In the past, financial advisors encountered many prospective clients who were either previous do-it-yourselfers who didn’t already have an advisor, or individuals who had just gone through a “wealth creation” event like selling a business or retiring and getting a lump sum rollover from their pension. Which means they didn’t already have an advisor. Increasingly, however, financial advisors are encountering prospects who already have a relationship with another financial advisor. And this distinction between working with prospects who already have an advisor and those who do not is important, because the dynamics of winning a new client away from an existing advisor are different than just winning a new client who has never worked with an advisor before!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore why it is difficult for some prospective clients to fire an existing financial advisor (even when that advisor is not doing a good job), and what financial advisors can do to help prospective clients prepare themselves to switch away from an existing financial advisor!
Many financial advisors have had the experience of talking to a prospect who was not being served well by their existing advisor (or “advisor” who was actually just a product salesperson selling them a bunch of stuff that may not have even been very good for them in the first place), where the prospect says they want to work with you, but then, at the last minute, decides to stay with the former advisor or broker after all. Oftentimes these prospects may abruptly cancel meetings, start to communicate sporadically through only email or voicemail, or simply just stop communicating at all. Unfortunately, in many of these cases, it is likely that the prospect is struggling with how hard it is for most people to “fire” their former advisor. After all, this is a relationship business, and most people don’t like to terminate relationships and fire people they have a relationship with (regardless of whether it was the healthiest relationship to begin with). The key point: we often underestimate how uncomfortable it will be for prospects to fire former advisors, and, as a result, don’t do anything to help prepare these prospects for such potentially difficult conversations.
So what should financial advisors do about this? First and foremost, if you’re talking to a prospective client who is going to be leaving a soon-to-be-former advisor or broker to come work with you, then you have to prepare them for that conversation. One approach is just to say, “I’m so glad you’ve agreed to work with us, and we’re excited to start working with you. But I need to warn you that when you tell your former advisor you’re leaving, he’s going to try to keep your business and win you back. Have you given any thought to how you’re going to handle that situation?” And let the prospect talk through the challenge. Additionally, financial advisors may want to help clients think through scenarios such as what the client would do if the existing advisor offering to cut his or her fees to retain the client.
Because the reality is that by merely getting the client to talk through these scenarios (even without the advisor providing recommendations, which the prospective client could see as biased anyway), an advisor can still help a client better prepare themselves for that conversation. And, as a result, the client may be less likely to get caught off guard by an aggressive advisor who tries to retain their business (even after not serving them well in the first place), and less likely to be tempted to back down. Alternatively, prospective clients may even decide that it’s best to start the transfers or the new financial planning process with the new advisor now so that they don’t even have to confront the soon-to-be-former advisor, who will only learn once the money leaves.
Ultimately, though, the key point is to recognize that there is a real challenge and pressure that clients feel, in the moment, when they have to break the news to a soon-to-be-former advisor that he or she is being fired and the relationship is being terminated. Which means anything you can do to help them prepare in advance, even if it’s just to point out that it will be a challenge and invite them to think through how they’ll handle it – can make a big difference in bolstering their courage and confidence to actually do it, terminate their former advisor, and follow through on hiring you, when the time comes!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
For today’s Office Hours, I want to talk about a challenge that I find is increasingly common for advisors who are trying to grow, and it’s the difficulty in winning a client away from another advisor they’re already working with.
In the past, this was somewhat less common as a lot of clients that we as advisors would work with either were previously do-it-yourselfers who didn’t already have an advisor or maybe even had just gone through some kind of wealth creation event like selling a business or retiring and getting a lump sum rollover from their pension for the first time. So they hadn’t previously had the liquid wealth to work with an advisor, but now they do, so they are looking for an advisor for the first time.
But increasingly, research from folks like Cerulli finds that more and more often, advisors are getting clients who already have a relationship with another advisor. Whether that’s simply because you’re growing adoption to financial planning in the marketplace, more firms that used to only do work with high-net-worth clients have come down market, and even a lot of direct-to-consumer plans like Schwab and Fidelity and now even Vanguard that historically just provided the mutual fund products to the brokerage platform to self-directed investors are now rolling out their own advisor solutions to the clients that have already used their existing products and services.
And this matters because the dynamics of winning a new client away from an existing advisor are different than just winning a new client who’s never worked with an advisor. And this was something that really hit home for me pretty early in my career. At the second firm that I worked at in the business, our marketing approach was to do seminars on revocable living trusts and estate planning and use that as a way to open the conversation about comprehensive financial planning. At the time, consumers were much less familiar with revocable living trusts even than they are today. Estate tax exemptions were much lower back in 2001. It was only $675,000, so just any young couple with term insurance to protect the family for young kids had an estate tax problem and a potential probate issue. And so revocable living trust combined with estate planning conversations was a pretty compelling topic, and we brought in a lot of business that way.
And I remember we had a particular prospective client who came to one of our seminars. She was actually a recent widow who had this revocable living trust that her now former husband had set up, and she didn’t know what to actually do with it now that he passed away and her existing broker (he was a broker at a large firm in the area that shall go nameless) had not done much of anything to help her as he was primarily her husband’s broker and not hers. She had no real relationship with him. And so we met with her and talked her through the situation in the hope that she would need to sell the estate.
