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Ben D. Jones
Managing Director – Intermediary Distribution
BMO Global Asset Management
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Miniseries episode 4:
Stop hoarding unprofitable clients
In part 4 of our “Building an effective practice” miniseries with Steve Moore, we discuss the often uncomfortable topic of how to disengage with unprofitable clients, the value of referrals, and dealing with emotional attachment to clients. Listen in as Matt Smith interviews practice management expert Steve Moore on topics from his book, Ineffective Habits of Financial Advisors and the Disciplines to Break Them.
In this episode:
- How to determine if a client is profitable or not
- Other possible reasons to keep an unprofitable client
- Thinking about brand erosion and brand creation
- Dealing with emotional attachment to clients
- How to start the disengaging process
Like what you hear?
Steve Moore – We want to keep on hanging on to those unprofitable clients. It’s just from an objective point of view really, really silly.
Ben Jones – Welcome to Better conversations. Better outcomes. presented by BMO Global Asset Management. I’m Ben Jones.
Matt Smith – And I’m Matt Smith.
Ben Jones – In each episode we’ll explore topics relevant to today’s trusted advisors, interviewing experts and investigating the world of wealth advising from every angle. We’ll also provide actionable ideas designed to improve outcomes for advisors and their clients.
Matt Smith – To learn more, visited us at bmogam.com/betterconversations. Thanks for joining us.
Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates, or subsidiaries.
Ben Jones – Today is the fourth installment of a miniseries we’ve embedded into season one of the Better conversations. Better outcomes podcast. It’s a set of interviews with Steve Moore.
Matt Smith – Steve, we’re doing a series of podcasts. This is the fourth. The podcast series, just to remind the listeners, is highlighting chapters from your book titled Ineffective Habits of Financial Advisors and the Discipline to Break Those. As I said in the previous podcast, the first podcast was an overview of the entire book, and now we are focusing each podcast on one specific habit. So Steve, in this chapter you talk about disengaging with unprofitable clients. But before we get into that, let’s talk a little bit about how you help advisors determine whether or not a client’s profitable in the first place.
Steve Moore – So part of it is fact-based, but some of it is subjective. Advisors don’t do a great job of charting the amount of time that they spend with people. It’s not like with an accountant or an attorney where you call them and they push a button and the clock is running, and you pay for every 15 minutes that you’re on the phone with them. Advisors are way looser with time than that, and so what we’ve come up with is a way to subjectively evaluate how much effort a particular client is using. So on a one to five amount of effort subjectively how much time they’re using. So we attribute a number, we assign a number to each one of the clients, and then we also then plot it against the amount of revenue that they’re generating. So obviously the clients that are using either four or five amount of effort and they’re in the bottom 20% or 30% of your book are most likely unprofitable. There are also other ways that you can back into it. You can back into the amount of your hours’ worth simply by taking the total amount of revenue that you generate, dividing that by the 2,000 hours that you have in a work year, and saying that is the amount of money that we earn per hour. So you can calculate the amount of hours that you’re spending with some of these smaller clients, even though that’d be a guess, it’s most likely that at least it’ll point you in the direction of those clients that are probably not above that profit line. I’ve not been able to — Matt, I’ve not been able to in my mind figure out how anybody can serve a client and actually provide service to them for under $5,000 of revenue.
Matt Smith – On annual revenue per that client of $5,000.
Steve Moore – Yes.
Matt Smith – So there is some subjectivity to it. You talked about looking at the amount of time you’re spending with the client. Are there any other factors?
Steve Moore – We’re supposed to be spending our life’s energy in ways that it returns to us -returns good feelings, returns revenue. The more value that I put out to the world, the more of those things that should come back to me. And if I’m not getting that back, if I’m not getting positive reinforcement from clients, I don’t believe an advisor should have to work with them regardless of the amount of money that they’re paying you. But that’s beside the point here. Right now we’re just talking about profitability.
Matt Smith – Okay. When you do your sessions, what kind of reaction do you get from advisors when you’re going through this early step of analyzing the profitability? Do they have a sense that they know which clients are profitable and which ones aren’t?
Steve Moore – They do, and it’s painful for them. You know, Kahneman’s work in thinking fast and slow shows that when you have something, it’s worth more to you than it actually is to the world. So emotionally you’re connected to these people, they’ve been with you a long time, you care about them. You think they’re worth more than they actually are. So all those reasons, people want to hoard them. They want to keep on hanging on to those unprofitable clients, and it’s just from an objective point of view really, really silly.
Matt Smith – I’m sure you’ve heard other excuses too. One I would guess is common is that well, that particular client might be unprofitable, but they’re a center of influence or they lead to referrals. Maybe sometimes that’s true or maybe sometimes that’s wishful thinking. How do you address that?
