When financial advisers should let go of clients

The toughest breakups are the ones where both parties involved still care about each other, but circumstances force them apart. Just about all financial advisers, if they are successful enough, have faced these breakups when they raised account minimums and had to let go of clients who didn't measure up. “It is a difficult, huge issue,” said Ross Levin, founding principal and president of Accredited Investors Inc. Over the years, the advisory firm has raised its account minimum to $2 million. To help clients whose assets didn't meet the requirements, Mr. Levin created a task force to interview other advisers to find appropriate matches for clients whose accounts were too small. “If we think they could easily work with these other advisers, we do a kind of matchmaking,” Mr. Levin said.

'eHARMONY FOR CLIENTS'

“Essentially, we serve as eHarmony for clients we try to do this for,” he said. “It is a delicate operation.” Few advisers establish account minimums when they are just starting out. Most take on all clients at first but establish or raise the minimum asset level or fee amount that they require as their businesses grow. The decision isn't driven solely by a desire to make more money, Mr. Levin and others said, but by the different requirements of portfolios of a few million dollars, versus those with a few thousand. That doesn't make it any easier.

'RESENTING THE RELATIONSHIP'

Many advisers put off or avoid cutting smaller clients altogether, which shortchanges both the clients and the adviser, Mr. Levin said. “At some level, if you are losing money on clients, you could end up resenting the relationship. It could come out sideways in different ways,” he said.  Keep in mind that the client may be happier in a relationship where they could be “one of the largest clients rather than one of our smallest,” Mr. Levin said. Advisers recommend having that difficult conversation in person, rather than over the phone or by letter. “People take it personally,” said Heather R. Ettinger, managing partner of Fairport Asset Management. She said that clients might be offended if they receive a letter telling them that they need to find a new adviser. Ms. Ettinger's firm, which has been in business since the 1960s, has raised minimums more than once, and generally sets its minimum at $10,000 in annual fees or retainer. Sometimes her firm will send a letter suggesting that the client schedule a meeting, but the topic itself is reserved for an in-person conversation. Beforehand, Ms. Ettinger said that she makes an effort to find another adviser affiliated with Charles Schwab & Co. Inc., which is the custodian she uses. That makes the transition a little easier for clients, who don't have to sell out positions when they change advisers. Ms. Ettinger said that she keeps in mind the client service maxim that a customer who feels mistreated will tell an average of eight people about the bad service. “If you don't treat them well on the way out, you are creating magnified ill will,” she said. “I wouldn't want to get a letter.” Client reactions to the news vary from tears to appreciation for the adviser's efforts to find them a new relationship, Ms. Ettinger said. What has most surprised her during the process is how often clients decide to consolidate other assets with her firm in order to meet the account minimum or move up from investment management to a higher level of service. After several account-minimum increases over the years, Thomas J. Henske, a partner at Lenox Advisors Inc., now sets the bar at $1 million. “I really struggled personally with this decision,” he said. “I felt like these were the people who helped me build my business.” Rather than refer smaller accounts to other firms, Lenox has brought in junior advisers with less experience to take over smaller accounts. “Your script of how you introduce the subject is vitally important,” Mr. Henske said. “If you don't get that right, you are sunk.” One potential pitfall is “not being understanding of [the client's] concerns,” he said.

'STRESS THE TEAM'

“They may say, "I bought into Tom, not this next person,' so you have to stress the team,” Mr. Henske said. “If I get hit by a bus, it is not like you will be looking for a new team.” Advisers need to acknowledge the client's importance to their success and the success of the firm, Mr. Henske said. “Show a little bit of vulnerability,” he said. “One thing we learned is to have really good advisers to whom you are referring your client,” Mr. Levin said. He prefers fee-only advisory firms with at least five employees to avoid the possibility of picking an adviser who won't stay in the business for the long run. Although many advisers said that it isn't a good idea to keep on smaller clients with the idea of providing a lower level of service, Lee Munson, chief investment officer of Portfolio LLC, said that he sometimes does that with accounts that fall well below his usual $100,000 minimum. The offer is to provide money management only, no quarterly meetings and most communication by e-mail, he said.

LOWER LEVEL OF SERVICE

“We tell them to save more money” so they can reach the account minimum, Mr. Munson said. Mr. Henske doesn't provide the option of a lower level of service for smaller accounts. “I don't think that is the optimal way to do it,” he said. “When you start having multiple service models, it adds complexity, and complexity leads to breakdowns.” Mr. Levin's firm briefly considered going that route but decided not to, because it would be “a dying business because we didn't want to grow it,” he said. If an adviser has to shed an account, Mr. Munson has some rules. “Don't send a form letter. Do not throw your clients to the wolves or fast Eddie,” who sells everyone annuities, Mr. Munson said. “So either bite your tongue and keep them,” or help them find a good alternative, such as moving their accounts to a low-cost asset manager such as Schwab or The Vanguard Group Inc., he said. If you don't look out for them, “they will hate you, not fast Eddie, because you didn't protect them,” Mr. Munson said. E-mail Lavonne Kuykendall at lkuykendall@investmentnews.com.