Some industry observers have been telling advisors that it isn't so bad if they get fired. When a client fires one financial advisor, they say, another one gets hired.

Advisors were indeed players in a zero-sum game in previous bear markets. A gain or loss of a client was balanced by losses or gains from other advisory firms. But the Internet has been a game changer. These days, when a client fires his advisor, I would bet he is more likely than ever to manage his money himself.

If the fired advisor is an RIA, then the client probably won't even have to transfer his account. The top three RIA custodians all make a big chunk of their profits on their retail discount brokerage services for self-directed investors. And if the fired advisor is an independent rep, then the client won't have much trouble moving accounts to an Internet discounter. Account transfers aren't nearly as difficult as they used to be.

In addition, the tools offered by Internet brokerages are much better now than they were the last time the market tanked from September 2000 to September 2002. Once technologically handicapped, retirees are now on the Web in big numbers, especially if they've got money and time on their hands.

While most investors have been so shell-shocked by the market crash that they have done nothing, it stands to reason that a lot of client money will be on the move in the coming months. Spectrem Group, a Chicago-based consulting firm that specializes in the wealth and retirement markets, reportedly expects that, over the next several years, 20% to 30% of wealthy clients will fire their advisors.

Most independent advisory firms have only 100 to 200 clients, and every one of them is important. The economic cost of losing and replacing a client is significant, and the emotional price can be even more painful.
It's wise right now to examine closely how you respond to clients facing financial distress and look critically at how you talk to them.

I asked some of the world's foremost experts on these tough discussions for help-the authors of The New York Times bestseller Crucial Conversations: Tools For Talking When the Stakes Are High. Published in 2002, Crucial Conversations has influenced millions of business leaders. Stephen R. Covey, who wrote The 7 Habits of Highly Effective People, called it a breakthrough. The book's authors, Kerry Patterson, Joseph Grenny, Ron McMillan and Al Switzler, established a consulting firm, VitalSmarts, that develops corporate training programs for Fortune 500 companies.

One of the things the authors have been interested in finding out is whether financial advisors are holding these crucial conversations with their clients. I spoke with VitalSmarts' Research Director David Maxfield about the challenges advisors are facing in the current financial crisis. Maxfield, who is the author of Influencer: The Power To Change Anything and who did his doctoral work in psychology at Stanford University, has designed a questionnaire for financial advisors to determine what are the most crucial financial conversations they should be having with clients.

The survey, completed by 200 respondents, asked advisors first about their client attrition rate. Ninety percent of respondents said that in the five years preceding the financial crisis, they had averaged a client attrition rate of less than 5%. Just 7% of respondents reported an attrition rate of 5% to 10%, while 2% said they averaged an attrition rate of 10% to 15% in those five years.

After the crisis, however, these numbers went way up. Only 71% of advisors now say they are averaging an attrition rate of less than 5% (versus 90% before the crisis), and 22% of respondents say they are averaging an attrition rate between 5% and 10%-three times the number of advisors in this group before the crisis. The number of advisory firms losing between 10% and 15% of their clients is also way up, more than doubling to 5%. And while only a fraction of 1% reported an attrition rate of 15% to 20% in the five years preceding the crisis, 1.5% of firms now fall into this hapless group.

It's no surprise that advisors are losing more clients now than before the crisis. What we do not know is how bad it will get in coming months and how many clients will choose to direct their own financial futures.

After all, they are being bombarded with reasons not to believe what advisors say anymore. Modern portfolio theory is being questioned, while authorities every week charge another advisory firm or two with running a Ponzi scheme.

That's why the results of Maxfield's research are so helpful. The survey posed ten challenging scenarios advisors could possibly face with their clients in the next year as a result of troubles in the economy-problems such as a client's high credit card debt, his lost savings or even alcohol and drug problems. After asking if the advisors had dealt with any of these issues, the survey then asked the advisors three questions about how they might deal with these problems. (See the survey in the sidebar on page 88.)

Of the ten situations, Maxfield found three that could cause clients the greatest harm and that are most common at firms with high attrition rates. These are both common and costly problems, according to the survey data, but what really differentiates them from the other seven is that advisors find them especially difficult to discuss. As a result, the topics are often off-limits in client meetings.

The three challenges are:
When a client loses substantial savings or suffers a job loss and must change his financial plan;
When a client is not saving enough and spending too much; and
When a client is racking up too much debt and must change spending habits.
In the coming months, advisors should try to keep these three high-stakes issues in mind. Be sure you are identifying them and trying to address them.
Maxfield cross-tabulated the attrition rates of advisors against how well they handled these three situations, as well as how they responded to clients facing other difficult financial issues.
According to the data, 41% of advisors have "high attrition" rates if they work with many clients facing these three situations but fail to speak about the problems or solve them-high attrition being defined as losing more than 5% of clients annually in the five years preceding the market break. In comparison, fewer advisors, just 29%, report high attrition when they have many clients with these problems but proactively speak to the clients about them. Fewer advisors have high attrition when they bring up these problems with clients.

