology, rationalization or overselling your proposition. When friends and relatives ask you to compromise on this, they are intruding on your relationship and taking money out of your pocket. When you voluntarily discount your fees, do so with full awareness of why you are doing it and for whom. If you find yourself resenting any client—especially one close to you—you are not doing yourself or your staff any favors.

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