Should you take back former clients?

Todd Peters believes in second chances. Only a handful of clients have left him during his career—but, he says of those, some have come back and asked to be rehired.

The advisor with IPC Investment Corporation in Winnipeg, says that during the 2009 and 2011 downturns, clients “came to me and said, ‘The markets are lousy, so what are we going to do about it?’ My response was, ‘The same thing I’ve been doing the entire time we’ve worked together,’ ” which means holding during down markets and actively rebalancing.

But one client wasn’t happy with that answer. “He even asked me, ‘If you could go back in time, would you have changed anything?’ I said no. He didn’t think that was a good response, [so he] switched to a different person who was promising wonderful returns and lower fees.”

Around the same time, another client took his portfolio to an online broker in search of higher returns. “Both clients had middle-of-the-road, balanced portfolios and their risk profiles were that of your typical 50-year-old or 60-year-old,” he says. “They had 40% fixed income and 60% equity, and were fully diversified.”

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Years later, both got in touch again.

“The guy that went to a new advisor said he didn’t get the service he thought he was going to get, and the guy that tried to manage his portfolio on his own realized that’s a tough thing to do.”

Peters took them back. “People react to money emotionally and, sometimes, that drives decisions. Such responses are honest but not always right, so you to need to give people a chance to understand the original source of their discomfort,” and to correct their mistakes. Still, he says, decide whether you and the client are a good fit under the current circumstances before reintegrating him.

Darren Coleman, senior vice-president and associate branch manager at Raymond James, says advisors must be cautious when dealing with former clients who appear to be chasing performance and continually switching advisors.

“There’s a difference between people leaving based on a service issue versus a performance issue. We can control the risks we take and people’s portfolio allocations, but we don’t have any say over what’s going to happen in markets.”

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Markets have tested Coleman’s client relationships several times. When technology stocks were hot in the 1990s, for example, “we got fired quite a bit. I wouldn’t allocate capital to products that had vastly more risk attached than people thought they did.” Then, “about two years after the tech bubble popped, we had clients come back who said, ‘You saw the problems before we did, and we want to work with you again.’ But we didn’t take them back, because my feeling was, if they didn’t listen to me that time, why would they listen to me now?”

If you do decide to welcome former clients, here’s how to handle the transition.

Restarting relationships

When clients leave, says Peters, “I keep their files in a folder called ‘Inactive Client Files.’ So, if you were a former client of mine and you wanted a copy of your file, I could bundle it all up and send it to you.”

When old clients want to return, he starts by referencing those files.

He checks to see if clients fired him over performance issues. If so, he determines the point when they were most disappointed in the markets, and charts what their performance would’ve been had they stayed. Then, he’ll share that comparison during their initial discussions about coming back.

He also reviews old meeting notes and talks about their past concerns. And he tells them he understands why people leave and lose confidence.

He also goes through the discovery process all over again to reaffirm personal details, and explain what his firm will be doing to manage the client’s assets, and why. “It’s an abbreviated version of explaining my process, though, because I don’t have to go through the details of who I am,” he says. What’s most important is “making sure a returning client’s risk profile is defined again, and that they understand why they left previously and why they’re coming back. But I don’t dwell on the past and I don’t make them feel dumb.”

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His main goal, he explains, is “to get their expectations on a level that I feel I can reach. As I go over everything, I watch their eyes glaze.” But he makes them go through it, since he’s making the choice to take them back.

After the first few meetings, says Peters, you tend to “fall back into the relationship you had.” When expectations are clear, “it doesn’t take a year to trust somebody again.”

Jolene Laing, associate portfolio manager at ScotiaMcLeod in White Rock, B.C., agrees. She’s brought former clients back on successfully and, as a branch manager, helps other advisors do the same. “When people realize they’ve made a mistake and move on, their leaving becomes a blip on the radar. Two or three years down the road, you may even forget that someone left,” she says. “You can’t treat them differently than everybody else” (see “Dos and don’ts of rehiring clients,” below).

But Laing does require returning clients to discuss and sign new investment policy statements. She manages a conservative discretionary portfolio, which holds North American large-cap and fixed-income securities, and only invests in managed international equities. She doesn’t waver from that approach.

