How To Gracefully Let Go Of (“Fire”) Small Clients As A Financial Advisor

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#OfficeHours with @MichaelKitces Video Transcript

Welcome everyone! Welcome to Office Hours with Michael Kitces!

For today's topic, I want to talk about practice management, and client segmentation, and how we handle "small" clients.

One of the challenges I find in getting practice management advice as an advisory firm owner is frankly, there are a lot of strategies out there that are much easier said than done. As the saying goes, "The theory works well in theory, but not in practice."

And actually I try to be careful not to fall into that trap as well, as someone that not only deals with this running an advisory firm, but also as someone who writes a lot about practice management advice myself. I try to make sure that, at some point, we get practical and talk reality of how to implement practice management ideas.

Along those lines, one of the biggest struggle areas I see with practice management advice is the suggestion that we're supposed to segment our clients into A clients and B clients and C clients. Where you give special services to your A clients, and you give "normal" services to your B clients, and then your C clients you provide the lowest service level. Because the C clients are paying you the least, and you just can't service them as much as everybody else. In fact, some practice management consultants suggest "You need to systematically fire your C clients, and focus on your As and Bs, so you can grow your business."

But there's a practical challenge to this, highlighted in this weeks's question from Don:

"I've been working with a practice management consultant, who's pushing me to prune my client base and get rid of my smallest clients who aren't very profitable. I get the theory, but how exactly do you do this? Do you just go and say to the client, 'Hey, sorry, not going to work with you anymore. Have a nice life?' If you fire a client, isn't that gonna piss them off?"

Good question, Don!

How Many Clients Can A Financial Advisor Really Serve? [Time - 2:30]

There's an important context to set first. We must recognize that we're all limited in how many clients we can actually serve. We can only handle so many. There's some research out there suggesting our physical brains can just only handle so many relationships. And so if there are only so many client slots in your brain that you can handle, it becomes an appealing strategy to say "all right, maybe we need to let go of some small clients, and free up slots in our brain for someone else."

Now, for firms that really want to grow and expand the business beyond just themselves, they handle this issue by hiring an associate adviser, and let that advisor serve the smaller clients. It can still be profitable for the business, because a younger or a newer adviser has lower salary demands, such that the firm can pay them reasonably for their experience, they can serve smaller clients, and it's still profitable in the aggregate.

But I'm going to assume for a moment that you don't want a hire. Or maybe you don't have enough small clients for it to make sense to hire a full-timer. But you need to do something. You're reaching your own client capacity, you need to free up room for bigger clients to grow your business.

It's Hard To Fire The Smallest Clients [Time - 3:16]

Except it's really hard, in practice, to fire a client. Especially since the reality for so many of us is that our smallest clients are often our first clients, or our longest-standing clients. Is that true for any of you out there? After all, when we get started, we'll take anybody that we can work with. Which means we end up taking on the smallest clients early on. Then as the business succeeds, we start moving up to more affluent clients. But our small clients are still there, and they were our first.

That creates all sorts of challenges in trying to let them go. It feels disloyal to say "Hey, thanks for sticking with my advisory firm for 10 years, but now I've become so successful, that I'm not going to work with you anymore." It doesn't feel like a very gracious thing to do with clients who took the leap by getting started with your business!

Nonetheless, this bottleneck remains, because we can only serve so many people, and the small clients may be crowding out your ability to grow.

"Graduate" The Client To Becoming Self-Directed [Time - 4:06]

So there are a few strategies you can try out to actually fire, or get rid of, your smallest clients... that I think you can do in a reasonably graceful manner.

One strategy I know a lot of advisers use successfully is to "graduate" the client. So you sit down with a client and say:

"We've been on this journey together. We've been working together for years now. But I think I've taken you as far as I can on this journey. We've gotten your finances sorted out. I've helped you in several areas, and I think you're ready to do this on your own. And hey, you can even save the costs of paying me. I'll help you transition to a self-directed platform like Schwab or TD Ameritrade or E-trade so you can take care of yourself from here."

