Breaking Up
When crooner Neil Sedaka performed “Breaking Up Is Hard To Do,” he could just as easily have been talking about a retirement plan adviser’s client relationships. The very notion of ushering a client to the exit is anathema to the typical sales personality—who ordinarily would rather lose a limb than a client—particularly in the competitive world of retirement plan services.
Adviser Paul Grutzner, Managing Partner of ClearPoint Financial in Seattle, knows the feeling captured in Sedaka’s hit all too well and why many advisers prefer to stay mum. “I think some people just don’t want to get their name in the paper saying “We fire [clients]”,” Grutzner observes.
“We don’t cultivate a reputation in terms of firing [clients],” adds adviser Troy Hammond, President and Chief Executive of Pensionmark in Santa Barbara, California, “[but] I’m not saying we haven’t done that, because we have.”
Any discussion about ending a relationship—professional ones between an advisory client and a financial adviser or the personal ones Sedaka referred to in his song—has to start with how the relationship began.
An adviser does not necessarily have to “like” a client for the relationship to work from a business perspective, but there are similarities with the “other” variety of relationship-building—namely finding someone who shares your core values.
“There are qualities that must be present for an effective client/adviser relationship to prosper,” Hammond contends. “Clients must be cognizant of their fiduciary responsibilities, and willing to put the effort into making sure they are meeting those responsibilities. In addition, clients must follow the practice of putting the interests of the participants ahead of their own. Without these core essentials, we are ineffective at our jobs and, therefore, our relationship cannot prosper.”
When adviser Craig Hyldahl, a Principal at R.I.C.H. Planning Group in Woodbridge, New Jersey, affiliated with AXA Advisors, LLC, meets a potential client, he is gathering as much information about a potential customer as the person is about him. “While my decision on moving forward with a potential client is not based on whether I would want to hang out with them, I am very interested in how we interact,” Hyldahl explains.
“Divorcing” Clients
Although the reasons for ending a client relationship are varied, the “why” for a client “divorce” typically comes down to this: Keeping the client simply has become more difficult than the relationship is worth and now is draining time and resources better and more profitably lavished on other customers.
Frequently, advisers say the first sign of trouble in a client relationship is when clients demand a deliverable more quickly than originally agreed upon. “Everyone thinks you’re going to do this, this, and this in this time frame,” says adviser Jim Comer, President of Alliance Benefit Group Carolinas in Charlotte. “Clients say “I thought I was going to get that in two weeks and it took two months.””
That unreasonable demand for speed seems to turn up more often than a disagreement over the quality of professional services that went into preparing the materials. “People view us as the experts,” said Kenneth J. Vilcheck, Principal of Hamilton Joseph Investment Consulting of Greenville, South Carolina. “The perception is that we are up to speed about the business and the regulations.”
Another sign of trouble: A client who routinely holds the plan adviser responsible for problems created by sub-par work from an external recordkeeper, third-party administrator (TPA), or other service provider. “If we’re not responsible for that, they can’t call and expect us to be the problem solver when it is not our fault,” Grutzner contends.
However, advisers point out that such a situation also can represent an opportunity to provide additional service to the plan sponsor.
Vilcheck’s firm recently took over a plan from a national 401(k) provider that failed to file Form 5500s for the last four years, and didn’t perform discrimination testing for three years. The client had highly compensated employees who had overcontributed for three consecutive years and had to amend their tax returns. Vilcheck said his firm came in and worked with the company’s CPA, fixed the problems, and changed providers. Perhaps because of actions like this, Vilcheck says his firm has fired individual clients, but has never had to go the same route with a corporate client because those accounts so often are managed by a committee, which keeps its members accountable. “They may not agree individually, but we end up with a consensus at the end of the day,” Vilcheck says.
Hyldahl has even run into clients who are not above outright lies to their adviser—behavior that certainly will earn a client a quick pink slip at Hyldahl’s shop. For example, one client recently insisted to Hyldahl that a portion of his assets was only being moved to another practice for review when it actually was being transferred. “A client has every right to change advisers. What he doesn’t have the right to do is lie and assume there are no consequences,” Hyldahl says. “I told him I knew what he did and that, as of that moment, I was no longer his adviser. This was the only instance, but it only takes one instance to find the bad apple.” Hyldahl says he “fires” three to four clients a year.
As with many things in life, advisers say the best defense to getting bogged down by a sour client may be a good offense.
First, separating from a high maintenance client is actually evidence of a willingness to stick to a well-thought-out business model. An adviser has to be comfortable knowing what type of client the adviser can most effectively—and profitably—handle. “You need to attract the kind of clients you set up your business model to embrace,” Grutzner declares.
“Just because you can deal with the client’s demands, doesn’t mean you should,” Vilcheck says.
Next, adviser and client must agree in detail to what each is going to do—and when. This is particularly true when the adviser has agreed to be a co-fiduciary on a plan, sources say. Because of the legal implications of being a co-fiduciary, all parties need to agree in writing about the exact nature of the products and services the client wants and when those are to be delivered. After one-on-one meetings, for example, Comer and the client prepare a “vision statement” to help chart out their business relationship.
Calling It Off
While separating from a client is never going to be fun, advisers say it still can be done in a professional and even appropriately dignified manner. The adviser simply needs to contact the client and be honest about the issues in the relationship. It’s always best if the two can agree on an orderly transition to another adviser. “The firing process should be professional and systematic,” Vilcheck advises.
In the case of his firm, which signs on as co-fiduciary, Vilcheck says clients are expected to follow the 24 Uniform Standards of Care from the Center for Fiduciary Studies.
Vilcheck explains: “If the client decided that they were not going to adhere to the code, we would meet face to face and discuss the areas where there was a void. If they refused to follow all the rules, we would kindly let them know that we are removing ourselves as their adviser and as a fiduciary to the plan. There would be an agreement relieving us from that role signed by both parties. We would recommend that they contact their attorney or CPA for a reference to another adviser. I would not want to refer someone who doesn’t follow the rules to another adviser.”
“We think you would be better served by going elsewhere,” Hyldahl tells clients, to start the separation process.
Hammond’s firm, in fact, translates the whole process to what he describes as a sophisticated profitability analysis that takes into account projected annualized income and the cost/effort expenditure on clients. “We then can tell by the level of that index whether a client is profitable, break-even, or not profitable,” he explains. “Now that we have the profitability analytic system built, we can more appropriately analyze prospects and determine up front whether the relationship will make sense, and/or how much we will need to charge to deliver our services. This helps [prevent] us from bringing in the wrong types of clients moving forward.”
Although Hammond’s firm does not start the day intending to fire customers, he says sometimes that is exactly what is necessary. “There have been instances, however, where the profitability was so low, mixed with other factors, such as a client that is unwilling or unable to do their part as a plan fiduciary, where we need to step out of our role as plan adviser.”
Illustration by James Yang