Given that the past two years or so have been financially challenging for most financial advisors, some have chosen to downsize in an effort to regain profitability. But without a clear plan, they could be doing more harm than good in the long run.

One of my consulting clients, a financial practice in New York state, for example, recently decided to move into a smaller office space, going from 1,500 square feet to 1,200. But even though the space was smaller, the costs may not have been: In the larger space, the office was rented for $12 per square foot per year. This amounts to $18,000 per year of office rental cost (not including extras, taxes, etc.). The new space, by contrast, cost $13.50 per square foot per year. While not that much more, the apparent cost savings with the smaller space per year is only $1,800 (again, not including extras). In four years, the cost savings would amount to $7,200.

On the surface, it looks like a good deal. However, if we take into account the cost of the move, roughly $5,750 in this example (along with the cost associated with a change of address-the new letterhead, envelopes, business cards, yellow page listings, advertising and much more), then the cost savings quickly evaporates. And if we factor in the cost of time for packing, moving and setting up the new office and then multiply that times the number of employees involved, we find that the firm actually paid more than if it had stayed where it was.

In the end, the firm faces additional expenses and no cost savings after its move-and it now must function with significantly smaller office space. Furthermore, the aggravation, confusion and frustration associated with moving lead to employee discontent and client dissatisfaction. Ultimately, what does it say to your clients when you move into a smaller, cramped space?

Still, there are times when moving makes sense. When partners break up, for instance, the move can be explained easily to clients. Also, it would be unsettling to your clients if you continued to operate in a much larger office that was only half full. So moving into a smaller space is sometimes justified for more than just the cost factors.

When they're not downsizing space, financial advisories must also sometimes consider downsizing staff. After all, the cost associated with payroll is generally one of the highest in a firm. But such pruning is often mishandled, and it might lead not only to the loss of a valued employee, but also to a loss of trust among remaining staff.

Sometimes there are situations in which an underperforming employee can be identified and weeded out. At another firm I consult with in Tennessee, one of the highest paid employees was found to be perusing NASCAR Web sites on the company computer most of the day rather than contributing to the success of the firm. And at yet another company I consulted with in Texas, a new male employee was caught viewing porn on a company computer in full view of anyone (including clients) who might walk by his desk. But it's obvious what to do in those situations. It's tougher to lay off people when your firm has lost revenue from AUM fees, especially when it means letting go of employees who are hard-working, talented and motivated.

Some firms look instead at firmwide salary rollbacks as an alternative to releasing valued staff. For example, a firm with seven employees averaging a salary of $40,000 each could roll back those salaries 10%, freeing up $28,000, not to mention FICA, Medicare, state and federal tax withholding, 401(k) contributions and other potential costs in the budget. Ultimately, such a rollback could save the employer almost as much as it costs to employee one staff member, but without firing anyone. If employees balked at a salary cut, the firm could present it as a temporary cost-containment procedure, one preferable to firings. It could also be paired with a year-end (or quarterly) bonus program directly tied to net profit increases, giving the employees the incentive to make the firm more profitable so they could recover their 10% or more in the long run.

But sometimes firms don't want to downsize space or employees; they want to cut back clients. Yes, some firms actually do this, especially with those clients who demand too much time and/or labor while contributing little or no profit to the firm. Many firms have a list of clients that were perhaps carried over from earlier years in the business, people who may be far less than ideal (in the amount of assets they have, the products they want, or in some other aspect). In some cases, they remain clients in name only because of the limited nature of the relationship. Yet they may get the same level of support, feedback, reporting, access to the advisor, etc., than clients who are wealthier, more profitable or simply a better fit.

In most cases, performing a cost/benefit analysis of your client base is an excellent way to figure out which clients offer the firm the most efficient net profitability and then find out what those clients' characteristics are. While you can always make exceptions (for example, by bringing in the relative of a client with whom you have a good relationship, even if the relative is not as good a fit), you can improve your overall profit picture by focusing on those clients who match up with what you do and how you do it. The question is: What do you do with the others? Do you simply fire those who don't fit the ideal? Do you charge them more or reduce services to them? Do you assign them to the new advisor in the office for "practice"? These are the questions that must be answered. But whatever you decide to do, you must explain it to those clients in a way that is both positive and affirming.