Executive Summary
When a financial advisor first opens their own firm, they often start with few (or no) clients and little revenue. And while they might have an ideal target client in mind, it can be tempting to bring on any client who can pay the advisor’s fee so that the advisor can simply ‘keep the lights on’. But as the firm grows, these initial clients might not generate as much revenue as the firm’s newer clients, perhaps because they were grandfathered into a lower annual fee schedule. While an advisor might be loyal to these clients (particularly those who came on board during their early days and have stuck with the advisor since then), without a "kill criteria", continuing to serve them can sometimes create challenges for the firm’s bottom line.
However, deciding to move on from a less profitable client can be hard for advisors because they might not want to let down a client who has stayed with the firm for several years or with whom they have developed a personal relationship. Which means that without establishing objective criteria to determine when to let a client go or setting a date to do so, advisors can end up with ‘1-more-year’ syndrome, where they continue to serve these clients at the cost of their firm’s profitability or the available free time to enjoy for themselves, putting off the conversation of raising fees or of terminating the relationship for 1 more year.
In her book "Quit: The Power Of Knowing When To Walk Away", professional poker player Annie Duke suggests a potential solution to this type of problem: implementing "kill criteria", objective measures that can help someone decide when to quit an activity. For Duke, the best kill criteria have both a "state" (i.e., an objective, measurable condition) and a "date" (i.e., a specific time set to measure the state and take action). For instance, an advisor might set a certain date each year where they identify the clients whose annual fees are less than the average per-client overhead costs for the firm, or perhaps clients who generate well-below-average revenue but take a well-above-average number of hours to serve. And because actually following through on kill criteria can be challenging (e.g., letting a client go), it can help to have a ‘quitting coach’ to hold the individual accountable for their pre-commitment. For an advisor, such an individual could be an actual professional coach, or perhaps a mentor or trusted peer willing to hold the advisor accountable for the kill criteria they set.
When advisors identify clients that match the advisor’s kill criteria, they have several potential options to choose from to move on from the client, including referring the client to another advisor who might be a better fit, ‘graduating’ the client to handle their finances on their own, or, if many clients meet the criteria, engaging in a partial sale of the business. Advisors could also consider instituting (or increasing) minimum fees, which could give clients the option of continuing to work with the advisor for a higher fee.
Ultimately, the key point is that because moving on from smaller clients can be a challenging decision, using kill criteria not only can help advisors objectively identify these clients, but also can make it more likely that the advisor will follow through on letting the clients go when the kill criteria are met. Which can ultimately improve the financial health of a firm and, potentially, the advisor’s own wellbeing as well if they are able to work fewer hours serving more profitable clients!
Imagine that a mountain climber is nearing the top of a challenging summit, which, if reached, offers both a spectacular view and a sense of accomplishment after a full day of climbing. But as the climber approaches the peak, they realize the sun will be setting soon, which would make it hard to navigate the rocky descent from the top of the mountain. Further, storm clouds can be seen on the horizon, which could make the climb down from the top even more perilous. This situation can leave the climber with a dilemma: do they continue up to the peak despite the potential dangers? Or do they turn back to ensure their safety, even though that would make them feel like the effort they already put in was wasted?
While they might not have the life-or-death stakes of descending from a mountain peak, some decisions faced by financial advisors can feel just as difficult to make, such as deciding what to do when they put significant effort into serving a client but don’t receive fees commensurate with the amount of work done. Like the mountain climber, these advisors have a decision to make: do they continue to serve these clients even if it hinders their ability to work with potentially more profitable clients, or do they cut ties with the client, which could lead to a healthier business but create an awkward (and potentially emotionally challenging) situation for both the advisor and client, even if the split is handled amicably?
In both situations, making decisions in the moment, when emotional stakes are high, rather than committing to a particular decision in advance could lead to regret in the future. Instead, setting and following through with specific “kill criteria” (i.e., objective criteria that, if met, will trigger an individual to stop an activity) can help advisors make the decisions that are in their best long-term interest when it comes to continuing to serve certain clients or letting them go.
