Graduating Clients The Right Way: A Thoughtful Approach To Sustainably Transition ‘Small’ Clients To On-Demand

As Firms Grow, Early Clients May Not Keep Up

Estimates from a Fidelity Investments presentation suggest that serving a single client costs advisors between $6,000 and $10,400 on average. Are all of your clients covering their costs? I'm willing to bet that they're not. When was the last time you took a hard look at the revenue generated by your smallest clients and asked yourself why you continue to maintain unprofitable relationships? While many advisors have grown their average client size over time, it can still be extremely difficult to let go of smaller clients, even when they aren't profitable – or when it's the right decision to make.

It's a familiar challenge: letting go of small clients, especially when they include family or friends who were among the first to put their trust in you. But for every client you lose money on, a larger client's revenue is making up the difference. Your smallest clients are rarely your best-fit clients. Graduating them to self-management – or offering them access to advice on an on-demand hourly basis – can help increase your profit margin and reduce stress for both you and your team.

In 2021, my firm, Goodwin Investment Advisory, signed 100 new ongoing management and planning clients – nearly two new clients per week. But shortly after, during our leadership team's annual retreat, someone commented that we might be better at onboarding clients than at providing an unforgettable client experience. Ouch!

Around this time, one of the advisors on my team mentioned in passing how excited he was about growing his book so quickly. But he also admitted that, at our current pace, he couldn't figure out how to take PTO without falling hopelessly behind upon his return. The burnout alarm in my head was getting louder! 😉

I'm a big fan of Dan Sullivan and Strategic Coach – I was a member for five years and loved it. One of the first concepts taught in the program is the "ceiling of complexity". The idea is simple: as you grow and your business becomes increasingly complex, you will eventually reach a point – the 'ceiling of complexity' – that requires the advisor to make a choice between "rugged individualism" (believing I can do it better myself) or a "team approach" (that we can do it better together).

The solution most commonly discussed for managing growing complexity is simple: Expand the team. So if a firm wants to add new clients and its team is maxed out, the answer seems clear – It's time to hire more staff.

However, there's an alternative for firms that don't want to grow their teams. While sticking with the rugged individualism approach can spread advisors too thin and risk the quality of the client experience, graduating smaller clients can create the space needed to serve new, higher-value clients without compromising service standards. And even though no one wants to fire a client – or be fired – there are ways to handle the transition without burning bridges. For example, our team adopted a more positive framing: we 'graduate' smaller clients to self-management by transitioning them from ongoing management to on-demand hourly advice.

From Novice To Expert: Why Your Time As An Advicer Is Worth More Than Ever

When I got started as a financial advisor, I was happy to meet with everyone and anyone willing to sign a client advisory agreement and open a brokerage account I could manage. In those early days, I had no minimum client size. If someone wanted to open a zero-balance Roth IRA and commit to contributing, I was happy to take them on as a client.

At that point, I had little experience in the field, no team, and no CFP marks to my name. My value in the marketplace wasn't far above what an intern might earn. Fast-forward 20 years, and so much has changed. I now have an incredible team of 12 employees, including four CFP professionals. I've gained two decades of experience (and I like to think I'm 20 years better at what I do! 😉). So why am I still holding on to a client with a small Roth IRA? Or a client who never made a contribution after initially signing on with us?

If you're curious about what your experience is worth now out in the marketplace today, just ask ChatGPT, Google, or Salary.com – it's almost certainly much higher than when you first started. Trustworthy CFP professionals with experience are increasingly in demand, and supply hasn't kept up. That realization was a turning point for me: Some clients simply hadn't grown alongside me.

To provide exceptional service to clients who exceeded my average client size, I needed to create more space – both mentally and with my time.

Having No Minimum Is Expensive – Calculating The Cost Of Serving Each Client

Not having a minimum client size or asset threshold comes at a cost – sometimes a significant one. After we did an internal exercise to assess the profitability of our clients, we realized that maintaining a lower client minimum was holding us back. As a result, we increased our minimum from $100k to $300k in March 2022. The reason? We discovered we were losing too much money serving too many clients whose revenue didn't justify the expense.

