Advisors who switch firms or strike out on their own regularly trumpet their successes, breathlessly saying they wish they left sooner. However, a new study by Cerulli Associates examines the often unspoken downside — client attrition and loss of client assets.
On average, “Approximately 19% or one-fifth or client assets are lost when advisors change firm affiliation, in addition to planned attrition,” Cerulli noted. Moreover, advisors lost an additional 10% of their client assets as a result of planned attrition, defined as assets that an advisor chooses to leave behind, explains Michael Rose, an associate director of wealth management research at Cerulli, a Boston-based research and consulting firm. Hence, they relinquish close to 30% of client assets on average.
Insiders interviewed by RIA Intel underscore that long-term most advisors will make up for the initial losses and planning ahead can put the reins on asset departures.
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Cerulli’s Rose urged advisors before they switch firms to perform “an honest self-assessment of the strength of their client relationship, and the share of their client base that could be at risk as a result of breaking away.”
He says the 19% of lost assets, excluding for planned attrition, stem from a lack of client connection with their advisor. “Some clients are very satisfied, and some less satisfied, and there may be some clients who don’t have as good a relationship that makes it worth it to make the change,” he notes.
But Rose says focusing on the 19% is a glass-half-empty attitude — that still means 80% of clients move with their advisor. "It speaks more broadly to the quality of relationships, in general, that advisors have with clients.”
The planned attrition, amounting to about 10% of client asset losses, stems from clients who are “not the best ones or the most profitable,” Rose explains.
Advisors also lose clients moving from the so-called wirehouses and other large financial services company to smaller — new or existing — RIAs. Many clients associate “brand comfort with a big name firm, or may never have heard of the small independent firm, and that can be a concern,” Rose says.
Firms generally restrict the kind of information that an outgoing
advisor can take to a new firm, which can hurt client retention and trigger a reduction in client assets, Rose asserts.
A transition package from the new firm may help offset departing client assets and “can provide relief to the advisor,” Ross says.
Even with the departure of client assets, economics favor advisors. When most move from a wirehouse or large bank to an independent, “they’re getting a larger share of top line revenue, so the economics work, even when you account for some attrition,” Rose says.
Moreover, most advisors leave for more than money. “It’s often about going independent, about control over business and operations,” Rose says. But advisors need to objectively evaluate the quality of their client relationships “and have a reasonable understanding of what share of their clients will come with them,” he adds.
But any advisor who is planning to switch firms needs to lay the groundwork to bring their clients with them, from three months to a year in advance of leaving, if possible, notes Joshua Tomolak, a senior consultant at Morristown, N.J.-based Diamond Consultants, which specializes in financial services. Deepening bonds with clients via Zoom or phone calls, and meeting for coffee when permitted in a pandemic world, intensify the relationship and heighten the chances of client retention.
Client attrition is a risk that every advisor encounters when changing firms. “If every advisor brought over 100% of clients, we wouldn’t be seeing incentives that are reaching high water marks with firms. These firms are paying for the risk that the advisor is experiencing,” explains Tomolak.
He urges advisors moving to a new firm to highlight the benefits that the client will reap with the new firm, such as no longer paying trading fees to broker-dealers.
And planned attrition is part of the changeover. Some clients are better off managing their own assets, some have complicated investments that won’t fit into the new firm, or some are facing tax issues, Tomolak suggests.
But often the loss of nearly 30% of client assets pays off, Tomolak says, in a better work/life balance, or long-term in generating more revenue or attracting new clients.
But Matt Sonnen, CEO and founder of Redondo Beach, Calif.-based PFI Advisors, which specializes in improving RIAs business, says, in his experience, most advisors who switch firms and prepare for the move, bring 95% of their existing clients with them. If they’ve been with UBS or Morgan Stanley or any large firm, most clients associate with the specific advisor who has overseen their retirement portfolio, attended their wedding, helped them work through their divorce, and stay advisor loyal.
The ones who lose clients, and raise the statistics of client loss, are the ones who have accumulated or been given these clients, but aren’t really beholden to them. “Most of those advisors never actually got the clients themselves,” Sonnen points out.
Nor does Sonnen think advisors should be upset by the potential of losing unplanned clients or cutting off some clients who don’t fit in under new guidelines. Taking one step back to take two steps forward is acceptable, he suggests.
Most advisors who launch their own firms grow because they’ve established a client niche, according to Sonnen. Whether they concentrate on state court employees or professional athletes, a fresh, tailored focus on those clients should attracts others like them, compensating for any temporary losses.
When Chiquita Rice left Edward Jones last month after six years of being an advisor to open her own firm, Monarch Investment Advisors in West Roxbury, Mass., she did so in pursuit of “greater flexibility and compensation.” Rice said she respected that the families she worked with were clients of Edward Jones and didn't solicit them, which contributed to some of her concerns about client retention.
At this early stage, about 25% of them have left Edward Jones to move to her new firm. “That’s a big chunk I’ve left behind,” she concedes. Moreover, she has no planned attrition, suggesting that there aren’t any previous clients she wouldn’t mind staying with her.
Nonetheless, she’s focused on developing new clients, actively marketing her business, with fewer constraints on social media, developing a blog, networking, and holding seminars. She describes her ideal client as a female mid-level professional, ideally 10 to 15 years from retirement, with many in the legal and medical fields, though she’s open to all fields.
Despite only bringing over 25% of her clients so far, Rice is positive and optimistic about future success. To thrive will require “being disciplined with my marketing effort, my day-to-day activities, and cultivating relationships I’ve had with Edward Jones, and clients that follow with me,” she explains.
Cerulli’s Rose says, “the influence that assets under management return would have on an advisor’s decision to leave depends up on the advisors’ circumstance and why they are choosing to change affiliation.” A young advisor with an opportunity to join a high-growth firm differs from an experienced advisor within 10 years of wanting to retire “who is looking to maximize the economics of their practice over the short-term,” he says.