And in this process, we discovered that her broker wasn’t taking very good care of her portfolio either. So this was back in 2001, we were still in the bear market and kind of the unwind of the tech bubble, and the broker had been buying a lot of individual stocks, including a lot of the tech companies that were getting slaughtered at that point. And she was paying a small mountain load of transaction costs to the broker for each trade. It was arguably borderline churning.
And by the end of the meeting, it became pretty clear that she wanted to and needed to change advisors away from her former broker and over to our firm that was actually doing financial planning and could introduce her to an accountant to help sell the estate and could help her with all the administrative paperwork to move money around under the terms of the trust, and to fix her portfolio into something that was more diversified and a lower cost. Our AUM fee was going to be materially cheaper than the volume of trading commissions that were already happening in her account at the time. So she left our office at the end of the meeting with a plan to come back for a meeting the follow-up week to sit down with the accountant that we had a good relationship with. We were going to bring him in to start the process of selling the estate and to begin the paperwork process to transfer accounts to manage his inheritance.
And then the day before the meeting was supposed to happen, she called and left a message after hours (after everyone had gone home), so we didn’t even get it until the morning of the meeting, saying that she needed to reschedule. No rescheduling date in the message, though. So we called her back the next day, couldn’t reach her. Called her twice more that week, couldn’t reach her. Tried to be nice. I mean, we weren’t pestering her. We had an accountant ready and waiting in the wings to start working with her to sell the estate and she said she wanted to move forward with us.
And after another week of leaving our messages, we finally got a message in response, again, left on our voicemail after business hours that said she had decided to stay with her current broker after all and thanks for our time, and that was that. The one who hadn’t helped her with any of her problems, just making terrible investment recommendations, costing way more than what we would have charged her anyways, all of which we clearly showed her in the first meeting, that was who she was staying with and not coming to work with us.
And I suspect a lot of you listening to this Office Hours have at some point had a similar experience, talking to a prospect who’s not being served well by their existing advisor who’s really just a product salesperson. They’ve sold them a bunch of stuff and may not even be good in the first place. And the prospect says they want to work with you and move forward, but then at the last minute, decides to stay with the former advisor or broker after all. You know, have you had this happen to you, where you lost a prospect that you thought was certain to follow through because they balked when the time came to actually terminate the other advisor? Or have you even been the terminated advisor, where the client didn’t even want to deal with the situation so you just find out because one day the accounts transfer out and they’re already gone?
Why Clients Don’t Leave Bad Advisors [Time – 5:48]
Ultimately, what I’d failed to realize with this prospect (being earlier in my career and not having been in that situation very often), is how hard it actually is for most people to fire their former advisor. After all, this is a relationship business. Most people don’t like to terminate relationships and fire people they have a relationship with, regardless of the fact that it may not be the healthiest relationship in the first place, may not be terribly well served, because, for most people, it’s just easier to avoid the confrontation.
And that’s what was happening in this situation. I didn’t realize at the time, but it wasn’t a coincidence that the widow kept calling us after normal business hours to leave messages that she was rescheduling and that wouldn’t take a direct call from us to reschedule, and then ultimately told us that she wasn’t going to work with us in another after-hours call. She didn’t like the confrontation. She didn’t want to feel like she was being put on the spot, so she avoided that confrontational situation with us. And avoiding that confrontational situation is also why she decided not to work with us because simply put, she wasn’t comfortable actually firing the broker and terminating the relationship when the time came.
I don’t actually know how that conversation went. Maybe he pleaded with her that he would do a better job servicing going forward. Maybe she questioned the trading activity and he said he’d tone it down. Maybe she called out the trading commissions and he said he’d get a lower price on execution. This was back at the time about a $1 million account, which is a sizable account for most advisors today but was a very sizable prospect 17 years ago. So I’m sure the broker did whatever he could do to preserve the relationship and keep the business. So he said he’d get better or give her better service or give her better pricing or whatever reasonable concession he can make to keep her as a client.
And that doesn’t even consider the fact that, unfortunately, some advisors and brokers are even less ethical in their tactics to keep clients. You know, maybe he tried to scare her with all the bad things that could happen if they went to us complete strangers instead of staying with him, the broker she and her husband had worked with all these years. Maybe he took a really aggressive tone in the conversation just to make her want to back down from the confrontation. Maybe he tried to guilt her about leaving because he was the one her husband picked or that he needed her account to keep his job or make his numbers or feed his family or put his kids through college. I hope that wasn’t the case, but in my career, I have literally seen all of those situations come up as ways former advisors or brokers tried to keep their clients, some of those more than once.
And the mistake we made at the time, simply put it was, again, we underestimated how hard the former or hopefully soon-to-be former advisor was going to try to keep her business. And even more important, we hadn’t done anything to prepare her for that challenge.
