A full-service, fee-only, wealth management firm can only effectively handle 100 clients per financial advisor (approximately, with a sizable standard deviation and positive skewness). A more transactional model can manage a greater number, but since many of the smaller accounts will be neglected (to some extent at least) it is unclear that the actual revenue generated will be greater than having a deeper relationship with fewer clients. Because the number of clients that can be served is limited, it is important that the advisor ensure he or she is working with the right people.
It is far easier to get the right people from the beginning than to try to upgrade the client base later. Firing clients who were with the advisor from the early days is at best awkward even if they are no longer a good fit. On the other hand, it is better to “pull the Band-Aid” quickly than to let a poor fit continue. Most advisors have at least a few clients who shouldn’t be clients. To make sure we maintain the discipline to keep only the right relationships, we have a policy of (politely) firing one client every year. Input on which client that should be comes from all of the associates of the firm.
A policy of proactively removing one client per year has a few positive effects:
- There is always someone who really isn’t a good fit.
- It keeps the advisor from accepting clients initially that are just going to be let go in the future.
- It reduces the stress on the firm’s associates during the year.
Let me explain that last point. If a client is difficult or simply seems to require more work than their fees may justify, realizing that they may be the one to be let go can reduce the stress level of the associate who is dealing with them, even if they are never the client actually selected for removal.
When accepting a client initially or determining who should be asked to find another advisor, there are four things we look for (in order of importance from most to least):
- Personality fit. If a client verbally abuses an associate or if we feel dread when seeing their name on the caller ID, that client does not qualify to work with us. Life is too short.
- Willingness to delegate. While our clients are intelligent (see the next point), if they do not wish to delegate portfolio management to us, obviously it won’t be a good fit. For example, a retiree who watches financial news all day and wants to constantly discuss with us what the talking heads are saying will not be a good fit. We are more than happy to explain what we are doing and why and obviously there has to be agreement on the appropriate risk level of the portfolio, but we are not “co-managers” of the portfolio with the client.
- Cognitive abilities. While obviously people are paying us for our knowledge and wisdom (which are two different things), we want clients who are intelligent enough to recognize our value and who (at least at a high level) understand how we manage portfolios. We have doctors, lawyers, CPAs, etc. and those are all very good clients for us. We work less well with unsophisticated people. In fact, we work well with professional people that other advisors typically struggle with; engineers, for example, are notoriously unpopular clients but we enjoy them. Their thoroughness and analytical approach matches our approach.
- Substantial assets. Our ideal clients have at least $1mm invested with us, but you will notice that this is the last thing on the list. While a prospective client obviously has to have “enough” assets to be managed, once they are at that threshold, the other factors are far more important.