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Wall Street Steward Blog

Case Study: Service Kills

I confess that service is one of the weakest areas of my financial planning practice.  Please do not misunderstand – our service is not weak, but out of everything, it is the spot that I could improve the most.  

Between meeting with prospects, selling, planning, managing accounts, writing blog entries, fighting negotiating with compliance, conducting seminars, answering e-mails, blah, blah, blah….my plate is full.  The easiest thing to neglect is the service side.  However, sometimes it does NOT pay to service an account.

This case study is one of those situations.

BACKSTORY
Exactly one year ago, a lady attended one of my seminars and we immediately connected.  After meeting with her and her husband, I discovered that they were new to the area and had not found a local financial advisor.  This is exactly what an advisor wants to hear.  Or, as we like to call it, *low hanging fruit*.  Their account was in the $1 million range and we had a great rapport, so they decided to let me manage their money.

I went through my typical “new client” red carpet treatment – explaining my commitment to them and their money and the commitment I expect from them in return.  I expect every client to trust me and to take my advice.  If someone takes issue with that, I kindly say “it was nice meeting you” and escort them to the door.  Life is too short to constantly have people second guessing every call you make, so for that group of people, finding another advisor is going to be mandatory. 

This family agreed to both sides of the agreement and we were off.  Risk assessment and honest discussion about the potential to lose money?  Done.  Service expectations?  Completed.  Goal analysis and assignment of probability?  Boo-yah.  Everything was set.

FIRST YEAR BLUES
The last year (Dec 2010-Nov 2011) has been tough, to say the least.  The last thing you need is for me to spout off all of the reasons that the market has been terrible, so I won’t do that.  I will sum it up with 2 facts: 


  1. Only 23% of active money managers have outperformed the indices this year, according to Merrill Lynch.  See this link.

  2. The average hedge fund was -2% year to date (YTD) vs. S&P 500 +.87% through 11/30, according to Zero Hedge and Hedge Fund Research.

OK, many consider those that manage hedge funds to be the best managers in the industry, and they have underperformed this market by almost 300 basis points.  As far as the average manager, only 1 in 4 has beaten the market this year.  Even “the best of the best” have an off year. 

I am not claiming that I deserve to be in this category.  Quite the contrary…my point is that if Kobe Bryant is struggling to hit a free throw, then the court is a hostile environment.

The client’s portfolio was down 1% during the first year with me.  Remember that.

ACCOUNT REVIEW
A mentor once said “the investment business is like a water bucket with a hole in the bottom.  You will always lose some clients, but the key is to gather more new clients than you lose.”

Interesting concept.  One would think that if an advisor were to bust his/her can in the service department, they would be able to hold onto every client for a long time.  Not true.  Don’t know why…but it is simply doesn’t work that way.

After several pep talks from my marketing people, I agreed that it was time for me to sit down and conduct an account review with this client.  I was dreading it, because I thought their performance had been poor so far….I was wrong.

The review began.  I showed them their current allocation (where their money was and how each asset was performing), my target allocation for them, and then we discussed long term goals, which had not changed for them.  They were thrilled so far.

Next we moved into the “brass-tax” performance discussion.  I told them they were down 1%, and immediately the morale shifted. 

“I thought if we paid fees and commisions, we wouldn’t lose money.”  If only it were that easy.

“I never said that.  As a matter of fact, here are my notes from our first meetings and I told you that with your investment objective, your accounts could drop as much as 20% if things really hit the fan.  We are not down 20, we are down ONE.” 

We delved into every holding – why it was purchased, what my rationale was for future prospects, what we should do with it, and how much they had made/lost on EACH one.  Report card mentality.  Kid brings home A, A, B, and D…which one do you want to discuss?  This is no different.

“Why would we sell XYZ and buy ABC?  XYZ has done well and ABC is our biggest loser.”

“It is called rebalancing, and we have been over this repeatedly.”

Things got worse from there.  The next day, they called to ask me about one holding that they were concerned about.  “I went over this yesterday.  I think we should hold it because of reasons 1-2-3-4.”

At that point I assumed this client was a “rent a client” and started counting the days before I would receive the inevitable 412 deliver (broker talk for an outgoing account transfer).

THEY DIDN’T KNOW
They transferred.  I lost the client 1%, and then lost the client.  If they had told me that losing 1% would have been a dealbreaker for them, I would have told them to flip a coin.  Heads – bury their cash in their backyard.  Tails – buy a CD.

I have played the review meeting over and over in my head about 50 times during the 2 weeks since this exchange.  When I lose an account, it downright hurts my feelings.  I take things personally, and that is what makes me good.  I care. 

Then, one day it hit me, THEY NEVER KNEW!

All of their “concerns” were AFTER I had told them the answers.  I told them their account was down 1% and they were mad.  I told them that holding XYZ was their worst performer and then they wanted to question me on it.  I gave them specific action steps, and they argued with me. 

They had thought everything was “hunky-dory” until our meeting.  I had called them multiple times over the year and told them how their account was doing, so that part was not a surprise to them.  But, when I put it in WRITING and sat down and reviewed everything, it hit home for them.  Then, they fired me. 

If that review had never happened, I believe that I would still have that million dollar account today.  They would have made all of their money back as of this writing (12/4), not known about the relative performance of our problem holding, etc.

I actually LOST an account because I serviced them.  If I had neglected to do the annual review, they would likely still be around.  Reviewing accounts is the right thing to do, and I would want to know where my money was if it were reversed.  I will continue to review all accounts every year, because that is part of my fiduciary responsibility, but it might cost me more accounts going forward. 

Do the right thing, and it will all work out in the end.  We lost that million dollar account, but since that day, we have replaced that $1 million with almost $3 million more. 

We are gathering more water than we are losing.  My mentor would be proud.

Important Disclosure: This example is from a former brokerage client. Their views may not be representative of the views of other clients and are not indicative of future performance or success.