Among advisors who do not have many clients facing these three problems-but who say they proactively speak with clients about difficult financial issues anyway-just 14% have high attrition. Even those advisors who do not have many clients in trouble with these things face a higher attrition rate if they do not proactively speak about difficult issues in general-32% of such firms being plagued by an annual attrition rate of more than 5%.

Maxfield says he is sure that advisors know whether their clients are facing difficult issues. He adds that advisors with few clients affected by the three high-stakes problems are likely to have clients who face other problems. The data show that your client attrition rate is related to your ability to discuss any difficult issue with a client-whether it's one of these three challenging scenarios or something else.

Maxfield offers six tips to improve your skills at conducting crucial financial conversations with clients.

1. Ask, "What do I really want, in the long term, for myself, for the other person and for the relationship?" When you feel unsafe or think your goals are at risk, you tend to focus on yourself more and look only at the short term. You go into self-defense mode. Instead, try to broaden your perspective. Think long-term and inclusive. Decide what you really want to accomplish for the client. Then keep your focus on this positive objective.

2. Instead of judging the client, try to find out what the real story is. When you hold court in your head and find a client guilty, the verdict is bound to show on your face, in your voice and in your manner. Instead, critique the story you've told yourself about the client and his problem. Do you really have the facts to be sure of your conclusions? Would any other story fit this same set of facts? Why might a rational, reasonable and decent person do what this client is doing? Asking yourself these questions will turn you from a judge into a concerned counselor seeking the truth.

3. Watch out for the two different traps of silence and anger. When people feel unsafe with you or think their goals are at risk, they often retreat from dialogue into silence-avoiding or withdrawing from a conversation. Alternatively, if they are very frustrated, they could become abusive-controlling, labeling or verbally attacking you. When you see signs of either one, know that the client is simply feeling unsafe.

4. Maintain safety. When you decide to speak up about a problem a client is facing, it may be misinterpreted as an attack. So show respect for the client. Make sure he or she knows you're both on the same side. Set the stage for bringing up a sensitive issue by reminding the client that your role is to help him or her succeed.

5. Start with facts, then share your story. When addressing a client's financial problems, don't start with your conclusions. Instead of saying, "You aren't going to be able to retire at age 65," cite facts and keep it constructive. Say to the client, "To retire at age 65 you're going to need to increase your savings by $1,000 a month. Can you do that?" Begin with facts that establish common ground. After the facts are agreed upon, share what they mean to you-then tell the story. And remember that your story is just a best guess about what the facts mean.

6. The goal is honest dialogue, not winning. Don't sugarcoat or back away from controversial subjects, but also avoid resorting to attacks. The goal is to share all of your information as directly as possible while creating conditions that encourage your client to be equally direct with you. These skills aren't about winning or being right. They're about getting the best information on the table where it can lead to high-quality decisions.

The Survey
The survey asked advisors three questions about ten problem scenarios they and their clients are likely to face in coming months:
1. Your client has lost substantial savings, lost his job or is threatened with losing it-and you need to talk to him about changing some of his plans for the future. For example, the client had planned to buy a boat or a vacation home or pay for a child's education, but his recent losses put these plans out of reach.

2. Your client has lost substantial savings, lost her job or is threatened with job loss-and you need to talk to her about reducing her current expenses. For example, she may need to downsize her house, sell other assets or even move in with a relative.

3. Your client has lost substantial savings, lost her job or is threatened with job loss-and she needs to reallocate the portfolio of savings that remain.

4. Your client has reached an age when he should invest more conservatively, but he doesn't want to. Perhaps he doesn't want to admit that he is aging or is perhaps desperate to recoup losses he's suffered.

5. Your client isn't saving enough. For example, he's in a house that's too expensive, has too many cars or is simply spending at too high a rate.

6. Your client is getting into (or is already into) too much credit card debt. He needs to make serious and immediate lifestyle changes.

7. Your client is making financial choices that could get her into tax trouble or even legal trouble.

8. You suspect that your client has an alcohol or drug problem or some other dependency that could affect his ability to provide for himself or his family.

9. Your client is rude, brusque, accusatory, vindictive or otherwise a pain to work with.

10. Your client repeatedly fails to follow your advice.

Advisors were then asked these three questions about each of the ten problems:
1. During the next year, how likely is it that you'll have a client who faces this kind of challenge?
a. Not likely
b. Somewhat likely
c. Very likely
d. Extremely likely

2. Think of the times when you had a client in this situation who refused to change. What was the result for the client?
a. Very little negative impact
b. Little negative impact
c. Moderate negative impact
d. Severe negative impact
e. Very severe negative impact

3. How do you handle this situation with a client-and how does the conversation go?
a. I don't bring it up, but discuss it if they bring it up.
b. I bring it up, but if they don't want to discuss it I back off.
c. I bring it up and share my full concerns-even if they don't want to discuss it. However, they don't typically change and my relationship with them is damaged.
d. I bring it up and share my full concerns-even if they don't want to discuss it. I'm usually able to get them to change and my relationship with them is strengthened.

Andrew Gluck, a longtime writer and journalist, is CEO of Advisor Products Inc. (www.advisorproducts.com), a Westbury, N.Y., marketing company serving 1,800 advisory firms.