Although most
advisers are hesitant to let go of any revenue, three-quarters say they have
ended a relationship with a client
Company culture and
hiring the right talent are key elements of top-performing
advisory firms, but what about the clients?
According to research
from American Century Investment and InvestmentNews, the most successful
firm have an acute focus on working with the right clients, having 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. 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 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 worth keeping or not can help maximize their
firm's profitability.
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