Two advisors start their practice at the same time and financially are in the same boat. To avoid cash-flow issues, both take any new client who can fog a mirror. In doing so, they maintain a positive cash flow and, over time, gradually grow their two practices. Fast-forward 15 years. One advisor generates $200,000 per year with 400 households while the other brings in $1 million annually with 100 households. Why the difference?

It could be that the latter has articulated what type of client he wants and aligns his clientele to meet this vision. The other is willing to work with anyone and aligns his vision to fit whatever the client base happens to become. That brings to the fore the issue of "pruning." This means proactively asking some clients to transfer their accounts to other advisors. But to many professionals, it is controversial.

Because such clients are often dubbed "C" or "D" clients, one has to consider how his firm can progress if they are a significant drag on the organization. Several factors could influence an advisor's decision to prune clients. He may have become more sophisticated, gotten a CFP license, learned to enjoy a particular type of client or problem to work on, found more or less time in the day, moved office or home, or discovered a need for more revenue.

Some advisors have trouble with the concept of pruning-not to mention its execution. They feel that, if they have taken on a client, they have taken him or her on for life. So pruning could imply a lack of loyalty. After all, these may be the clients who helped the advisor get started, helped the advisor "make it." Is it right to terminate those relationships?

Gurus offer contradictory advice. In her article, "Five Keys to Success," Patti Abrams, formerly of CEG, presents pruning as a strategy that can make a significant difference in an advisor's financial success and quality of life. She asserts that advisors who focus on fewer, wealthier clients won't be pulled in so many directions and will have fewer demands on their attention and schedule. On the other hand, for decades author and marketing expert Bill Good has said that pruning is the number one worst tactic-at least from a marketing perspective.

One Or Many?

Few argue with the logic of terminating a client or two if they put the firm at risk, say, when a client asks you to use trust money for things other than the trust's stated intent or asks you to do something else outside the bounds of your fiduciary duty. Another clear candidate for pruning is the client abusive to the advisor or staff. Such a person isn't worth losing employees over.

But there are other clients an advisor may not be as sure about. For example, what about clients who are nuisances, frequently telephoning because of anxiety about small market changes, wanting to check balances daily, questioning every recommendation or failing to heed the advisor's financial advice? Are such clients worth the hassle? 

But pruning generally means eliminating more than one or two clients. There may be tens or hundreds involved.

The Odds

One common argument against pruning is that there may be some less attractive clients who down the road will come into money through inheritance or something else. But that's a little like playing the lottery. The odds of winning are very low. Critics of that approach say that waiting for clients to come into money is a failed business model. It would be better to wait for their ideal clients to come into more money.

Staff Input

One advisor analyzed his client list and came up with the names of 40 people he barely broke even with. But because they were nice people and didn't take up too much time, he was inclined to keep them. Then he shared the list with his staff. Of the 40 names, the staff identified ten who used up too much of their time and energy. 

If advisors clocked every fraction of an hour a client takes up, as law firms do, what might they discover? Even if they don't, though, the staff often knows which clients need too much attention.

Revenue Per Household 

Advisors can usually tell if they have to prune clientele after looking at the amount of revenue they take in per household, because certain clients don't generate enough for the effort spent on working with them.

This is a compelling piece of data and it will be hard not to confront it. It may be that advisors looking at these numbers see their large clients subsidizing small clients. From an ethical, fiduciary point of view, does the advisor have a responsibility to protect larger clients from time-eating small clients? On the other hand, don't smaller clients need a trusted advisor, too?

Therein lies the dilemma. 

Usually, revenue per household is just one factor to consider. Many advisors think that the children of larger clients are actually like small clients. As long as the advisor has a strong bond with the children, he or she believes it's worth keeping them with the expectation that they will inherit wealth in the future. But data show that 98% of children won't stay with their parents' financial advisor.1 If you keep these individuals as clients because of loyalty, remember that loyalty may not go both ways.

Different Techniques

There are several common approaches to pruning. Advisors can:

Transfer clients to other advisors within their firms;

Transfer clients to advisors outside their firms;

Make clients into house accounts of a broker-dealer;

Part ways with their clients without an advisor reassignment.

The easiest approach is to shift clients to a junior advisor. That can keep the client within the firm, offer a training opportunity for a less-experienced advisor and allow the ex-advisor to avoid the guilt trip of letting someone go. The downside is that a junior advisor may get saddled with so many low-revenue clients she never reaches her potential. For her to do so, those clients would later have to be transitioned again to another junior advisor.

Another approach is to match the clients to be pruned with an advisor outside the firm. Bruce Hosler of Hosler Wealth Management in Prescott, Ariz., puts it this way:

"When it comes to pruning clients, advisors can feel guilty of betrayal. We have feelings of letting our friends (the clients) down. As fiduciaries, we always put our clients' best interests first. We ask ourselves, 'How can it be in the client's best interest to let another advisor take care of him, if I'm the best?' But if I refer the clients I am pruning to another good local advisor who is looking for more business, I've met my moral and emotional obligation to help take care of them, even though I may no longer be their advisor." 

Hosler goes on to explain that, in his process of disengaging from clients who are no longer an ideal fit for the services he offers, he has found several keys that improve the process. He feels obligated to look out for the clients' best interests. To do that, he has to "light a path" for clients with a new, competent advisor, so he facilitates the introduction and handoff. The clients receive a new advisor who is eager to work with them and qualified to handle their investment needs.

In some cases, it is possible to send clients to a broker-dealer-if the B-D accepts house accounts. If this approach is chosen, advisors and clients need to understand that having a place for clients to keep money and receive statements is far different from having a trusted professional who provides financial guidance.

Finally, some advisors might simply write a Dear John letter to clients they wish to part with. If the relationship is not good in the first place, the client may not mind. At a minimum, the letter could include the names of Web sites the client can research to find other advisors in the area.

Timing And Money

Timing is also important, especially in a tight, small town where everyone knows everyone else. A hundred letters sent at once may become the talk of the town, while five letters at a time wouldn't create a ripple. This staggered approach could also offer a beta test for the advisor to see people's reaction to the letter and make changes as needed.

Occasionally, advisors will want to sell an entire book of clients. But they need to be realistic about the value. Because if they are looking to prune some people, it's likely other advisors may not see value in those clients either. And if the book does have value, it typically is not at market rates.

Letting clients go also means advisors must surrender income they may have worked hard to earn. Even if the relationships are no longer viable for the advisors or the clients, it may be difficult to let go of the revenue. Not surprisingly, most advisors prune when their cash flow is healthy enough to take action.

It is particularly easy for an advisor to prune when he or she changes B-Ds. Another good time to do it is a few years after a strategic change. Say an advisor transitions from a commission-based business model to a fee-based one. Three years later, 80% of the clients have embraced the change, but 20% still pay for transactions. In that case, the 20% can be given another chance to fully embrace the change; if they cannot or do not want to, they may transfer their assets elsewhere.

Following One's Instinct

In the end, the advisor needs to listen to himself more than to any guru. One can find good reasons to prune and good reasons not to. Those who do are typically happy they took action. 

As we have seen, there are ways to simultaneously create a book of clients aligned with an advisor's vision and to sensitively, professionally transfer clients who are not. At a minimum, it offers the advisor operational efficiency and a better quality of life.

When considering severing business relationships, it may help advisors to answer this question: Doesn't every client deserve to be someone's "A" client?