Some industry observers have been telling advisors that it isn't so bad if they get fired. When a client fires one financial advisor, they say, another one gets hired.

Advisors were indeed players in a zero-sum game in previous bear markets. A gain or loss of a client was balanced by losses or gains from other advisory firms. But the Internet has been a game changer. These days, when a client fires his advisor, I would bet he is more likely than ever to manage his money himself.

If the fired advisor is an RIA, then the client probably won't even have to transfer his account. The top three RIA custodians all make a big chunk of their profits on their retail discount brokerage services for self-directed investors. And if the fired advisor is an independent rep, then the client won't have much trouble moving accounts to an Internet discounter. Account transfers aren't nearly as difficult as they used to be.

In addition, the tools offered by Internet brokerages are much better now than they were the last time the market tanked from September 2000 to September 2002. Once technologically handicapped, retirees are now on the Web in big numbers, especially if they've got money and time on their hands.

While most investors have been so shell-shocked by the market crash that they have done nothing, it stands to reason that a lot of client money will be on the move in the coming months. Spectrem Group, a Chicago-based consulting firm that specializes in the wealth and retirement markets, reportedly expects that, over the next several years, 20% to 30% of wealthy clients will fire their advisors.

Most independent advisory firms have only 100 to 200 clients, and every one of them is important. The economic cost of losing and replacing a client is significant, and the emotional price can be even more painful.
It's wise right now to examine closely how you respond to clients facing financial distress and look critically at how you talk to them.

I asked some of the world's foremost experts on these tough discussions for help-the authors of The New York Times bestseller Crucial Conversations: Tools For Talking When the Stakes Are High. Published in 2002, Crucial Conversations has influenced millions of business leaders. Stephen R. Covey, who wrote The 7 Habits of Highly Effective People, called it a breakthrough. The book's authors, Kerry Patterson, Joseph Grenny, Ron McMillan and Al Switzler, established a consulting firm, VitalSmarts, that develops corporate training programs for Fortune 500 companies.

One of the things the authors have been interested in finding out is whether financial advisors are holding these crucial conversations with their clients. I spoke with VitalSmarts' Research Director David Maxfield about the challenges advisors are facing in the current financial crisis. Maxfield, who is the author of Influencer: The Power To Change Anything and who did his doctoral work in psychology at Stanford University, has designed a questionnaire for financial advisors to determine what are the most crucial financial conversations they should be having with clients.

The survey, completed by 200 respondents, asked advisors first about their client attrition rate. Ninety percent of respondents said that in the five years preceding the financial crisis, they had averaged a client attrition rate of less than 5%. Just 7% of respondents reported an attrition rate of 5% to 10%, while 2% said they averaged an attrition rate of 10% to 15% in those five years.

After the crisis, however, these numbers went way up. Only 71% of advisors now say they are averaging an attrition rate of less than 5% (versus 90% before the crisis), and 22% of respondents say they are averaging an attrition rate between 5% and 10%-three times the number of advisors in this group before the crisis. The number of advisory firms losing between 10% and 15% of their clients is also way up, more than doubling to 5%. And while only a fraction of 1% reported an attrition rate of 15% to 20% in the five years preceding the crisis, 1.5% of firms now fall into this hapless group.

First « 1 2 3 4 » Next