Steve Moore – Well, once again with the referrals, I simply go to their book and look at the clients, and tell me the referrals that that person actually brought to you, and are they in fact high net worth referrals. Most often it’s not the case. Most often they may have brought you one high net worth referral and that was it. So in most cases, they’re an unprofitable client. People want to kid themselves because they want to hang on to them, and that’s what I call hoarding. If you’ve ever seen one of these TV shows where they have hoarders, not that you’re going to watch for very long, but it’s a complete friggin‘ mess, Matt. Advisors will say well I don’t do that, and I say well let’s just look at the book and see if that’s not the case. It’s just in many cases the bottom 50% of a book is an unprofitable book.
Matt Smith – Do you ever get the reaction from advisors that — maybe it’s subconscious, that well what am I going to do with my time, what am I going to do if I disengage with half my clients. Is there some level of security to have a certain number of clients?
Steve Moore – The security is in that people have gotten used to just being really busy, but not having the time to think deeply about what they’re going to do for clients. And they do wonder how am I going to go and think deeply about these clients that are profitable, and what’s the value that I should bring to those people. That is a little bit scary for people.
Matt Smith – Now, one way you deal with that, and we’ll cover it in later podcasts, is — then you help them with that part too, right. You help show them what are these other values that you can bring to your clients.
Steve Moore – There’s so many things that people are aching for that they’re not getting. Just the other day we talked about, Matt, that typical advisor concept with 2.5 goals per client, where the client by themselves come up with seven. Well think about the implications of that, Matt, where the advisor only knows a fraction of what a client actually is aching to get. I was on the phone the other day with a client and I asked him to actually send me the numbers. But they did a tell me your story — a question that we’ll teach later on in this podcast, where they asked please tell me your story, and they continued to take notes and what else, and they continued to take notes. And out of that, they created what they would call a discovery agreement. All the data that they think has an impact on this couple’s finances. Then they went back through it and asked well how many of these things did they know before they actually asked the question, and it turned out there were less than 10% of the information that they knew about before going in and asking that better question. They’ve been working with this client for in excess of 10 years. So if you actually will take the time to go deep with clients, first of all they’re amazing and there are amazing stories, but you find out the real value that you can actually start to bring this couple.
Matt Smith – Are there any other aspects of a client that legitimately stick out that you’d want to consider when looking at your book of business?
Steve Moore – Well Matt, what you mentioned a moment ago is the referral value. If they’re legitimate referral sources that bring you clients above whatever your new minimum is, I would say a minimum of $5,000 of reoccurring revenue, and they legitimately bring those to you, that would be an exception because the value of a client is twofold. It’s the reoccurring revenue that they generate, their lifetime reoccurring revenue that they generate for you, but it’s also the lifetime referral value. So if somebody is maybe not up there in the reoccurring revenue but they’re generating legitimate high net worth referrals, I certainly would keep those as well, and I would attribute it as a marketing expense.
Matt Smith – Now you’ve gotten an advisor to think more objectively about their book, start to disengage clients. We’ll talk in another podcast about how to help your current clients be better referrers of new business. Do you ever run into issues with advisors where clients are referring business that just doesn’t fit their book, and then the advisor’s having to turn those referrals down? Does that ever cause a problem?
Steve Moore – It doesn’t, because what you do is you say well thank you very much for referring Bill to us. We had a nice conversation with him, and it looks like his needs can be met at a much lower cost, so we referred him to a financial advisor who can have his needs met at a much lower cost. Our minimum fee is $5,000 of revenue per client to deliver holistic wealth management, and he doesn’t need that level of service right now. The referring client will understand it completely.
Matt Smith – I heard — I think I read — I read an interesting quote the other day, I think it was in a blog, and the point of the blogger was that you need to create boundaries with your clients. They will keep asking you for this or that until they find the edge. And the clients aren’t necessarily looking for yes, they’re looking for the edge. And once they find the edge, then they know what you can and are willing to deliver, and that actually gives them a level of security because they know you have thought through your service model and you have defined it. I think part of what you’re saying is an advisor who’s decided thoughtfully what’s their minimum fee and the types of clients they want, I’ve got to believe that that actually gives some clients a real sense of security, saying that we can’t do that sometimes is a feature.