The Challenge For Advisors Of Moving On From Clients
When a financial advisor first opens their own firm, they often start with few (or no) clients and little revenue. And while they might have an ideal target client in mind, it can be tempting to bring on any client who can pay the advisor’s fee so that the advisor can simply ‘keep the lights on’. But as the firm grows, these initial clients might not generate as much revenue as the firm’s newer clients, perhaps because they fall well below the firm’s average assets per client (for firms charging on an assets-under-management basis) or were grandfathered into a lower annual fee schedule (for firms charging on a retainer basis).
While an advisor might be loyal to these clients (particularly those who came on board during their early days and have stuck with the advisor since then), continuing to serve them can create challenges for the firm’s bottom line. Because these lower-revenue-generating clients could require a time commitment similar to (or greater than) clients paying higher fees, the firm could be making a significantly slimmer margin serving them. Or, at the extreme, these clients might not generate enough revenue to compensate for the firm’s overhead costs to service them. As while most advisory firms have overhead expenses somewhere in the neighborhood of 30-40%, clients who generate less than about a third of the average revenue per client might not cover their slice of the basic costs of running the business.
In addition to taking time away from serving the firm’s other more profitable clients (or just giving the advisor more free time in general), working with clients who generate less revenue can also hinder the advisor’s ability to find and serve new (and more profitable) clients, whether due to the limits on the number of relationships an advisor can manage at one time, or just the number of hours the advisor can work in a day (and while an advisor could address this problem in part by hiring another advisor or support specialist, doing so would add costs that could further eat into the firm’s profitability).
While it might not be hard in theory to understand that certain clients won’t bring in as much revenue as others, determining exactly what makes a client less profitable can be challenging. Further, deciding to move on from a less profitable client can be even harder for advisors, perhaps because they do not want to let down a client who has stayed with the firm for several years or with whom they have developed a personal relationship. This difficult decision can make it tempting to ‘kick the can’ down the road by waiting to address the issue of low-revenue clients once the advisor’s time or profits get really crunched. Which means that without establishing objective criteria to determine when to let a client go or setting a date to do so, advisors can end up in ‘1-more-year’ syndrome, where they continue to serve these clients at the cost of their firm’s profitability or the free time they have to enjoy for themselves.
Nerd Note:
The total amount of fees paid is not the only factor that could lead an advisor to let a client go. Other potential reasons an advisor may choose to release a client include an inappropriate fit for the advisor’s services (e.g., if the bulk of an advisor’s clients are in a certain niche, providing services to clients with different needs could take up additional time); a client’s continuous failure to follow through on the advisor’s recommendations (which can be frustrating the advisor, who might think their time would be better spent with other clients); or an unsuitable personality fit for the firm (which can drain the morale of the advisor and other employees working with the client).
Using Objective Criteria To Determine When To Let A Client Go
Recalling the mountain climber nearing the summit described in the earlier example, there are several measures they could have identified before the climb that would have made it easier to decide whether to continue to the peak despite the potential dangers. For instance, they could have set time deadlines for different segments of the climb, which, if not met, would signal that they should turn back to have enough time to get off the mountain before sundown. Or, they could have established a minimum radius of the peak that would need to be free of any storm signs for them to consider ascending to the summit. Monitoring these objective criteria could have taken some of the pressure of making a decision out of the hands of the climber as they advanced up the mountain.
In her book “Quit: The Power Of Knowing When To Walk Away”, professional poker player Annie Duke calls these objective measures that can help someone decide when to quit an activity “kill criteria”. For Duke, the best “kill criteria” have both a “state” (i.e., an objective, measurable condition) and a “date” (i.e., a specific time set to measure the state and take action). For example, in the case of the mountain climber, an example of an effective kill criterion could be “If I’m not within 1 kilometer of the summit by 5:00, then I will turn around” (in her book, Duke gives several examples of mountain climbers who were seriously injured or killed because they failed to set or follow through on kill criteria and attempted to complete climbs despite dangerous conditions). For financial advisors, an example of a kill criterion might be to move on from any client who does not meet a set minimum fee at the end of the calendar year.
