Back of the Napkin
Director, Strategic Insights Grant Shorten
Unmasking the toxic client How to spot them, how to stop them As an investment professional, you are in the business of discovering the needs, goals, fears and objectives of your clients, and designing strategies to address those factors head-on. As with any role demanding interaction with a wide range of personalities and temperaments, you will occasionally become involved in a partnership with a “toxic client.”
What is a toxic client?
> Ignores the strongest elements of the
Based on my experience in working with more than a thousand Investment Advisors, I have developed the following simple definition for a toxic client:
> Focuses on index returns with no regard
A toxic client is an individual, couple or household who consistently exhibits any of the following characteristics in the context of their relationship with you…
> Makes unfair demands of your time and attention
> Fails to take action on sound investment recommendations
> Takes credit for positive performance, but blames negative performance on you and your team
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portfolio, and consistently highlights weaker areas for prudent asset allocation
> Demands deep discounts on fees > Is rude, antagonistic, challenging, critical, threatening or dishonest
> Drains the energy and vitality from you and the members of your team
Naturally, some of your very “best” clients may manifest one or two of these behaviours under specific conditions, but that does not necessarily mean they should be classified as “toxic.” The key component in identifying a toxic client is the evidence of a consistent pattern of behaviour. It would serve us well to avoid judging our clients too harshly — for just being human from time to time.
“All too often, the advisor is left bewildered — wondering how they could have missed the early warning signs.” One of the most disheartening scenarios for any investment professional is to watch a new client relationship mysteriously morph, apparently without warning, into an advisor’s worst nightmare. All too often, the advisor is left bewildered — wondering how they could have missed the early warning signs. The reality is, there are several things we can be aware of during the critical early stages of the relationship, which may provide valuable insights into the potential toxicity of a prospective client.
Signs of toxicity The following attributes, behaviours or clues may serve as early warning signs of toxic potential down the road. Employ sensory awareness from your very first meeting, and combine your discoveries in order to create context and provide perspective. The investor:
> Has had relationships with a long list of advisors in the past
> Engages in “rate shopping” from the start > Has launched complaints or legal action against advisors in the past
> Talks about the need for outperformance > Talks about beating indices as the indicator of your success
> Is aggressive or rude during your sessions > Demands an unjustified service level agreement
> Challenges your early portfolio recommendations
> Refuses to embrace your model of portfolio construction
> Refuses to embrace your financial planning process
> Refuses to provide you with crucial information
Be sure to take notes during your meetings, and place an asterisk beside notations that leave you with a sense of caution or discomfort. Trust your instincts. You will be able to review your notes with more clarity after the session.
The presence of one or more of the early warning signs should be interpreted as an important signal to gather more information. It will be essential to discover whether these clues are genuine harbingers of things to come, or just a simple misunderstanding.
The onset of “toxemia” Toxic client relationships don’t typically appear overnight. They tend to develop over a period of time through a series of events or interactions. If the onset of “toxemia” was blatantly obvious, it would be easy to identify, and would provide the justified impetus to make rapid change. This is rarely the case. More often, something is said, a challenge is made, a complaint is leveled, a recommendation is ignored, the seed is planted and the pattern begins. Sometimes, months or even years will pass while the growing “dis-ease” continues to manifest. Why does this happen? There are a number of factors that lead us to tacitly ignore creeping toxemia within a given client relationship. First of all, as investment professionals, we have an industry-wide predisposition to “gathering assets” at almost all costs. We also have an aversion to letting those assets go. On top of that is a feeling that occasional unpleasant interactions are “just part of the job”— that dealing with tough clients is simply to be expected.
The side effects of “toxemia” Unfortunately, despite our best intentions, toxic client relationships always come with a list of costly side effects, which may include:
> Increased stress levels for you and your team members
> A perpetual drain on your energy resources
> Harm to your passion, conviction and joy > Damage to your self-esteem and self-worth
> Defensiveness — as a protection mechanism
> Irritability — which spills over to your team members and colleagues
> Reluctance to engage the toxic client > Reluctance to actively prospect or sign up more clients
> A stifled vision and sabotaged mission > L oss of your valuable time
“Ask yourself what happens to your neurology when you see this client’s name appear on your call display.” The most effective way to objectively determine if you are the unwitting victim of a toxic client relationship is to step back and evaluate where you are today. How many of these side effects do you or your team experience on a regular basis? What are the underlying causes? Revisit the bullet points throughout this article, and determine if you have any toxic relationships that have been unconsciously permitted or even facilitated.
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Strategy 2 Set up a face-to-face meeting with the toxic client. Respectfully explain your issues around their behaviour. Further explain that you’ve come to the realization that your personalities are not ideally suited for each other. Make the recommendation to move their account to another advisor or another firm. Offer any transfer support you deem suitable.
Strategy 3 Set up a face-to-face meeting with the toxic client. Respectfully explain your issues around their behaviour. Further explain that their approach to investing simply contradicts your own philosophy, and that you cannot, in good conscience, maintain a working partnership under those conditions. Make the recommendation to move their account to another advisor or another firm. Offer any transfer support you deem suitable.
Strategy 4 Send a personalized letter — covering any of the above strategies. If you’re uncertain whether a relationship is truly toxic, here’s a very simple test that an advisor in Toronto taught me: Ask yourself what happens to your neurology when you see this client’s name appear on your call display. If the very sight of their name fills you with dread, despair, anxiety or any kind of negative psycho-emotional response, all other things being equal, you may be dealing with a toxic client. If you are like many advisors, the exercise above will empower you to identify at least a couple of relationships that fall neatly into the “toxic” category.
Taking action: detoxifying your practice The first step to detoxifying your practice is to acknowledge and embrace the fact that immediate action must be taken. More often than not, the most effective action is the surgical removal of the toxic party from your client base. Make a list of all the benefits 6 renaissance investments
that you and your team will enjoy from the extraction of the toxic client. Internalize the benefits and bask in the empowerment this important action will bring. I recommend that you take action to detoxify your practice as soon as possible. I also recommend engaging your branch manager or reporting officer as you ponder the best detoxification strategy. There are many ways to go about it, and I provide the following as food for thought:
Strategy 1 Set up a face-to-face meeting with the toxic client. Respectfully explain your issues around their behaviour. Detail how you expect the relationship to unfold afresh, starting today. Having articulated the new “rules of engagement,” ask for acceptance of the “new way.” Gauge their reaction and response.
Putting it all together The quality of your work life has a major impact on your personal life. The elimination of even one toxic client can pay extraordinary dividends — saving you time, energizing your approach and ultimately increasing your revenue stream. By proactively detoxifying your practice, you are molding your environment and creating a more extraordinary experience of life for you and your team! To discuss strategies for dealing with toxic clients, please book an appointment with your Renaissance Investments representative.