Preparing Prospects To Leave Their Soon-To-Be-Former Advisors [Time – 8:34]
So what should you do about this if you’re talking to a prospective client who’s going to be leaving that hopefully soon-to-be former advisor or broker to come work with you? You have to prepare them for that conversation. That may mean actually saying, “I’m so glad you’ve agreed to work with us and we’re excited to start working with you, but I need to warn you that when you tell your former advisor you’re leaving, he’s going to try to keep your business and win you back. Have you given any thought to how you’re going to handle that situation?” And then just let them talk.
In practice, I find some prospects say, you know, no, no, no, he’s done a terrible job with them. “We’re through.” To which you’ll say, “Great. How are you going to break the news?” Because I actually want to see, are they going to send them an email and avoid the confrontation? Are they going to call them and tell them? And based on what we know from the client so far, do I think that’s going to work out? You know, we certainly have some clients who I know will not have a problem confronting a former advisor who’s doing a bad job for them. They’re very comfortable with the confrontation, but for others, it’s an issue and they may say, “Oh, I hadn’t even thought about that,” and then they start reflecting on it.
And we might even extend that conversation a little bit further. “Yes, I know one of the reasons you’ve decided to work with us is that your former advisor charges you a lot more than we do. Have you considered what you’ll say if he offers to cut his fees to match us?” And then again, stop talking and just let the prospect talk through and kind of process how they’re going to handle the situation. Do they say, “Well, because actually if he cuts his fees, I’ll have to think about that?” Okay. Well, then that’s a hint to us we have not sufficiently differentiated or demonstrated our value because it’s apparently just about price. Or do they say, “I don’t care if he cuts his fees, I’m done with him?” Great. Because once they’ve said it out loud even to themselves, they’re much more likely to be committed to actually follow through on it and fire when the time comes.
Now, I know a few advisors that have entire scripts that they run with prospects around this. I talked to one who actually tells prospective clients to roleplay with him, “If the former advisor says this, how will you respond? I’m going to ask it now, tell me what you’ll do. And what will you say next? What if you respond this way?” Technically, that’s actually probably a good way to help clients bolster their courage, but I have to admit, it’s a little bit too salesy for my style at least, to actually tell prospective clients that they have to roleplay with me through the situation of firing their former advisor. Unless they just outright say like, “I’m afraid he’s going to push me to stay. Help me.” And then maybe we’ll go a little deeper.
But I do try to raise this question, and I think it’s really important. “If your former advisor tries to convince you to stay, have you given any thought to how you’re going to handle that situation? Or if the advisor offers to cut his fees to match us, have you considered what you’ll say?” Or even just, “Hey, I’m just curious, how are you going to break the news to your former advisor?” Because just asking them the question and letting them talk through it, even if we don’t give any suggestions (which technically we’d be pretty biased anyway since obviously, we’re trying to win the prospect’s business ourselves), but the mere fact that we raise the question and let them talk it through themselves still helps them to better prepare themselves for that conversation and potential confrontation so they’re not caught off guard and then tempted to back down when they unexpectedly find that their former advisor gets very proactive or sometimes outright aggressive in trying to win and keep their business.
In fact, I find with some prospects that they just decide actually to start transfers now just to avoid confronting the advisor. Just let him or her find out when the money leaves. For some, that’s more comfortable than any kind of confrontation. I know because unfortunately, it’s also happened to us one or two times over the years as well, where clients decided that they didn’t want to work with us anymore and were so nervous about telling us and terminating the relationship, and knowing that we were probably going to make a pitch to try to keep their business, that they deliberately didn’t tell us. And we didn’t find out until the money suddenly transferred out. Or we get an email or we get an after-hours voicemail. Because they don’t want to feel the confrontational pressure of telling us face-to-face because they know we’re going to try to win the business. That’s what most of us do. And again, the more that the industry shifts from our roots of product salespeople to actual advisors who have ongoing advice relationships with clients, the more this will matter in the future.
Now, the good news again is that in general, the mere fact that they’re in your office talking to you as a potential new advisor means they’re unhappy enough with their current advisor or broker that they’re considering whether to leave, or they wouldn’t be meeting with you in the first place. So your odds are good. That’s good news, at least.
But again, don’t make the mistake that I made in the early years. Don’t underestimate the real challenge and pressure that most clients feel in the moment when they have to break the news to a soon-to-be former advisor or broker that he or she is being fired and the relationship is being terminated, and how far a lot of people would go, including staying with very bad advisors and brokers, just to avoid that confrontation. Which means anything you can do to help prepare them in advance, even if it’s just to point out that it will be a challenge and invite them to think through how they’ll handle it, can make a big difference in bolstering their courage and confidence to actually do it and terminate a bad advisor and follow through on hiring you when the time comes.
In any event, I hope this is helpful as some food for thought. This is Office Hours with Michael Kitces, 1 p.m. East Coast time on Tuesdays. Thanks for joining us, everyone, and have a great day.
So what do you think? Do you talk to prospective clients about how they are going to fire an existing advisor? Would you roleplay that conversation with a client? What strategies work best for individuals who wish to avoid conflict? Please share your thoughts in the comments below!