When a prospective client told adviser Thomas E. Reynolds that she had successfully sued her previous two financial advisers, warning bells went off in his mind.
“We politely took a pass and indicated that she did not meet our minimum level of investible assets,” said Mr. Reynolds, who, along with his brother, Matthew, founded CRA Financial LLC in Northfield, N.J., over a decade ago.
That decision wouldn't be such a big deal except for one thing: This prospect had been referred to Mr. Reynolds' firm by one of its most highly valued clients.
When top clients ask their adviser to consider taking on a friend or relative, many say that they will try their best to make that happen, even if the referral's account size is below their usual minimum or they appear to be a future headache.
Sometimes, however, taking on a particular new client is simply too disruptive or unprofitable.
Joe Kain learned that lesson the hard way years ago when one of his largest and most valued clients asked him to manage a friend's investments.
Mr. Kain, a principal of Sunflower Asset Management, in Lenexa, Kan., agreed to take on the new client even though that person's investment philosophy was different from his own.
“I reluctantly took him on because of the relationship,” Mr. Kain said.
In the following months, the new client besieged him with phone calls every time the price of his stocks moved, ordering him to buy and sell stocks based on day-to-day market movements.
Despite his concern about insulting the valuable client who had made the recommendation, Mr. Kain decided to fire the client before the constant phone calls could cut into the time that he gave to other clients.
The experience helped change the way Mr. Kain views introductory interviews. Now he sees them as a two-way process that gives both parties a chance to see whether they will be able to work together as client and adviser.
Mr. Reynolds has developed a similar approach.
“We now go more with our gut feeling, and it's as much or more about us interviewing them as them interviewing our firm,” he said.
It is always better to decline a potentially troublesome client than to take on the account and resign it later, said Ginny Hudgens, who worked as a financial adviser for 20 years and runs consulting firm Back Office Adviser in Baton Rouge, La.
“If a client asks you to take on a friend as a favor, find out how much of a problem there'll be if the prospect isn't a good fit,” she said. “It is so much easier to say on the front end that it didn't work out than to go back and undo the situation.”
In some cases, however, an adviser just can't say no.
In Ms. Hudgens' experience, a referral from a client for a family member is particularly hard to refuse.
“If it is family, you are usually stuck with them,” she said.
For adviser Ralph G. Adamo, it is uncommon for his clients to refer a friend who is extremely argumentative, but they sometimes refer potential clients who fall well below his typical account size.
SMALL POTATOES
“[My] clients know when someone is too demanding, and they don't send them,” said Mr. Adamo, founder and president of Integrity Wealth Management in Newport Beach, Calif.
But he said that he will readily waive minimums for prospective clients who demonstrate that they are serious about their financial affairs, their family and community.
“If they have two nickels to rub together, we will make a commitment to help them,” Mr. Adamo said.
In order to stay profitable, smaller clients get more-modest service than A-list clients, he said.
All the advisers interviewed said that they will waive minimums in some cases when a big client asks them to help a friend.
Mr. Reynolds said that to encourage family cohesion, he counts the large client's account as covering the minimum for immediate family members.
On the other hand, for a difficult client such the litigious prospect he met, an account minimum can act as a “shield” to allow him to decline an account, he said.
EATING INTO PROFIT
There is a downside to waiving minimums, however.
If advisers do so for too many of these clients, it eventually takes a toll on business profitability, said Gabriel Garcia, director of relationship management at Pershing Advisor Solutions LLC.
He recommends that advisers determine what it costs to serve each client and try to base most client decisions on financial rather than emotional reasons.
Sometimes, the potential damage to an existing relationship factors into the equation, especially if an adviser decides to resign an account, Mr. Garcia said.
“What you don't want to do is just terminate a relationship that came to you from a key client and leave them no alternative,” he said.
“You need to find another organization in the community that serves that type of client. Have some options for them to engage with another adviser that meets their needs,” Mr. Garcia said.
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