The idea of this approach is to make the client feel good about what they've accomplished with you, and emphasize that they're ready to go out on their own. So you're not firing them, you're graduating them. "Congratulations. You've sorted out your life enough that you can do this on you own now! You don't need me to work with you anymore!" Particularly if the reality is that as a smaller client for you, you're probably not really servicing them that in-depth anyways at this point, and they're mostly self-directed already.

So the "graduation" strategy makes clients feel good about themselves. You're not rejecting them. You're trying to uplift them, recognizing that they've just moved on to the point where you're not the right one to be on the journey with them anymore.

And in point of fact, I've seen people do this not only to small clients, but also those few "pain in the butt" clients that you really have helped some and you really don't want to serve anymore, regardless of even whether they're a C client financially or not. Again, you can just go ahead and say, "We've worked together, I've helped you for a while, and I think you're really ready to go out and do it on your own," which is a much nicer way than saying, "You're a pain in the butt and I just don't want to work with you anymore," even if that happens to be the case!

Refer The Client To A "Smaller" Advisor [Time - 5:53]

Of course, the caveat to the strategy of trying to graduate clients is that it's hard to do so in good faith if you actually don't think the client is in a good mental or financial situation to do so. Turning them out by themselves would just set them up to hurt themselves.

So if this is your situation, option B is that you refer them out to another financial advisor. Instead of graduating them to be self-directed, you're going to send them along to another advisor that can help them more.

The basic approach is still the same. It's telling the client:

"Look, I think I've helped you as far as I can on your journey. I'd like to refer you to so-and-so, who I think is going to be a better fit to help you from here."

Be certain to check with that other advisor first, though. Let him or her know that you're going to be sending a referral over, to make sure it goes smoothly. Because last thing you want to do is refer a client out to another advisor, and have the other advisor reject him and say, "I don't want to work with you either!"

A key aspect to this strategy is to recognize that a client that might be too small for you could still be a big, awesome client for another advisor. I find that we sometimes tend to forget this. We tell ourselves "Well, if I can't service the client, then no one can service the client." And it's just not true.

Because the reality is that different advisors can be at very different places in our businesses. We may have different targets about who we want to serve, or even what kind of income we want or need to make. So this isn't just about sending a small client away like they're a castoff. It's about sending the small client to an advisor who actually wants to work with that person, and who wants to give them good service.

Because again, the reality is usually that if it's your C client, you're probably not really giving them the best service at this point. Because you're focusing on your A and B clients. But your C client could be someone else's A client, where the client will get A-level service!

And there are a lot of places you can go where you can refer smaller clients to advisors that will happily and graciously serve them. You can look at firms that don't have minimums like Garrett Planning Network. We're the same at XY Planning Network, with no asset minimums, so our advisors can be a good fit for small clients who will simply pay for financial planning with a monthly subscription fee. You can also network around your local FPA chapter, NAPFA study groups, the PFP section of your state CPA society if you've got one; all of those are places you can find other advisors to refer to.

But the whole point is let the client go to someone who will really value them as a client. Because the truth is it can be better for the client, it's better for the other advisor, and it's better for you because you've already determined this is not a very profitable client for you! Because that was how they were classified as a C client in the first place!

Sell The Small Clients To Another Advisor [Time - 8:26]

If you're looking to release a lot of small clients, another option to consider is rather than simply referring them out, you actually do a partial sale of your advisory business. So you sell that grouping of C clients by selling a portion of your client base.

A partial sale may be easier because if there's a whole bunch of C clients, you can negotiate with one advisor to do it all at once, rather than just referring them out one at a time. And frankly, if it's a big chunk of C clients, there is some economic value there for the business. Because again, those clients are still valuable and profitable to someone else, even if they're not necessarily valuable to your business at this point.

So this means you might go to look for buyers at platforms like FP Transitions. Or you can go through your broker-dealer or custodial platforms to find another advisor who can work with the clients where they are, so they don't have to move to your accounts and re-paper and do all those things that clients don't like to do. Or again, another option is to network with other local advisors to find a local buyer who would be convenient for those clients.