To understand this dynamic in your own firm, it helps to calculate the cost of serving each client and compare it to the revenue they generate. There are two main ways to do this: by using a simple calculation or following a more detailed breakdown that breaks out revenue and cost by client segments.

The simple approach involves subtracting your firm's total profit from its total revenue to determine your total costs. Then, divide this figure by the total number of clients to calculate your average cost per client across the firm.

A more detailed analysis, however, can provide greater insight into how costs vary across different client segments. To begin, consider grouping your clients by complexity. For example, mass-affluent clients might only require standard portfolios and minimal contact, while high-net-worth clients may need more advanced services like tax planning, estate strategies, or frequent advisor interaction. By segmenting clients in this way, it becomes easier to pinpoint where resources are being most heavily utilized.

Next, calculate the direct costs tied to servicing individual clients. This includes factors such as the time advisors, planners, and assistants spend with each client, which can be tracked and multiplied by their respective hourly rates. Technology expenses, such as CRM systems or financial planning software, should also be allocated proportionally to clients who benefit from these tools. Additionally, custodial fees and any costs related to in-person meetings, like travel or hospitality, need to be factored in.

Beyond direct costs, firms should also consider indirect operational expenses, which are spread across the entire client base. These include office overhead (e.g., rent, utilities, and administrative support), marketing and client acquisition expenses, compliance costs, and investments in staff training or professional development. By adding the direct and indirect costs together and dividing by the total number of clients in each segment, you can develop a clearer picture of the average cost to serve clients at different levels of complexity.

To summarize, the detailed approach to understanding client costs involves the following steps:

• Segmenting clients by complexity (e.g., basic vs. complex needs).
• Calculating direct costs, such as time spent, technology, custodial fees, and meeting-related expenses.
• Allocating indirect costs, including office overhead, compliance, marketing, and staff development.

Combining direct and indirect costs for a complete view of client profitability.

• Calculating the average cost to serve each client by dividing the total costs by number of clients:

For those who prefer a quicker process, many custodians offer tools to simplify the analysis. Advisors can check with their custodians to see if they'll help with this exercise. For instance, Fidelity provides access to its Client Insight Tool, which helps advisors analyze client profitability and better understand their cost structures.

It's important to recognize that having a handful of unprofitable clients is normal – even expected. However, when too many unprofitable clients dominate your book, it creates challenges that can't be ignored. Notably, firms with no unprofitable clients tend to set much higher minimums, often in the million-dollar range.

For me, the key realization was understanding that my profitable clients were subsidizing the cost of serving unprofitable ones. That hit me hard. I had to wrestle with the question, "Am I okay with this dynamic?" My answer wasn't a simple "yes" or "no," but more of a "not so much." And that's when I knew it was time to make a change.

Having Too Many Clients Is Stressful

At a certain point in our evolution as a firm, we realized we had to decide on a cap on the number of clients we could effectively serve – both at the advisor level and across our firm as a whole. Without having a cap, and while simultaneously paying our advisors based on their results, there was no built-in limit to how many clients advisors might take on. This approach, while initially motivating, ultimately pushed advisors to keep signing new clients indefinitely… to no end, often at the expense of their own well-being.

While setting a minimum client size helped reduce the number of smaller, less profitable clients, it wasn't enough to fully address the strain. We found that not having a cap led to team member burnout and, as a result, a less-than-optimal client experience. This realization drove us to take action.

To measure our team's stress (and success), we use a service called WorkLeap, an employee experience platform designed to enhance employee engagement, streamline performance management, and support talent development within organizations. In fact, Goodwin Investment Advisory was proud to be recognized as an Employee Experience Leader by WorkLeap in June 2024 as one of the Top 20 companies (in the 0-99 employee category) for fostering employee engagement.

However, back in 2021, our WorkLeap scores (it was called Office Vibe back then) revealed rising stress levels among our team. While there were multiple factors that contributed to this, one of the most significant was the absence of a clear limit on the number of clients advisors could be responsible for. In response, our leadership team decided to implement a cap.

