Top advisers know which clients are worth keeping, and which to let go

Although most advisers are hesitant to let go of any revenue, three-quarters say they have ended a relationship with a client

Nov 15, 2019 @ 12:23 pm

By Ryan W. Neal

A positive company culture and hiring the right talent are key elements of top-performing advisory firms, but what about client selection?

According to research from American Century Investments and InvestmentNews, the most successful firms are acutely focused on working with the right clients, and have clear client segmentation strategies and structured process for measuring client profitability.

Speaking Wednesday at the 2019 Top Advisory Firm Summit in Chicago, InvestmentNews senior research analyst James Gallardo said half of advisers don't have a minimum fee or asset level. Nearly every adviser who does have a minimum will make some exceptions to the rule, such as taking on a younger client who they believe will soon be a high earner.

But taking on too many small clients can put a drag on a firm's book of business, said Don Bonder, vice president of intermediary consulting and personal financial solutions at American Century Investments.

"Accommodation accounts are necessary, but they should be limited," Mr. Bonder said, adding that top firms closely track what percentage of their book of business is small accounts. "The greater your percentage of households under $250,000, the more you put your whole book at risk."

Mr. Gallardo's research found that most advisers are hesitant to let go of any revenue, regardless of how small it may be.

But three-quarters of advisers also said they have ended a relationship with a client in some way.

"The reasons for doing so are not for profitability reasons," Mr. Gallardo said. "[Advisers] chalk it up a poor fit, a general sour relationship — the human element of it."

It's important to quantitatively measure such qualitative factors as coachability, trust and the likelihood the client will refer others, in addition to traditional business metrics like profitability, said Joni Youngwirth, managing principal of practice management at Commonwealth Financial Network.

Even if a client is costing the firm money and is personally a pain to deal with, many advisers still hate to have those conversations, Ms. Youngwirth said.

"Some [advisers] will say they took [the clients] on for better or worse. It's like a marriage," Ms. Youngwirth said. "I can't help but think about the Simon & Garfunkel song, '50 Ways to Leave Your Lover.'"

There is no one right way to end a client relationship, but Ms. Youngwirth and Mr. Bonder recommended being upfront with the client about the fact that they aren't a fit for the firm and offering to help them find a new solution.

A good gambler knows when to hold 'em and when to fold 'em, to paraphrase another song, and advisers who know which clients are or are not worth keeping can help maximize their firm's profitability.

[More: 9 signs it's time to fire your client]

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