Now if you're selling your smallest clients, you may not exactly get a premium purchase price for them. But it's still better than just walking away from the revenue by referring them out or shifting them to a self-directed account. And remember, selling the portion of your business that is not really a great fit to you at this point anyways may still be a wonderful fit for another adviser.

And again, the messaging for clients is also a bit softer with this approach. You're not ditching them. You're not firing them. You simply made a business deal with a nother advisor to sell a portion of your business, and they're going to be going to be working with that new advisor now... who is excited to serve them and work with them. This can be framed as a positive for the client.

Institute A Minimum Fee (Or Raise It) [Time - 9:55]

Now if you can't or you don't want to send the clients away by graduating them, or referring them out, or selling them off, your last option is simply to raise your financial planning fees, and let clients fire you. So you don't make it about them not qualifying to be your client; instead, you make yourself not affordable, and let them make the choice to leave.

Notably, to do this, you can't just impose a minimum account size. Because now you're back in the world of making small clients feel slighted. "Hey, you only have $250,000, and I'm making a new asset minimum of $500,000." Now the client feels bad again.

So the trick here is not to institute an asset minimum; instead, you institute a minimum fee for your services. So you might go to clients and say:

"We're instituting a new service process for all our clients. And we've determined that in order to service our clients well to the depth that we think is appropriate, and be effective as a business, we need to charge clients a minimum of $4,000 a year (or $1,000, or $5,000, or $10,000, or whatever your number is). We're going to start charging $4,000 a year, starting next year.

If you'd like to stay with us, we welcome you to continue working with us, and we'll tell you all about the new service standards we're going to be delivering for all clients going forward. If you don't want to work with us, that's okay. We'll help you find another advisor you can work with, or we'll help you shift your accounts to manage yourself."

So now the choice is the client's, about whether to fire you or stick with you. And the truth is that if they really value what you do, particularly if you're doing comprehensive financial planning and providing more value than just portfolio management, they may well decide to step up to the fee. They may say, "Hey, the $4,000 fee on the $250,000 portfolio is a relatively high percentage, but the value you give me goes way beyond just the portfolio. It's about all the other financial planning services that you provide. So I'm happy to pay you the minimum fee." And if they do, they just turned themselves from C clients into at least B clients for you, so now it's profitable to keep them, and you can continue to service them as you have!

Alternatively, if they decide to move on, and the client says, "I'm sorry, I'm not comfortable paying your new minimum fee," well, that's fine. Because frankly, the goal was to not really work with those C clients going forward anyways! But now, you're not firing the client. You're not telling the clients, "Go away." You've simply gone through a fee increase that you're doing for your entire business, and they decide to fire you. They get to reject you. Which reduces the risk of angry or resentful clients, especially the ones that have been with you for a long time. It's a much easier way to do the transition.

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The bottom line is that there really are reasonably gracious ways to try to eliminate working with smaller clients who aren't profitable. Because again, it's not just about firing them so you can let them go and make more money, or just because they won't implement your recommendations. It's also that recognizing that your C clients can still be someone else's B clients or even someone else's A clients, because that advisor has a different cost structure or business model or income goals. And that means sending them to the other advisor benefits the client, who's going to get better service from that advisor.

And you can make this happen by deciding to graduate clients, or you can refer them out, or you can sell a portion of your client base, or you can simply institute a minimum fee (or raise your minimum fee) and let the client self-select out.

But given that we can only serve a limited number of clients and particularly if you don't want to do more hiring and build out a large-scale business, it really is important to make sure that you're working with clients that are right for your business. So don't feel guilty about the need to at least move on from certain clients who don't fit where your business has gone. Just be ready to find a gracious way to let them go.

So I hope that's helpful! This is Office Hours with Michael Kitces, 1PM East Coast Time on Tuesdays. Sorry we got started a little bit late today, but thanks for hanging out everyone. Hope this was helpful food for thought and have a great day!

So what do you think? Have you ever had to "fire" or move on from small clients? How did you break the news to them? Do you think one of these strategies would work for some small clients you want to release now? Please share your thoughts in the comments below!