Kill criteria can be particularly effective at helping overcome the sunk cost fallacy, which is the tendency of individuals to follow through on an endeavor if they have already invested time, effort, or money into it (regardless of whether the costs outweigh the benefits of continuing on the current path). For the mountain climber, the sunk cost fallacy could kick in as they near the summit; given that they have spent hours (or perhaps days or even weeks) climbing the mountain, it could be mentally challenging to turn back as they near the summit, even if evidence mounts that doing so would be dangerous. But in reality, the work to get to the current point on the mountain is a 'sunk cost', as that effort has already been expended no matter what decision they make going forward; the important question is whether the benefits of continuing to the summit outweigh the potential costs.
A financial advisor’s decision of whether to let go of a less profitable client can be influenced by the sunk cost fallacy as well, as the advisor might be reluctant to move on from a client given the effort they’ve already put in to attract, build a relationship with, and serve the client. But all of this previous effort truly represents a sunk cost – the time and resources invested into the client have already been spent –and so the key question for the advisor is whether continuing to serve the client is in the advisor’s best interest, which can involve factors (e.g., personal relationships) beyond hard dollars and cents.
Using A "Quitting Coach" To Follow Through On Chosen Criteria
Notably, setting kill criteria, whether by athletes on a long-distance hike or by a financial advisory firm assessing which clients to keep, is insufficient on its own (i.e., without a time frame to take action once the criteria are met), as the individual(s) using them must actually follow through on them as well to make them effective. And while kill criteria can serve as a form of pre-commitment (which can involve committing to stop doing a certain thing if the chosen measures are met), using them without a deadline can make it challenging to follow through on the decision to quit in the heat of the moment, particularly if the conditions are close to the limits set by the kill criteria (e.g., a mountain climber might set a kill criterion of turning back if they didn’t make it to the peak by 5:00; if they end up close to the top by that point it could be tempting to keep going).
In the case of a financial advisor, a longstanding client might be just under their new minimum fee, leading to a decision of whether to grant an exception for the client (although, unlike the mountain climber who can’t ‘ask’ for more time, the advisor could give the client the option to either pay the new minimum fee before moving on from them).
Because of the temptation to ignore previously set kill criteria, it can help to have a ‘quitting coach’ to hold the individual accountable for their pre-commitment. For example, in the case of the mountain climber, this could be a partner who reminds them of the pre-commitment to turn around (and the potential dangers involved in not following through with it) once they hit the deadline. And for an advisor, a quitting coach could be an actual professional coach, or perhaps a mentor or trusted peer willing to hold the advisor accountable for the kill criteria they set. Together, setting kill criteria and using a quitting coach can help advisors make more objective business decisions for their practice!
Nerd Note:
Kill criteria can be used in the financial advisor context for many purposes beyond deciding whether to move on from a less profitable client. For example, an advisor with a relatively young firm could set kill criteria to help them decide whether to stay in business or to shut the firm down (e.g., reaching chosen revenue or income thresholds by a specific date).
Kill criteria can also help clients with their decision-making needs; for example, some clients nearing retirement have a tough time leaving their jobs, believing that working ‘just 1 more year’ will provide them with a secure retirement. In this case, an advisor could help their client not only by setting kill criteria for retiring (e.g., once the advisor can show with high confidence that the client will be able to generate a certain amount of income in retirement) but also by acting as the client’s quitting coach to remind them of the pre-commitment they made to retire once the kill criteria were met!