Steve Moore – Absolutely, Matt. And for more than just this sense of viscerally understanding your value where it resonates with the people that you’re in front of adds confidence for the client, absolutely for sure. But you know Matt, it’s beyond that. If you went down to buy a Lexus and you didn’t have whichever model of Lexus you wanted to purchase, and you didn’t have the money required to buy that, they’re not going to sell you the car. And for some reason, advisors think because somebody walks in the door and they want to buy the Lexus, even though they don’t have the money that you’re supposed to give it to them. It’s the silliest thing in the world. So what does that do for brand erosion? You say you’re a high net worth wealth manager, and yet you’re bringing in smaller clients who aren’t paying you very much. What does that do for brand erosion? Brand is easily established. You simply do something special in the marketplace and you slap your name on it. You do something special again and you slap your name on it. You do something again and you slap your name on it. That’s called branding. So if I do something at this high level, for example deliver wealth management, alright, and I am associated with it by slapping my name on it over and over and over again, I finally end up with a brand that represents high net worth wealth management. Well, what happens if I start to bring in smaller clients and become associated with it? That’s called brand erosion. So this disengagement is not only good for creating capacity to deliver your best clients the service they legitimately deserve, it also goes a long way of creating brand for yourself.
Matt Smith – What do you say then to advisors who they understand that a client is not profitable, they just have an emotional attachment. They love all their clients equally, how do you deal with that thought process in helping advisors think through that.
Steve Moore – Well first of all, you’re going to keep some of them. There is your next door neighbor that you’re going to probably keep, you’re going to probably keep your mother-in-law, so there’s some subjectivity there as well, so some of them you’re going to keep. But you have to understand that every client that you’re spending hours for that you’re not getting paid back are actually stealing from your very best clients. Your best clients, those that are paying you $10,000 or $15,000 per year are thus funding those smaller clients. I think it’s unethical. I think it’s unethical to take what is rightfully a client who’s paying you a lot and giving that to one of those smaller clients. I think it’s an ethical issue, I think it’s wrong. And most people after listening to that will sit down and think deeply about it, and it will pain them, but they’ll agree with that and they’ll know that it’s wrong. That mind share that you’re giving that smaller client, that accountant that calls in and needs something for that smaller client, that smaller client that gets in a little trouble and want to know how to move some money around, and ends up actually spending more time than they ever paid you for in their lifetime. You’re going to spend that time because you’re a people person and you care about them, and you want to do a good job. Well, that’s actually taking the time away from one of your best clients that has other big needs; you’re taking that time away and giving it to that smaller client. It’s wrong, it’s unethical.
Matt Smith – There is a common sense principle. Your next door neighbor you’re probably not going to disengage with if you have a deep relationship with them, they’re a good person, you want to deal with them. Those are a limited number of situations, right.
Steve Moore – Let me interrupt you on that Matt, it is a limited number. When people do that exercise kind of on their own, they’ll want to save three or four out of ten of those smaller clients. When I actually sit down with an advisor and work through it client by client by client, it turns out to be like one out of ten or fifteen is a legitimate reason to keep that smaller client.
Ben Jones – The decision to disengage from a client can be a challenging one. It’s not just analytical, it can be emotional too. We’ve heard Steve talk about how to determine if a client’s profitable, and if they’re not, how else they might be worthwhile for your business. But now, let’s move on to the hard part, actually disengaging from a client.
Matt Smith – Now that we’re ready to disengage with some of our clients, how do you do it? Do you just start choosing clients on the list and disengaging? What do you suggest to advisors?
Steve Moore – After you’ve identified the clients that are going to disengage over time, we suggest that you take 1% of your revenue, which is generally 20% of your clients, sometimes 30% of your clients, and disengaging those immediately, knowing that you can lose 1% of your revenue without killing yourself. From that point on, I have found that you have to allow advisors to grow while they’re disengaging. If they stop growing, the wheels come off, they start to make bad decisions. So you need to allow advisors to continue to grow. So the way you do that is you establish this new minimum, say it’s $5,000 of reoccurring revenue. Every time I bring in a new client that’s above that amount, I take half the revenue that they’re generating and dedicate that to cleaning up the bottom of my book. So if I bring in a $10,000 client, I take $5,000 worth of small clients and get rid of them. I bring in a $15,000 client; I take $7,500 worth of small clients, and disengage them. That way, over a year, two, no more than three years, you can clean up the entire bottom part of your book, eliminating all unprofitable clients.
Matt Smith – And at the same time you’re allowing the advisor to continue to grow. It might not feel as fast as in the past, but I’m guessing if you start cleaning up your book, you’re freeing up time, the growth might actually accelerate.
Steve Moore – Well, the data on that to support your point, Matt, is you grow four times faster by reducing small households than increasing small households.
Matt Smith – What are the different ways that you suggest you could disengage with a client?
Steve Moore – Well, the simplest one is if you have a small account desk that is available to you is to utilize it. Try and outsource the whole piece. Give the group a list and say these are now your clients, and let them contact them and get them off your plate.
Matt Smith – So this is — if an advisor’s part of a network that has a corporate small account desk.
