As a registered investment adviser, no matter how carefully you screen your clients before accepting them, there can still be relationships that just don’t work out. Perhaps a client has unrealistic expectations for investment performance or demands a high level of service for a low fee. In such a case, you might have to fire the client.
Initial conversations with a customer are much like a first date, says Karim Ahamed, a partner at the Chicago office of HPM Partners, a $4 billion registered investment adviser in Chicago. “Both sides are on their best behavior. Things may be left unsaid which have a critical bearing on how the relationship progresses.” But the best performance in the world doesn’t help much if chemistry with the client is bad, he adds.
Relationship problems are not the only cause of trouble. So how to decide when to part ways with a client? Lane Jones, chief investment officer at Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Florida, says his firm drops a client about every two years, for one of three reasons: First is mistreatment of a staff member by the client. Second is a misalignment of philosophy between the firm and the client. Third is an unprofitable client.
“If a client is belligerent or demeaning or unprofessional with our staff, we don’t accept that,” Jones says. Employee morale is important. “You have to have a thick skin in this business,” he continues, “but we’re very quick to let everyone from our receptionist up to the top know that they have a right to be treated with respect.” If a customer violates that, employees are encouraged to alert management.
When it comes to philosophical misalignment, sometimes in an effort to grow the business, you will take a chance on a customer who’s not a perfect fit, Jones says. The risk often doesn’t work. A client might become overly fixated on short-term market moves, for example, saying, “I pay you. How did you not see that decline coming?” he relates.
In fact, that was the exact scenario that happened with a client of HPM’s Ahamed. HPM put the customer in an alternative, illiquid investment, in which it was clear the payoff might take a while. The customer was preoccupied with short-term performance, however. “He came from the corporate world and was used to quarterly reports,” Ahamed says. The firm tried hard to get the client to adopt a long-term view, Ahamed continues, though over time, it became clear that he didn’t have such a horizon in mind, leading the firm reluctantly to part ways with him. In another instance, the market moved against a particularly wealthy client who had placed an options order with the firm. Instead of copping to an unwise move, he tried to pin his losses on a member of Ahamed’s team. Compliance officers were brought in and determined that the team member wasn’t at fault. Says Ahamed: “If you can’t trust a client to tell the truth, there will be problems down the line.”
Should an advisory firm decide that the client would be better served elsewhere, a good way to avoid bad blood is to do a “It’s not you; it’s me” and place the onus on the adviser. And at that point, the customer makes the decision. If he or she decides to bolt, the firm will try to help the customer find a new adviser.
That assistance is crucial, even though it’s not always easy, as some rejected clients feel quite insulted, says Michael Dixon, chief operating officer at Carl Domino, an RIA in West Palm Beach, Florida. It’s very important to terminate clients delicately to avoid potential bad-mouthing or, worse, legal action. Over the past five years, Dixon’s firm has let go four customers. Each time, the gentle approach worked, he says.
Finally, an RIA firm should calculate the profitability of each client, Jones says. The firm should let customers know they will have to pay more for a higher level of service, so that the firm can make a profit. To be sure, in the first five years of an RIA firm’s existence, terminating a client is rarely brought up, because it erases revenue. But in the long run — as some RIA advisers have apparently failed to see — sometimes you’re better off doing so.
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