Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Portfolio Construction

Dumping Difficult Clients — Gently

Your article was successfully shared with the contacts you provided.

I recently wrote an article about how important it is to prune your client garden from time to time, and gently let certain clients go. The ones you can never make happy and who are very high maintenance. These folks are not only time consuming; they are not profitable because they suck a lot of energy from you and your staff.

Here are some techniques we have used to part ways with the difficult client before the relationship becomes acrimonious:

Case Study # 1: Impossible to Save

Mr. and Mrs. G from Connecticut generated about $1.7 million a year in income. With zip in savings, they had moved up to better homes, five times, unable to sell the previous homes because they were each under water. This left them with four rental houses in addition to their residence — a mansion by many standards.

By the time I got to them, they had no liquid savings or investments and less than $100,000 in IRAs. Truly worrying for a couple in their early 50s, with four children in private high school! Did I mention they spent $50,000 per year on private tutors for the children? Not to mention another $30,000 per child for their school tuition. Given their tax bracket, it took almost $400,000, before tax, a year to pay for the children’s high school education. This didn’t include the nannies, gardeners, maids, landscapers and pool boys I would run into at their house.

One of the maddening things about the Gs is they refused to meet in our offices, which meant I had to travel an hour, to their home, for every meeting. After nine months of meetings, and a lot of drive time, the only financial action they took was setting aside $20,000 a month for their children’s college education. Within three months, they called to stop these savings, as they were too strapped to continue.

What we did: As luck would have it, we were in the process of leaving our broker-dealer for our own RIA firm about the time I decided that I needed to let this couple go. I sent the Gs a nice letter, explaining the changes in our firm and that we would not be able to serve them any longer. I put the blame on the new structure of our firm. I made sure to let them know, if they had any questions at all, they should just give me a call.

Result: We never heard back! The story didn’t end there, however. One of my favorite clients actually knew this client as they were both in a business where all the competitors knew the dirt on the others. She mentioned in passing, about six months later, that she’d heard Mr. G had been arrested by the FBI!

Case Study # 2: Do It Yourselfer

We have a few clients who are do-it-yourselfers who like to do their own investment management. It took me a while to see the pattern with these cases and why we needed to part company early.

Typically, all of our clients, even the recovering DIYs, like our scientific approach, initially. We explain the basics of modern portfolio theory, and go through the research, which resonates with most of our clients since college professors tend to like the scientific background. We discuss the difference between active and passive investing and the statistics supporting our choices.

What we do: We then look under the hood of their existing portfolio, and do a deeper dive into their existing investments. Usually they have no investment philosophy and are just picking stocks willy-nilly based on the news of the day. The internal expenses of the funds they are using often shock them.

Sometimes we use a Monte Carlo analysis to differentiate their approach from ours, or we stack our returns on top of theirs over time. The purpose is to show that, even with our fees, we can outperform their approach.

Sounds simple, understandable and logical right?

Results: It works with most of our clients, but a few diehards, three or four over the years, are either hung up on the fees (which are some of the lowest in the industry), think they are smarter than we are or, deep down, are convinced they can do a better job.

Our patient, educational system creates a strong emotional conflict in the DIY between wanting to control their funds themselves, and seeing the advantages and potentially greater returns using our services.

In the difficult client, the emotions always win. This doesn’t happen to us often. When we keep to our process of slowly, patiently explaining why our approach over time will beat theirs, even difficult clients may buy into our management at first. But what I found in those three or four cases, eventually, was that they choose to leave so they can return to manage the funds on their own. Their emotions eventually overcome their logic and they go with what makes them feel most comfortable.

I much prefer this method of slowly, steadily educating our clients and letting them prune themselves out of our practice such that the client makes the decision that they need to leave. I didn’t have to fire them. That way there are no hard feelings and I can send them happily on their way.

Case Study # 3: Hard Conversation

We are in the process of on-boarding a client, who has some of the earmarks of a difficult client. Remembering my rule of not taking the difficult client in the first place, you may be wondering how I let him get this far with us.

The short answer: I just liked Professor S. A math professor who is a widower with four children, he really enjoyed managing his own portfolio. After four meetings, I was convinced we could help him and at one point he agreed to move his assets over to our management. He called us on his way home from that meeting, saying he was having second thoughts and asked that we wait.

We are planning to meet again this week and it is time for the hard conversation.

Here is what I am planning to say: “You know professor, I can continue to show you, in different ways, why our portfolio management approach will be better than yours over the long run. I can show you in many ways why our management will get you better returns, even after fees, over time and reduce your stress and the time you will need to manage your own portfolio. In fact, we have never had a client, who managed their own portfolio, who did better than we have over the long haul.

However, if you believe deep in your soul that you can do a better job, or for some reason you don’t trust us, then you need to go with your gut and continue to do this for yourself. Otherwise you run the risk of never feeling completely comfortable or happy with our services. The main thing we want is happy, satisfied clients who love what we are doing for them.

So the bottom line is this, professor: What will make you feel the most comfortable, happy and satisfied?”

Yes, this is much more blunt than my usual style, but I feel it is time for Professor S to fish or cut bait. Either way this will work out fine for us. If he goes, we save time and stress on the team. If he stays I know we can keep him happy.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.