Today, our cap is 150 clients per advisor. This number could change as we continue to grow, and every firm will have its own optimal client cap based on its team structure and resources. For us, though, this limit has been working for us so far. It has allowed us to balance advisor workloads, improve client service, and create a healthier, more sustainable environment for everyone. 😉

Convincing Both Sides Of The Brain

Logically, you know the math doesn't support keeping smaller, long-time clients forever. But emotionally, it's difficult to let go of the trust and confidence these clients showed in you early on. Navigating the decision to graduate these clients to self-management requires more than just numbers — it means addressing both the logical and emotional sides of the brain.

Making a full-brain decision involves convincing both sides of our brain. The left hemisphere is where logical thinking and analytical reasoning reside, while the right side is associated with creativity, holistic thinking, and emotional processing. Of course, this is an oversimplification since we use both sides to make decisions, but thinking about them as different 'sides' that need alignment can be a helpful exercise.

For the left side of the brain, the numbers are clear: keeping small clients isn't sustainable, and implementing a reasonable minimum is a wise move. But if you've known this for a while, what's really holding you back? Often, the challenge lies with the emotional questions from the right side of the brain:

• What will clients think when you let them go? Will they still like you?
• Will they see you as ungrateful for the trust they placed in you early on?
• Could it damage your reputation?

These are all valid concerns and great right-side-of-the-brain questions. I wrestled with them myself after holding onto small clients for nearly 18 years. I worried about how my decision would be perceived, whether clients would feel betrayed, and how it might impact my team's reputation. Ultimately, though, I realized this: my team's well-being had to come first. For me, reducing stress for my team and ensuring they felt fairly compensated for their work was more important than avoiding the chance of upsetting a client.

In 2023, we transitioned 61 clients to self-management, giving them the option to access our advice on an on-demand hourly basis. In 2024, we transitioned 24 more. Admittedly, some conversations were tough. One client became upset, prompting me to reach out to him personally, and we ended up having a great conversation. Most clients, though, were grateful. That's right. They appreciated that we reached out with empathy and offered thoughtful options.

One of my favorite quotes is by Maya Angelou. She said, "I've learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel." With that in mind, we called and spoke to our clients with care and empathy. For clients we couldn't reach by phone, we followed up with a thoughtful email that clearly outlined their options. Most clients came to realize they could save money by paying our on-demand hourly rate for occasional advice instead of continuing to pay the AUM fee they had been charged under our previous minimum.

Where we thought we'd have pushback and clients would be offended, we instead found gratitude. Many clients appreciated being given a graceful way to move forward – what felt like a free 'get-out-of-jail card' rather than the embarrassment of having to fire us first. 😉

No Margin, No Mission

Running a financial advisory business isn't just about serving clients – it's about ensuring the business remains strong enough to weather inevitable market downturns. In 2022, when the S&P 500 went down by 18.11%, our already slim profit margins put immense strain on our ability to fulfill our core mission: leading people to financial peace, independence, and generosity.

With fewer resources, our ability to be generous as a company became very limited. New and innovative ideas – ideas that could have strengthened our firm – had to wait if they required additional costs. The weight of knowing I had employees who depended on me and the company for stability and a steady paycheck was very heavy.

That experience reinforced a hard lesson: I never wanted to be in that position again. While we couldn't predict how strongly the market would recover, our leadership team decided we needed to increase our profit margin dramatically. Letting go of as many non-profitable clients as possible seemed counterintuitive at first – why voluntarily let go of all that revenue? But the data was clear: serving unprofitable clients was costing us more than it was contributing.

Two years later, that decision has paid off. Our profit margin has increased from 7% to 23%, providing the stability and flexibility we need to continue executing our mission effectively.

You Are Not Forgetting These Small Clients

Letting go of smaller clients doesn't mean neglecting them. In fact, it's quite the opposite. It actually requires thoughtful consideration about what's most appropriate for both them and your firm. Instead of continuing to manage their assets under a structure that may no longer be the best fit, you're helping them transition to a strategy that better serves their needs.

