Once you have established the type of firm you want, you can then establish the types of people with whom you wish to work.
These clients are those interested in working closely with their advisor and forming a bond with them. They tend to be conversational. The initial meeting flows smoothly and they relate well. These clients want to be comfortable with you and want to feel that they are in good hands. These clients are often great long-term clients and very good to work with. They need to stay engaged in the process, even though they may defer many of the decisions to you.
It is very important to establish boundaries and expectations with these clients. You need to be clear as to how much and what type of communication you will be providing. Because you will probably really like these clients, you may unwittingly create unreasonable expectations by the length and frequency of your original phone calls and meetings. It is also important to be very direct when something does not go as planned rather than, because of shame, avoiding the issues.
Since many of your meetings with these types of clients may be about feelings and items only indirectly related to wealth management, summary letters moving the process forward are critical.
The most important ingredient for a long-term, mutually beneficial relationship with this type of client is trust. During the market meltdown in 2008 and 2009, we were often reaching out twice a week to clients, letting them know that we were engaged in their situations. The feedback after this crisis from many of them was that they knew that they were being taken care of.
Losing a relationship client is very painful. When we went to a new fee structure, we had to contact our existing clients and let them know how and why we were implementing it. One of our relationship clients did not like his fee going up and, it seemed, felt that our relationship should have allowed an exception for him. The problem with exceptions is that you can't rightfully justify it for one client and not others. The client ended up leaving us and we both felt hurt and betrayed. As I look back, I probably violated a personal boundary by changing the nature of the relationship.
We do not negotiate fees up to $10,000,000, because we feel that if we give someone a deal, then we would be obligated to go back to other clients and provide them the same deal. We don't think this is good business.
These people have had either bad experiences with their other advisors or have little financial experience. These clients also typically do not isolate their fear from their finances; many of the things that they avoid come from their fear. These clients can be frustrated by their fears, even though they are ruled by them. Often, these clients have just come into an inheritance, are the financially uninvolved spouses in a divorce, or are the successful business owners who have sold the business and now need to live off the assets.
While these clients are also reliant on you, they need education. You want to work with them, not take care of them. You want to help them gain confidence around money issues. Even though these clients may defer to you (as a tool for avoidance), make sure that they are not retreating from you. If things get too overwhelming, they literally check out of the meeting. You may be talking, but not be heard. These clients need to be involved in the process so they can overcome their inherent desire to procrastinate. They are so afraid of making a wrong choice that they make no choice, until they suddenly, and often inexplicably, move forward with a decision.
Again, follow-up letters that emphasize decisions made and areas of agreement are very important. If handled well, the fear-based client will often turn into a relationship one.
We had one prospect come in with her second husband. She came to us as a referral from a money coach, who understood how she was being handcuffed by her fears. Neither she nor her husband had blended their finances and both were spending far less than their portfolios would allow. We met with them and told them we didn't think the timing was right to work together, and since they were spending so little of their portfolio, they didn't need to make a change to achieve their desired outcomes. They called six months later and wanted to come in again. During this meeting, they indicated that they were ready to do something different and we enlisted them as clients. Before the assets transferred, the woman had her husband call and say that she couldn't go through with the change. One of the things they said was that they didn't understand that the mutual funds we use charge internal fees in addition to our fee (even though their total costs were higher where they currently were). While we initially carefully went over the fees that clients pay, it was clear that the broker with whom she was working was playing off her fears by sabotaging how we do things. This was a very vulnerable type of prospect, so rather than try to convince them that their broker seemed disingenuous, we encouraged them to continue to stay doing what they were doing.
German philosopher Walter Benjamin said, "All knowledge takes the form of interpretation." Knowledgeable or curious clients are working with you because of their perceived time constraints. This means they really believe they can do what we do if they only had the time to do it. They are big readers and often come to meetings with newspaper or magazine clippings. And they usually are looking for advice that validates what they already believe.
The challenge with this type of client is to gain his trust through your own expertise. With the first two types of clients, your knowledge is a given and the relationship is more critical. With this type of client, you need to prove that you are technically competent. These clients require great detail work. It is also important to not simply give in to their predilections, but provide support for your contrary positions. A truly curious client can be persuaded by a well-researched argument.
Even if these clients appear to convert to relationship clients, don't underestimate their need for information, and ostensibly, control. After you have made joint decisions, continue to support those with articles or books that you can send their way. Be prepared to re-address issues.
One of our clients is a very detail-oriented doctor. She subscribes to several investment newsletters and services. As we began to reposition her portfolio, she had several concerns over various investments (using Morningstar reports to support her positions) or allocation choices. Once we took a step backward and spent more time on regression to the mean, asset allocation, and our process for making decisions, she was temporarily more comfortable. We sold out of a mutual fund that was very highly rated by Morningstar but had increased its assets by 600%. This particular manager had been named "manager of the year" by Morningstar. She interpreted this as an endorsement, obviously something it was not. We felt that because of its size, this concentrated fund would eventually no longer be able to perform as consistently as it had in the past. But it was only in some ways by coincidence, after the fund went from the top 1% to the bottom 1% that she saw the why behind our hows. Since she somewhat reluctantly sold out of the successful mutual fund, we would have needed to continue to support our thesis to her until the fund underperformed. If it never did so, we would have continued to have our work cut out for us with other recommendations.
I don't think it is possible to have a long-term relationship with this type of client. The question to ask yourself is whether you want a short-term one. These clients are interested in ever-changing objectives, only some of which are articulated. They are prisoners to short-term results. They are initially attractive because they have high energy, but they are often capricious. You start off on a pedestal with them and eventually get knocked off of it. While the client may say he wants comprehensive wealth management, he really only wants returns. This chasing means that he eventually blows himself up.
These clients hate to lose and obsess about their failures if something goes wrong. They believe in the incompatible theories of market timing and stock selection and perfect information. They are a train wreck that play havoc with your staff and have you continually performing tasks that are one-offs. They will inevitably leave you.
The best thing to do with these types of prospects is not convert them into clients. They simply suck the oxygen out of a practice.