Implementing Objective Criteria As An Advisor To Move On From Less Profitable Clients
While the kill criteria concept is potentially useful in many contexts, it is up to advisors to actually set their own criteria for moving on from less profitable clients based on their firm’s particular circumstances. Though notably, this does not have to be done alone, as advisors can consider working with their quitting coach to help create and/or refine criteria as well.
One potential metric that can help advisors assess when to keep clients based on profitability would be the fee level paid by clients, with a kill criterion requiring clients to pay fees determined to be at least enough to cover the firm’s overhead expenses per client. This fee amount can be calculated by taking the average revenue per client across the firm (i.e., dividing the firm’s total revenue by the total number of clients) and then multiplying by the firm’s average overhead percentage (and because many firms have an average overhead of 30%–40% , this would be roughly equivalent to dividing the average revenue per client by 3). An advisor with this kill criteria would move on from clients whose fees fall below this amount after a pre-determined amount of time.
Example 1: Roger’s firm has a total revenue of $540,000 and 60 clients, for an average revenue per client of $540,000 ¸ 60 = $9,000. His firm’s average overhead is 33%.
By multiplying the average revenue per client by the firm’s overhead percentage, Roger determines that $9,000 ´ 33% = $2,970 will be his kill criteria, and that any client who pays less than this amount in fees at the end of the year will be given the option to stay on as a client and pay higher fees; otherwise, the advisor will help them find an appropriate alternative (e.g., referring them to another advisor) based on their advice needs.
Roger reviews his client roster and discovers that he has 5 clients who he estimates will have paid less than $2,970 by the end of year. Because he believes they might not be covering their share of the firm’s overhead, he makes a note to review their fee payments at the end of the year to see if their fees will indeed meet the kill criteria.
Some firms might also consider the average time required to serve each of their ongoing clients throughout the year (as an advisor might decide to keep a client paying a relatively low fee if they do not take many hours to serve) to help identify those who do take up a disproportionate amount of advisor and staff time. For instance, a firm could decide to move on from a client if they are both in the bottom third of revenue-producing clients and require more than 1.5X the number of hours needed to serve the firm’s average client.
Example 2: Jessica currently serves 60 clients and wants to increase her fee revenue without increasing the number of clients she serves. As she begins to prospect for new business, she identifies her 20 existing clients that brought in the least revenue last year.
She decides to implement a kill criterion based on low fee payments and high service time that will be used to identify clients who she will let go of as she onboards new, higher paying clients. Jessica estimates that her ongoing clients require an average of 26 hours of servicing per year, and therefore flags the low-revenue clients who take more than 26 x 1.5 = 39 hours to serve per year.
She finds that 5 clients meet both metrics, both bringing in significantly less revenue and taking more time to serve than her average client. She decides to move on from these clients, referring them to an advisor who can meet their needs and would be willing to take them on.
Nerd Note:
The above are nominal examples of potential “kill criteria” and an advisor can craft their own based on their specific targets (e.g., profit margins or number of clients served), perhaps in conjunction with their quitting coach. Further, advisors might also consider how letting go of a number of clients (and the revenue they bring in) at once will affect their profitability until they can either attract new, more profitable clients or, if deciding to work with fewer clients, their overhead costs level out accordingly for the smaller client base.
As previously discussed, effective kill criteria often come with both a "state” (in this case, the measure of profitability or labor intensiveness) as well as a “date”. Because the decisions associated with kill criteria are often difficult (e.g., moving on from a longstanding client), setting a date to implement the kill criteria can prevent advisors from delaying a decision. For example, an advisor might pick a specific date each year to apply the criteria to their current client base.
Following the initial implementation of their kill criteria, an advisor might institute a minimum fee level for new (and current) clients to ensure that they meet the firm’s criteria (and could consider including it on their website to make it clear to prospects). Instituting a minimum fee can also be used to present current clients who pay a fee below that amount with the option to stay on at the increased fee level or to leave the firm (which could be a gentler approach than just telling a client they are too ‘small’ to work with the firm).
