This is the final installment of a three-part series looking at client recruitment and retention issues.
Being ranked among the top RIAs doesn’t make advisors immune to being fired by their clients.
When FA-IQ sister publication Ignites Research asked the Financial Times Top 300 RIAs why clients had closed their accounts with their firms in the past, three reasons stood out: a new financial advisor was believed to offer unique benefits; fees and portfolio performance.
Ignites Research surveyed 192 advisors from the elite group in October. Those surveyed had a total of around $580 billion in client assets, averaging around $3 billion per firm, as of October 2018. Advisors make it to the elite group based on their scores in six criteria: AUM, AUM growth rate, years in existence, advanced industry credentials, online accessibility and compliance records.
Brian Vendig, Farmington, Conn.-based president and managing executive of MJP Wealth Advisors and among the FT Top 300 RIAs, believes the top reason – a new financial advisor was believed to offer unique benefits – doesn’t necessarily mean another advisor has a brand-new or innovative way of doing things.
It mostly means another advisor offers something that the client’s previous advisor doesn’t have, according to Vendig.
“It is more about clients assessing what their needs are. They realize that their advisor isn’t a planner and they need a planner, for example, so they might make a change,” Vendig says.
“Sometimes clients only work with an advisor because it is really just about investments and they may switch to another advisor who might have access to a unique investment strategy. Or they might need to change firms to get access to a strategy,” he adds.
Advisors can prevent clients from closing their accounts by having a complete understanding of their clients’ needs and aligning their services to meet those needs, according to Vendig.
When it comes to fees, Patrick Schussman, Los Angeles-based head of advisory distribution at Aristotle Capital Management, believes advisors “tend to suffer more in their messaging” about what their clients are getting in exchange for the fees they pay.
“We need to reframe our thinking,” Schussman said at the Schwab Impact 2018 conference in Washington, D.C. in October last year.
Schussman suggests advisors have a prepared script when discussing fees with clients and focus on what he terms the 4Cs: confidence, clarity, conviction and a compelling reason. Without scripted company fee messaging, advisors are leaving it to chance and opening themselves to more scrutiny, he says.
Steven Check, Orange County, Calif.-based president of Check Capital Management and among the FT Top 300 RIAs, was frustrated that investment returns aren’t higher on the top reasons RIAs are hired by new clients but feels vindicated that they're among the top reasons why they are fired.
With “performance of portfolios” surfacing among the top three reasons for firing advisors, it shows that “once the client is on board, investment performance is important,” according to Check.
In the case of Check Capital Management, clients pay only a performance fee of 10% of the profits and no other fees.
“Our clients like that fee schedule,” Check says. “It keeps us focused on the investment performance goals and it also gives us performance-oriented clients.”
Check Capital Management occasionally “goes through a series of underperformance, which every manager undergoes,” and that’s the time when the firm may lose some clients. Check doesn’t consider that a huge loss, though, because he prefers clients who understand the ups and downs of capital markets.
“Sometimes, we’re doing worse than what the market is doing,” Check says. “But if they leave us because of that, they’re probably not the right clients for us. They have to be educated well enough about how the markets work, up one year and down one year.”
Check acknowledges that his firm has a “very tough business model,” particularly because the firm sets parameters as to when it can collect performance fees from clients.
Check Capital Management only collects its performance fee from a client after it delivers positive performance to the client for four straight quarters
“That’s the actual payment scheme – one year to the end of the quarter before we can collect our paycheck,” he says.
And when investment performance is negative, Check Capital Management carries that loss for an extended period before collecting its next paycheck from the client.
“If we have a down year, let’s say a loss of $50,000 [for a client], we carry that loss to the next year, and we have to make that up for that loss in the next year and then make money before we can get paid,” Check says.
This business model has kept clients loyal to the firm because the clients understand the advisors are incentivized to deliver that positive investment performance, according to Check.