The fine print

Laing says filing new policy statements is key, since the act of signing means clients acknowledge that they understand your current investment approach and, once again, they can’t expect you to alter your process based on market performance.These statements also protect you if the second try at a relationship doesn’t work. She recalls taking back one former client who had left her to work with an advisor who promised broader services, and then came back.

About eight months later, “that man fell into his previous habit of questioning my approach.” In particular, she notes, he wanted out of fixed income entirely because markets had performed well since he’d returned.

Luckily, the man had signed a new investment policy statement.

So, Laing says, “we had a conversation about my process and about how I was uncomfortable with the direction he wanted to go in, and I was able to show him why. We didn’t have a ‘you did something wrong’ conversation. I simply explained it wasn’t going to work and that he needed to seek an advisor who could cater to his needs.”

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That groundwork meant she and the client ended on good terms. “I made the mistake of taking that client back when I shouldn’t have and I recognized that,” she adds. In the end, the man understood her concerns, appreciated her candour and, after leaving, referred one of his friends.

New level of loyalty

Sometimes, returning clients can become your most loyal, says Laing.

One of her most successful rehires was “one client who left when her husband passed away.” Laing tried to draw out that client in joint meetings, but found her disinterested.

That client transferred her account to her sister’s advisor, but within a year found she wasn’t getting the same level of service.

Advisor Jolene Laing suggests you keep in touch with former clients you’d work with again. You can send birthday and holiday cards, just in case they decide to come back.

“She realized what she was missing,” says Laing, “and, even better, her sister transferred over with her when she came back. We take care of tax reporting and work with people’s accountants, for example, so for the original client it was a needs-based issue.”

Coleman notes he’s regained clients after losing them during a transition. “We’ve moved firms and had clients say, ‘We really like you, but we’re going to take this opportunity to see someone else.’ Often, they explain, ‘I’m going to try the new person out. He took over your account at the existing firm and I’m just going to stay with him since I don’t want to do any paperwork.’ ”

Then, “we get calls back where people admit the transition wasn’t as smooth as they hoped, and that they’re not getting the same service. Those people we take back because the issue wasn’t that they didn’t trust us. We created the ripple in the relationship, but they still made the effort to choose us once again.”

Tip

Explaining why markets are volatile will help clients understand that you’re not to blame.

And, whatever the reason a client left, Todd Peters says advisors should remember they’re in a position of power when the person apologizes. Often, “former clients feel bad enough after leaving the first time,” he says, so the rehiring risk is minimal. He notes, “I’ve also run into people at social functions who are even too embarrassed to come back. They’re always very sheepish about having left.”

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To put people at ease, Laing says she’ll mention her own past mistakes, such as how she left her accountant years ago and then asked to work with him again. At the time, she felt she wasn’t getting enough attention, but later realized her error.

She adds, “You need to legitimately make former clients feel you want to help them.” If you treat them fairly when you take them back, “they’ll know the grass isn’t greener and they’ll be more respectful.”

Decide whether to take THEM back

Ask yourself these questions before rehiring former clients

Do your research

If a client threatens to leave, says Darren Coleman of Raymond James, clarify why she’s unhappy and whether you can save the relationship.

Ask whom she’s spoken with. Besides neighbours or family members influencing her decisions, she may have met with another advisor. If so, she may be willing to share copies of that advisor’s sales materials, or more details about his approach. If a client envies another person’s returns, ask for more portfolio details.

“You may be able to show clients why the products and allocation models you use are more current and robust” than your competitor’s, or why their portfolios are more suitable, explains Coleman.

When a relationship can’t be saved, be sure of two things:

• See to it your client receives the same level of service during the departure as she did during her tenure.
• Try to find out what you could’ve done differently.

Many former clients talk to people about their experiences. But tools like Twitter make that sharing so much easier, which means your reputation could be at stake. Todd Peters of IPC Investment Corporation emphasizes you must explain all exit fees to departing clients and, to amp up service, “discuss ways they can possibly avoid some of those costs as they depart. They may be able to transfer their accounts in kind to the next institution and that will help minimize” losses and administrative hassles.

Katie Keir is content editor of Advisor Group.