For example, the following dialogue is an example of how an advisor might approach this conversation:
We’ve determined that in order to service our clients well to the depth that we think is appropriate and to be effective as a business, we need to charge clients a minimum of $X a year. Which means that we’re going to start charging $X a year, starting next year.
If you’d like to stay with us, we welcome you to continue working with us. If you don’t want to continue working with us, that’s okay. We’ll help you find another advisor, or we’ll help you shift your accounts to manage yourself.
Options For Moving On From Less Profitable Clients
While moving on from a client with whom an advisor enjoys working can be a challenging decision, actually having the conversation to inform the client can be even more emotionally fraught (for both the advisor and the client). But a range of options can be offered to the client, which allows the advisor to meet the needs of their firm while reassuring the client that having their planning needs met is still a priority.
For clients who could still benefit from a full-time advisory relationship, an advisor can help smooth their transition by referring them to someone who might be a better fit (e.g., an advisor with lower fee minimums). Because a client who might be considered ‘small’ at one firm might be a ‘big’ client for another firm at a different stage in their growth cycle. Further, by talking to the prospective advisor first (to make sure that they want – and are able – to serve the client), the original advisor can ensure that their client will have a new advisor who values them as a client. When broaching this with their client, an advisor might say something like the following:
I have really enjoyed our time working together, but I think I’ve helped you as far as I can on your journey. I’d like to refer you to Advisor X, who I believe will be a better fit to help you from here.
In some cases, the advisor might have helped the client reach a sustainable path with their finances, in which case they could ‘graduate’ the client to handle their finances on their own (or perhaps with the occasional assistance of an advisor offering hourly services), highlighting the accomplishments the client achieved while working with the advisor (if they really are ready to go out on their own and do not have major lingering financial issues). In these cases, the advisor could help their client set up a self-directed investment platform to ease the transition. A potential way for the advisor to frame this could be to explain the following:
We’ve been on this journey working together for years now. But I think I’ve taken you as far as I can. We’ve gotten your finances sorted out. I’ve helped you in several areas, and I think you’re ready to do this on your own. In addition, by working independently, you would even save the costs of paying me. I’ll help you transition to a self-directed platform like Schwab or Fidelity so you can take care of yourself from here.
A larger advisory firm implementing kill criteria for the first time might find that many clients do not meet the chosen measures. In this case, they might consider a partial sale of the advisory business to another firm. And while the advisor might not be able to fetch a similarly attractive price as selling their full (and more profitable) client roster, it could be a way to gain revenue in conjunction with the transition. Further, doing so could soften the messaging to the (former) clients, as the advisor would not be ‘firing’ them but rather was making a deal with another firm (similar to how an advisor might decide to sell their whole business).
Nerd Note:
Advisors who do not want to let certain clients go who do not meet their chosen kill criteria could consider ways to keep them onboard. For instance, an advisor might set aside a given number of pro bono seats for clients at their firm (this could be particularly useful for clients who are relatives or close friends), where the advisor chooses to serve a limited number of clients without charging a fee.
An advisor who does not want to cut ties with clients fully could also consider creating a tiered service structure. Such client service tiers could be differentiated based on the types of services provided, how they are delivered, and ‘perks’ (e.g., tax preparation support or concierge services) offered based on the fee a client pays. In this way, a firm can better align the cost and services provided to clients with the value the client brings to the firm.
Ultimately, the key point is that because the decision to move on from smaller clients can be a challenging one, using kill criteria not only helps advisors objectively identify these clients, but (particularly when combined with a quitting coach) also makes it more likely that the advisor will follow through on letting the clients go when the kill criteria are met. Which can ultimately improve the financial health of a firm (and, potentially, the advisor’s wellbeing as well if they are able to work fewer hours serving more profitable clients) while helping the clients being let go find appropriate options that meets their need for financial advice!
