A tough decision many firms face is whether or not to let go of less-than-profitable clients. It comes down to the business model you want for your future. Some firms will work with any client who wishes to take positive action in their lives, regardless of their profitability to the firm. This can be a successful model, but it may require increased overhead, technology or staff to support the service needs long-term. On the other hand, letting go of less-profitable, lower-tier clients may allow you to provide a more boutique experience for your “A” clients and high-potential relationships and give you time to focus on markets that are appropriate for your business.

This may involve building out a more simplified service or modular planning model for clients with less comprehensive needs. It may involve transitioning smaller clients to an operational service center, a robo-platform for advisory firms, or a potential junior associate. It may also be an opportunity to sell this block of your business to a potential qualified buyer. If a client relationship has been particularly tenuous, it may involve parting ways altogether.

The decision to let go of certain clients is not always easy, especially if they were some of the original clients who helped get your business off the ground. You may be afraid of offending a long-standing relationship or what a perceived slight might do to your brand. Other firms may not let go of clients because their business is not where they want it to be and they are afraid to lose any relationships…hoping that these clients will become profitable in the future. This can be a danger zone. Not taking the steps necessary to grow out of your comfort zone can leave you in a complacent mode for years, which could result in further business decline. Hope is never a plan.

GETTING STARTED

Assessing this important decision involves looking at your circumstances in terms of capacity, profitability, and how efficiently your staff can perform long-term. More often than not, you may want to grow, but your team and staff are bogged down by servicing lower-tier clients. It doesn’t mean these clients are not good people; they just may be better served by a limited service model, firm or associate who can dedicate the time and attention these clients deserve. All too often, firms won’t take action on less-than-profitable clients until they find their revenues have stagnated, their team’s performance or morale has declined, or client complaints start surfacing. It goes without saying that the last thing you want to have happen is to lose a high-potential client, or employee, because you lost your focus. Even worse, you could lose your reputation from a complaint or regulatory issue that stems from a less-than-profitable client.

Letting go can create more time to elevate the experience for the right clients, open new markets, or focus on relationships that have high-potential. You may also relieve a significant amount of stress on your support team. Letting go of clients who no longer fit your model can create an opportunity to redefine who you are and the value you deliver.

To help bring clarity to your decision, you may wish to consider the following steps:

Step 1: Revenue Analysis

Run a household report on your client base that includes columns for client type (i.e., “A+”, “A”, “B”, “C”), depending on how you code and segment clients in your firm. Look at the gross revenues/fees generated from these clients over the past two years, the number of services/accounts per household, whether they listen to your advice, and any other criteria you measure, such as referrals. Export your report to a spreadsheet so you can sort and analyze the data with your team in different ways. For instance, you may want to look at gross revenue by client and see who falls at the bottom. Taking into consideration each clients’ circumstances, it should be fairly clear to determine which clients may no longer be a fit for your model.

Considering each new client may take hours of your time to secure and onboard, you need to determine what level of fees, revenue, or billable hours it would take for you to keep these smaller clients in your practice.

Step 2: Strategize

The next step is to determine a strategy for each client you wish to transition. This is also the time to be honest with yourself. If you currently lack good prospecting skills, or have not focused on a new marketing vision, this may not be the time to start right-sizing your client base. However, If your marketing strategy is in place and you are clear on how to grow your business, then you need to decide for each affected client if they will be moved to a different service model, robo-platform or call center, transitioned to a junior associate, or asked to find another firm that is best suited to their needs. You also need to decide on a time-frame. Will you transition the entire block at once or shave your book gradually? If you are hesitant or not prepared to reduce your client base too quickly, you many consider a phased strategy. For instance, as you bring on each new client, perhaps you shave a commensurate amount of lower-tier clients who match that new revenue. This may help keep total revenues stable and provide a gradual transition to your new model. The goal is to determine a comfortable strategy with your team that will best align with your vision, circumstances and support staff’s capacity.

Step 3: Transitioning to a Lesser Service Model or Parting Ways

This can be the most difficult step in the process and every firm handles it differently depending on the client. To best serve a long-standing relationship, the most respectful way to transition a client is to call those clients personally. This allows you to communicate the direction your practice is going with different service models or promote the expertise of their new adviser, if applicable. This is also a chance to inquire if the client is able to meet your minimum requirements to stay in your new model. You can then follow-up with a formal letter confirming the conversation. For clients where the relationship is not as strong, a written letter may suffice. Regardless of the communication strategy you choose, you may need to seek out compliance assistance from your home office or outside legal counsel for effective guidance on transitioning clients. If you are selling this block of business as part of your transition, you also want to be clear on your company’s privacy policies to make sure they are being followed correctly.

The Bottom Line

These strategies do not guarantee that the process will be easy or that your overall revenues will increase. At the same time, in this ever-changing business and regulatory world, you do not want to be left vulnerable to potential complaints or compliance issues from clients who do not generate sufficient revenue to support the risk. There may be simplified service models you can provide these clients or other advisers who can support their needs and enhance the relationship.

Analyzing your lower-tier and high-potential clients is an exercise that should be done every year during your business planning. This will help you manage your practice and make important decisions for the future health and growth of the business. The more control you gain in your business now, the more you can continue to evolve and break-through in this ever-changing marketplace.

The concepts and content discussed in this article are meant to be educational in nature and are not to serve as specific business, financial, legal, or regulatory guidance. Individuals are advised to seek the counsel of such licensed professionals with respect to their own personal and unique business situation.