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.