Steve Moore – And that’s the easiest, the simplest, and I’m not sure it’s the best, but it certainly has been effective. I generally get through with this presentation in our sessions at about noon in our second day of work. I’ve had people come in after the noon break after lunch break and tell me that they’ve just disengaged 150 clients. That’s clearly the easiest way of getting it done. But that’s not the only way. You can sell them to a junior person in your office, somebody who you know has got integrity who’s going to be around for a while, but they’re willing to work for fewer dollars per hour than you are. There’s nothing wrong with packaging that up and let that client have them. You know, there are a lot of advisors that are out there that are old school advisors that don’t know any better. You can sell them to them, honest to goodness. I know it seems silly, but a lot of our advisors are selling them to other advisors. And so that’s a way, and I know that people are concerned when they’re doing that about are they going to come back to me, are they going to pay me, because they feel like they’re so wedded to you that there’s this deep, deep relationship, and I have to tell you, it’s not as deep of a relationship as you might think. You could get them to a Vanguard or you could get them to some robo advisor, and they’re perfectly content and happy. You’re not doing anything wrong to them.
Matt Smith – And one thing you mentioned before is you simply tell your clients that, like you said, your minimum fee is a certain amount that’s been arrived at in a thoughtful manner, and it’s good for all the clients in the book that you hold to that minimum fee.
Steve Moore – So our minimum fee is $5,000 per annum. We’ve looked at your work, we’ve looked at your book, we’ve looked at the things you’re trying to accomplish, and we don’t think you need to pay $5,000 per annum. We can connect you to somebody who works with smaller clients that don’t have that complexity that we’re dealing with, and have your needs met at a much lower cost.
Ben Jones – It’s important to keep in mind that disengaging with a client isn’t just beneficial for you. It can also help that client get serviced by someone whose services are a better fit for their needs. It’s likely to be a tough task, but it will probably feel pretty liberating as well.
Matt Smith – I’m interested in the kind of reaction you’re getting from advisors. As we said before, you have a series of sessions that you work with advisors, and in the interim months you have coaching calls. So you’re generally with these advisors for about a year. As you take them through those coaching calls in the subsequent months, and for those advisors who are implementing this advice, what kind of reaction are you getting from the advisors as they’re disengaging?
Steve Moore – It’s all over the map. The way we try and get people to do it is to just disengage one client. We feel like if you can do it one time that they’ll learn that it can be done and they’ll do it again. So we start out with just one, and once they’ve done it, then they get it, it can be done, and it wasn’t so painful, and they can live with the little bit of pain that there was involved. Then all of a sudden it just accelerates. But it is all over the map because we’ve had people by that next phone coaching call have disengaged 200 clients, and they are thrilled by it.
Matt Smith – And generally no negative reaction like ….
Steve Moore – If you disengage 100 clients, you may get a little pushback from two or three. Maybe two or three.
Matt Smith – And how do you hold advisors to this. Do you create a set of goals or tasks that need to be accomplished by the next coaching call or time frame and then talk to you about that.
Steve Moore – We have an action step of what are the things that you need to do in order to disengage your clients, and we ask for that in advance. Then we ask them to bend to the discipline of that action plan. And in our next call we see where they are on that action plan. So when you break down big tasks into binary smaller steps, you’re much more likely to implement, and that’s what we’ve tried to do.
Matt Smith – Binary meaning it’s either done or not.
Steve Moore – Either done or not.
Ben Jones – Disengaging with clients who aren’t profitable can help your business grow in leaps and bounds. Keep in mind however that it’s not just about money. Yes, it’s important for your clients to be profitable, but they can also be worth your time if they bring referrals to your practice. Once you decide to clean up your practice, the tools Steve mentions in this episode will help you disengage from clients who don’t fit your business plan so that you can approach new clients and excel on their behalf.
Matt Smith – A huge thanks to Steve Moore for his time and insight. Our production team includes Pat Bordak, Gayle Gibson, Matt Perry, and the team at Freedom Podcasting.
Ben Jones – Thanks for listening to Better conversations. Better outcomes. This podcast is presented by BMO Global Asset Management. To learn more about what BMO can do for you, go to bmogam.com/betterconversations.
Matt Smith – We hope you found something of value in today’s episode, and if you did, we encourage you to subscribe to the show and leave us a rating and review on iTunes. And of course the greatest compliment of all is if you tell your friends and coworkers to tune in. Until next time, I’m Matt Smith.
Ben Jones – And I’m Ben Jones. From all of us at BMO Global Asset Management, hoping you have a productive and wonderful week.
Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, or security. This presentation may contain forward looking statements. Investors are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment advice, and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment professional about their personal situation. Past performance is not indicative of future results. BMO Asset Management Corp is the investment advisor to the BMO Funds. BMO Investment Distributors, LLC is the distributor. Member FINRA SIPC. BMO Asset Management Corp and BMO Investment Distributors are affiliated companies. Further information can be found at www.bmo.com.