Advisors need to set standards and stick to them.

In 1999, San Antonio financial advisor Mark Little was at the top of his game. After starting in the financial services business in 1987, he had built his practice, Wall Street Services Inc., to more than 1,247 clients. He had become one of the top producers at his broker-dealer. He was also on the verge of quitting the business.

"I couldn't service all those accounts in a way that was satisfying to me," he recalls. "I was financially successful and emotionally miserable." Hiring a junior financial advisor, a route some professionals in such a situation might consider, would have added a level of complexity to his business that Little wasn't willing to assume.

After much soul searching and goal evaluation, he concluded that what he really wanted was to redesign his business so it would enable him to offer top-notch service to a limited number of clients, and to deliver it "without having to kill myself." Attaining that goal would mean paring back his client list to a fraction of its bloated size.

To do that, he devised a client profile that would match his needs and goals. He had three main requirements. First, a client would have to be a delegator who was willing to have Little handle the investment process. He would need to be comfortable with consolidating all of his investment accounts with one firm. And, he would need to pay a minimum annual fee of $9,000 and a management fee of 1.09% of assets.

As a next step, Little held seven seminars for all of his clients at a nearby hotel beginning in July 2001. "Basically, I told the truth, which is that I had more clients than I could service well," he says. "I explained my new client profile, and suggested scheduling a meeting to discuss how important it was to work with me versus someone else." He also offered referrals to other financial advisors to clients who wanted them.

"Most clients accepted what I had to say, though a few asked how I could do this to them after so many years. I told them that this was about my being unable to do my best job for them under the old circumstances, and about getting the attention they need."

Only 17 of his old clients stayed on, a situation that he says was "almost like starting over." His business grew mainly through referrals and today, he has 100 clients who pay an average annual fee of $12,400. "What I did may sound extreme, but I can tell you I'm a lot happier today than I was before I made the change," he says.

Facing A Crossroad

While few financial advisors pare their client list as much as Mark Little did, those who have been in the business for a length of time usually face a crossroad in at least a few client relationships that finally prompts them to suggest a parting of the ways. Most financial advisors shudder at harsh-sounding references to firing a client, preferring to use gentler terms such as "disengagement." Whatever the phraseology, there are times when a nudge toward the door is unavoidable.

The split can happen for any number of reasons. Like Little, some find that they have grown beyond a comfortable size and need to cut back. With too many clients, it becomes difficult, if not impossible, to give them all as much attention as they would like. Others point to philosophical differences that, either in the beginning of the relationship or over a period of several years, create insurmountable and irresolvable conflicts that consume large blocks of time and detract from the daily operations of the business.

"Financial advisors initiate a client departure for two main reasons," says Bill Bachrach, a San Diego trainer and coach for financial advisors who worked with Little on his transition. "One is to 'right size' their businesses. And the other is bad client behavior."

Bachrach says that determining the optimal size for a business means defining the nature and scope of the services you wish to provide and assessing the number of clients you can serve effectively. It also means setting financial and lifestyle goals and figuring out what it takes to reach them. "If someone believes that they need to earn $300,000 a year to be financially successful, and they need to generate $600,000 a year in income from the business in order to do that, that might translate into a goal of having 60 clients each paying an average of $10,000 a year," he says.

Bad behavior, the other major reason for severing client relationships, often means failing to follow advice. "If someone doesn't follow advice, you need to figure out the point of having this person as a client," says Bachrach. "It means the difference between being an advisor or a product gopher."

Bad behavior can take many forms. J. Michael Martin, JD, CFP, president of Financial Advantage in Columbia, Md., has only "fired" four or five clients during his 15 years as a financial planner. One of them, a woman in her seventies, was "very high energy and wanted a lot of involvement in the investment process," a situation in which Martin did not feel comfortable.

After three years, he finally decided to break off the relationship. "I told her that her level of knowledge had gotten so strong that she could save a lot of money by handling her investments herself." Despite his kid-gloves approach, says Martin, "she got very angry and hurt."

Mary Malgiore, CFP, of The Family Firm in Bethesda, Md., is currently considering whether to cut ties with a widow whose gambling is getting out of hand. "I've been telling her to rein in her casino habit, but she's just not getting it yet," says Malgiore. "I hope she hears the wake-up call before it's too late."

Her relationship with a couple of other clients who insisted on a heavy exposure to the technology sector has soured, perhaps to the breaking point. "The clients who bent our ear to over- invest in the technology sector are complaining now that we should have timed the market better," she says. "The challenge for advisors is finding the balance between bowing to legitimate personal preference and achieving appropriate diversification."

Regardless of the reasons behind a client divorce, Bachrach says, the best approach is a direct one. Initiating a breakup in a forthright manner isn't about being nasty or mean. It's about being honest. "If you're right-sizing a business, you might talk about why you're making the change and invite the client to come into your 'new world.' If that's not feasible, the discussion shifts to alternatives, which might include helping him find an advisor that can better serve his needs."

The approach would be different for a "bad behavior" client who, say, consistently fails to follow advice. In that case, "you might point out that you wish to act in an advisory capacity, but that you cannot do so under the current circumstances," says Bachrach. "Invite the client to change the nature of the relationship, and if he does not wish to do that, suggest he would probably be better served by someone else."

Warning Signs

Of course, the best way to avoid a breakup is to look for warning signs in the initial interview. Little requires prospective clients to bring all their financial documents, as well as a spouse if there is one, to the initial meeting. Failure to do one or both of those things is a leading indicator of problems, he says.

In one instance, a prospective client who came in without his wife told Little she had no interest in the couple's financial affairs, an observation that was confirmed by the wife in a conference call. When the husband became frustrated by the notion that his spouse's presence was necessary, Little stood up, shook his hand and thanked him for coming in.

Financial advisors also see red flags when a prospective client has strong opinions about what to invest in or insists on using a copy of a popular personal finance magazine with the latest hot funds on the cover as an investment blueprint. "We need to be the initiator of decisions because ultimately, we are the ones responsible for them," says Martin. "If I see in an interview that someone will be micromanaging and second-guessing every decision, I emphasize how much control and discretion we have managing their money. That sometimes sends them in another direction."

Martin is also wary of individuals who bad-mouth their former advisors excessively or have had a series of broken advisor relationships. "If a client takes some responsibility for a mistake and says it's time to move on, that's one thing," says Martin. "But if he's very bitter and puts all the blame on the old advisor and none on himself, that's another."

Unrealistic expectations are another danger sign. "If someone comes in and starts talking about achieving ridiculous rates of return or has unrealistic expectations about what I can achieve, I'll refer him to someone else," says Lou Stanasolovich, CFP, Legend Financial Advisors in Pittsburgh.

Regardless of the reasons behind a breakup, financial advisors should never feel guilty about severing client ties when they want to change the way they do business or when irresolvable differences arise. "It's not about firing people," says Little. "It's about setting standards and sticking to them."