Advisers often are distressed at the thought of ending a relationship with a client, even one they lose money on.
Sometimes, there may be a good reason for keeping smaller clients on board — for instance, if they stand to inherit significant assets in the near future. In many cases, though, you're faced with the unpleasant task of letting them go.
For advisers who find themselves in this situation with younger clients, the rise of robo-adviser services presents a new opportunity. Instead of pruning these clients completely, why not try grafting — that is, transitioning them to a robo-adviser until they have enough assets to be realigned with your own firm?
In the horticultural world, pruning means cutting away branches or stems of a plant to increase fruitfulness and growth. Grafting, on the other hand, involves taking a cutting from one plant and inserting it in a slit cut into a stem of another plant. The cutting then grows and develops on the new plant. In terms of your business, think of grafting as cutting off one type of relationship with your client but beginning to grow a new one.
Briefly, here's how it works:
You refer the younger investor to a robo-adviser service while continuing to maintain an arm's-length relationship with him or her.
As the grafted client's assets grow, so does his or her need for additional advice and personalized investment management.
When the time is right, you bring the investor back on as a client.
POSITION THE SWITCH
Of course, you'll still need to explain to these clients that your practice isn't a good home for them right now. Here are some ideas to help you frame the conversation and explain why moving to a robo-adviser may be in their best interests, at least for the time being:
Lower costs. Because these investors may have simple portfolios and need limited investment advice, they're likely to appreciate the lower management fees of a robo-adviser at this stage in their lives.
A better fit for their needs. Explain that your business model is designed to serve a different demographic and that you'd like to refer them to a service uniquely suited to their age group. This shows that you're watching out for them; outlining your target market may even give them something to strive for.
If you decide to graft younger clients to a robo-adviser, you'll need to check in with them on a regular basis for the strategy to pay off. Staying on their radar becomes particularly important as they get closer to needing more-comprehensive financial planning services.
Set expectations. Arrange a future meeting — say, in three years' time — to check on the client's progress and offer a second opinion on his or her robo-managed investments. Make the appointment now, with the understanding that it might be changed.
Keep in touch with marketing materials. Newsletters and mailings are a great way to touch base with grafted clients, just as you would with any prospect. Some topics may not be relevant to the investor today but will become more important as his or her assets grow. For instance, young investors may not be interested in reading about 529 plans until the birth of their first child.
Send a personalized email annually. Check in with grafted clients to see how they're progressing toward their goals and remind them of the appointment date you've scheduled. A yearly email conveys your interest and will help you gauge how close they are to needing your services.
DEVELOP A PROCESS
As you pursue the grafting approach, you'll develop your own best practices for referring clients to robo-advisers and eventually realigning them with your firm. Just as you evaluate the other professional advisers to whom you refer clients, such as accountants and estate attorneys, you'll need to do your due diligence in order to recommend an appropriate robo-adviser.
For the right clients, though, you may find that grafting is a very fruitful alternative to pruning.
Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.