Think about it: If your current average client has more than $500k in assets – and your new clients typically have even more – does it still make sense to retain clients with less than half that amount ($250K or less)? More importantly, as your firm evolves and your service model is designed around the needs of larger clients, are those same services still appropriate for clients at the lower end of your client base?

The reality is that they may not be. And by proactively guiding these clients toward solutions that align with their financial situation, you're ensuring they receive the right level of support – whether from your firm or elsewhere.

Offering Graduated Clients A Different Way To Stay With The Firm

What if, instead of letting go entirely, you offered smaller clients a different way to engage with your firm – one that better aligns with their needs and financial situation?

That's exactly what we did. We offered these clients the option to sign the new management agreement, which required a $1k per quarter minimum, or to transition to self-management while retaining access to our advice on an on-demand hourly basis at $375 per hour on demand.

This approach allowed us to continue providing the same great advice but without the ongoing risk, cost, and resource strain that comes with full-service management. More importantly, it reframed the transition in a way that felt much better for clients. Rather than feeling like they were being 'fired', they were simply shifting to a service model that was more appropriate for their circumstances.

Looking back, the results speak for themselves. After two years, my team reports that fewer than 20% of the clients we have graduated have returned for on-demand hourly advice – affirming that, for most, the transition made sense.

Graduating Clients The Right Way: A Thoughtful Reputation-Preserving Approach

Successfully navigating this process requires clarity, conviction, and careful execution – both for your team and your clients. If you're considering this path, here's a strategy to help you navigate it smoothly.

To set yourself up for success, start by ensuring you're fully convinced of the decision. If you have a team, don't try to sell them on it unless you truly believe in it yourself – good team members usually come with good built-in BS detectors.😉

If you haven't already, this is a great time to do the following:

• Set a maximum number of clients a single advisor or team can effectively serve;
• Establish or increase a minimum asset requirement for management clients; and
• Offer an on-demand hourly service as an alternative.

For context, our firm caps advisors at 150 clients each. In March 2022, we raised our minimum from $100k to $300k, and we currently offer on-demand hourly services for $375 per hour.

Once your team is aligned on the decision to move forward, make a plan to graduate clients gradually over time. I've learned that a scalpel approach – carefully selecting clients to transition over time – is far more effective (and far less stressful) than a hatchet approach. Also, consider your organization's current pace of change; timing is critical for ongoing success.

How We Transitioned Clients Over Time In Waves

We decided to graduate our existing clients gradually, in three waves over three years. The right timeline will depend on what makes the most sense for your firm, but for us, this phased approach aligned well with everything else our team was managing.

In 2023, the first year of our transition process, every advisor – including me (I had to lead by example, you know 😉) – converted all clients under $100k. I'll admit, it was humbling to realize we had 61 client relationships below that threshold.

In 2024, the second year, we moved the bar to $200k, transitioning 24 more clients. This year, we'll complete the process by graduating clients under $300k.

Our stated minimum is $300k, but in practice, it's a guideline rather than a hard rule. The actual threshold is a minimum fee of $1,000 per quarter. If a client with less than $300k in assets is willing to pay that amount, we may consider keeping them – but honestly, I don't love it. To ensure we don't overextend, we limit each advisor to just one new client below the minimum per quarter.

Like many advisors, I prefer to earn fees through value-driven management, not by charging minimums. If the timing is right for the client and they plan to grow quickly, we'll consider making an exception. But if they haven't reached the minimum within two years, our advisors know they'll need to have a conversation about converting the client to on-demand hourly.

Generally, we encourage clients below $300k to start with on-demand hourly advice before committing to full management. This year, as our team converts their last group, we anticipate that many of our remaining sub-$300k clients will sign the new advisory agreement and pay the $1,000 quarterly fee, as most are very growth-oriented and see the value in our services.

