When To Prune

March 2, 2012 • Page 3 of 4

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.

When To Prune

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