Spring cleaning: Letting go of clients who no longer fit your firm

Nearly three-quarters of Americans plan to spring clean their home, but have you thought about doing a little spring cleaning at your business?

I’m not talking about cleaning closets; I’m referring to your client list. The fact is the majority of advisors have some clients who are unprofitable or no longer a good fit for them. Sixty percent of advisors say that serving too many “nonideal” clients is a major challenge, according to a recent Cerulli Associates report.

IDENTIFY UNPROFITABLE CLIENTS

Now is a great time to identify any clients who are unprofitable and don’t fit your target profile. The first step is to categorize your clients by profitability using, for example, an A-B-C classification system. Your “A” clients are your most profitable clients. They usually have the highest account balances and drive the most profit. You should focus on providing the highest level of personalized service and attention to these clients, doing everything you can to retain them.

Your “B” clients are the next tier as gauged by profitability. They may generate acceptable profits so you don’t want to lose them, but you probably shouldn’t be devoting as much time and attention to them as your “A” clients.

Finally, your “C” clients are your least profitable clients, with the lowest account balances, as well as difficult clients who take up an inordinate amount of time. These are the clients you might consider letting go so you’ll have more time to spend servicing your profitable “A” and “B” clients to efficiently grow your firm.

TURN THEM PROFITABLE

Instead of letting unprofitable clients go, try to make them profitable first. You could transition them to work with a junior member of your team — with some oversight. This would lower their cost to your firm and create a good training opportunity for your junior advisors, while freeing up your time.

You could also raise your fees for unprofitable clients, letting the client decide whether to remain. If they decide to pay the higher fee and remain, you have boosted their profitability. If they balk at the fee and leave, you've accomplished your goal but allowed them to make the decision.

Last but not least, consider leveraging technology to provide unprofitable clients with more of an automated service option, like a robo-advisor. Digital investment solutions can help reduce the time spent on client management, and they can be designed to channel clients into one of several predetermined asset allocation mixes. If the client decides they need more support, you can charge them a larger fee and increase their level of service.

LET CLIENTS GO GRACEFULLY

If you can’t make unprofitable clients profitable, you’ll need to say goodbye. Here are three suggestions for how to let go.

1. Refer them to another advisor. Another advisor with a lower cost structure might be happy to work with your “C” clients. Start cultivating relationships with other advisors to whom you can make these referrals. Make sure they are willing to work with these types of clients — and if they are, perform due diligence so you’re comfortable sending clients to them. Garrett Planning Network and XY Planning Network are potential sources for referral advisors, as is your local FPA chapter.

2. Sell them to another firm. Consider packaging and selling a group of clients to another firm. This could generate additional revenue while also relieving you of your unprofitable clients and allowing more room for growth. Your broker-dealer or custodial platform may be able to help you find potential acquirers, or you can network with local advisors who might be interested.

3. Graduate them. This strategy works best with clients who you believe have the aptitude and interest to manage their investments on their own. You can say that you've done as much for them as you can and believe they’re ready to strike out on their own. Stress that they'll save money by no longer paying fees to your firm and offer to help transition them to a self-directed investment platform.

It’s a good idea to categorize and spring clean your client base annually. You should also establish profitability guidelines to help ensure that you only work with “A” and “B” clients going forward and prevent “C” clients from impacting your margins.

Letting clients go is never easy, which is why many advisors hold on to unprofitable clients even when they know they shouldn’t. By following these strategies, you can free yourself up to spend more time working with your most profitable clients while simultaneously growing your business.

Mike Watson is head of RIA Custody at Axos Advisor Services, an RIA custodian that delivers individualized attention, intuitive technology and knowledgeable consulting support.