The Personalized Script We Use To Communicate The Transition

Our advisors found that direct phone calls were the most effective way to navigate the 'graduation' conversation. Speaking with clients personally helped the client feel important enough to be reached out to directly, maintaining trust in the process. Whenever possible, we avoided sending mass messages – this is a delicate transition, and each client deserves a private, one-on-one discussion with their primary point of contact.

Handled poorly, this type of change not only could offend a client and damage the relationship, but it could also result in a bad online review that could impact future business. That's why a thoughtful, personalized approach is crucial.

If we weren't able to reach a client by phone after multiple attempts – including follow-up text requests to call us back – we'd send a personalized email. While each conversation varied based on the advisor-client relationship, the email below served as a foundation for written communication when necessary.

Example email sent when clients couldn't be reached by phone:

Dear [client],

I hope you are doing well.

I would love to schedule a time to discuss your financial plans, investments, and a potential upcoming change to our service agreement at year-end. Currently, your fee is based on a percentage-of-assets-under-management model. However, by the end of the year, Goodwin is implementing a $1,000/quarter minimum fee if your assets-under-management percentage fee would otherwise be less than that. This change will take effect on January 1, 2025.

Alternatively, you could switch service models to a fee-per-meeting model. I value our relationship and want to continue providing you with the best possible service, results, and value. I hate that I have to bring this up, but I want you to know far in advance and do what is best for you and your family.

It would be great to schedule a meeting with you soon to discuss your financial planning opportunities, investments, and the potential service model change. Here is a link to schedule a meeting with me:

[insert scheduling link]

Please let me know if you don't see a time that works for you.

I hope to talk with you soon.

Sincerely,

[Advicer]

Even with a thoughtful and proactive approach, not every client will respond to the email. If a client ignored multiple phone calls, text messages, and emails, we viewed it as confirmation that they were not an ideal long-term fit.

In those cases, our client advisory agreement allowed us to terminate the relationship with a 30-day written notice. In 2023, we had to mail 16 termination notices. We did not have to send any in 2024.

By following a structured, client-first process, we ensured that transitions were handled with respect and professionalism – preserving our reputation while reinforcing our commitment to working with engaged, growth-oriented clients.

Impacting Income And Other Considerations

As a growing company, we set guidelines to ensure that client graduations didn't negatively impact advisor income. Specifically, we recommended that advisors only convert as many clients as they could replace with new assets that quarter. So, for example, signing a $1M client meant they could let go of ten $100k clients – maintaining a similar income with nine fewer client relationships to manage.

For firms with younger or inexperienced advisors, it might seem logical to shift smaller clients to them – after all, they have more time, could benefit from the revenue share, and might even help these clients grow. Although I was tempted by this idea myself, I recommend avoiding this "no pain, no gain" exercise.

Because when I asked myself, "Knowing what I know now, would they actually want these clients?" – the answer was probably not. If we only gave them small clients, they might only have 'small' experiences. It wouldn't be fair for their growth to limit their ability to work with mid- to high-net-worth clients in the future. Instead, we decided to graduate and convert our small clients while focusing on setting up our newer advisors for success further down the line.

Beyond the income impact, there's another key consideration: unengaged clients tend to have the highest likelihood of firing you – or at least of being dissatisfied. Of course, this isn't always the case, but in many instances, it is. By letting them go, we reduced the risk of attrition and improved overall client satisfaction – while ensuring our team was focusing on the right relationships for long-term growth.

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Graduating clients is never a perfect process, but for us, the juice was worth the squeeze. Many of our former clients were grateful they could save money and still access us when they needed to. In reality, fewer than 20% of those we transitioned have returned for on-demand hourly meetings, which affirms that the shift made sense for both sides.

Letting go of our smallest 85 clients – 20% of our total client base – has been like a tide rising all ships. Our profit margin has soared from 7% to 23% in just two years. Our team is less stressed, more focused, and better able to deliver exceptional service to our core clients.

Ultimately, the key takeaway is this: By refining the client base and aligning service models with long-term sustainability, the entire firm benefits. More engaged clients, a more balanced team, and a more profitable, thriving business – these are the possibilities when firms make space for growth!