How To Avoid Financially Destructive Clients

Behavioral finance can serve as an advanced warning system when it comes to potential clients.

As financial service firms grow, there is almost always a progression towards being more selective about who they take on as a client. That may sound a bit cold, but really, it serves both advisors and investors to be paired well. So how do you know who will be an ideal client…and who won’t?

The Worst Client

When we polled our user base to identify who advisors believed to be the “worst client,” the resounding response was, “an engineer.” In my own experience with clients, I found that many engineers constantly wanted to benchmark and finetune the portfolio. When clients are not relationally compatible with their advisor or wealth manager, trust me, it can be challenging.

But, also in my experience, engineers aren’t the worst clients. Those hiding in plain sight during client onboarding who then slowly require much more time and risk to manage throughout their financial journey are the real worst clients. I say that because they are financially destructive, despite your best efforts.

A Few Examples of Financially Destructive Clients

  • The couple that brings in $300k + per year and spends it all
  • The mother that cannot say “no”
  • The couple that constantly switches plans or presents with ideas for deals from dinner parties

This type of client will not only be a drain on your time, but it’s hard, if not impossible, to set them up for the long-term win. So, how can you identify these clients from the get-go and avoid them?

The Observable Criteria

Historically, we have seen advisors selecting clients based on easily observable factors. They include:

  1. Meeting a minimum of assets under management
  2. Shared values
  3. Preparedness to delegate
  4. Being able to meet a specialist service need 
    (estate planning, family business, business exit, etc.)

Uncovering the Deeper Issues

While the above factors are a reasonable place to start, there are deeper issues to uncover. If you have been advising for any length of time, you probably already know that this simple checklist is not enough to thoroughly vet a potential client. So, what’s missing? Before taking on someone new, and in order to retain them long-term, it’s critical that the behavior patterns running under the surface are also uncovered.

Discovering Your Client’s Financial Personality

Stress has a way to bringing out a person’s true nature which can directly impact their financial decisions and the client-advisor relationship. So, be aware that some clients will do a “behavioral flip” when they are under pressure or in a highly emotional situation. They may quickly go from being a seemingly congenial and desirable client to being “too hot to handle.” It can be triggered by a myriad of market or life events, so it’s helpful to know their inherent behavior style before high-stakes decisions are on the table.

Thankfully, when you apply a little behavioral finance to the situation, these types of surprises can be avoided. That’s why many advisors use the DNA Behavior web app to get insights into how people make decisions and approach relationships with both people and money. It helps them avoid taking on the riskiest clients, and more successfully manage those they choose to advise.

Common Traits of Financially Destructive Clients

An abundance of behavioral data can be revealed by using the DNA Natural Behavior Discovery Process. In fact, a look into those discoveries over the years has helped us determine the shared traits of financially destructive clients. Contrary to the results of our user poll that singled out engineers, the revealed traits were not associated with any particular occupation. Rather, the most financially destructive clients were found to be the ones that required the most behavioral management over time.

  1. Low Financial Behavior Compatibility – They are more prone to making financial decisions that get in the way of wealth accumulation.

  2. Low Relational Style – They are interpersonally harder to manage; thus, there is a greater chance trust will be lost and advisory risk will increase.

A Risk Profile Isn’t Everything

A risk profile is only one dimension that needs to be considered when vetting new clients. It is a person’s complete financial personality that is a significant driver of wealth creation and of an advisor’s ability to help them reach their goals. Wouldn’t it be nice to know who was naturally inclined to display financial destructive behavior before you start working together?

Imagine knowing:

  • Saving and Budgeting Habits
  • Risk Appetite
  • Goals and Motivations
  • Real-time Market Mood Prediction
  • Behavioral Biases
  • Communication Preferences
  • The Best Advisor/Client Match

You could use this information to not only choose the right clients for your firm, but better manage your entire client base.

So, Who Makes the Best Client?

According to a study we conducted across 65,000 randomly selected participants who had completed the discovery process, we found that behaviorally ideal clients exhibit the following characteristics:

  1. High Financial Behavior Capability – They have the propensity to save money (low spender), emotionally manage losses (high risk tolerance), and build wealth (high goal motivation).

  2. High Relational Style – They have a desire to congenially work with the advisor to build a long-term relationship and not simply for performance management.

Interestingly we found that only 3% of clients would be ideal from a behavioral management perspective when you combine the two elements above. The remaining 97% could be clients who are prone to making financial decisions which would counteract accumulating wealth and/or would be difficult or not enjoyable to manage.

How To Get Behavioral Insights

Behavioral insights can help determine which potential clients to avoid, identify those who would be the most ideal, and better manage those who fall somewhere in the middle of the best to worst client scale.

When deeper insight exists, there is no reason you have to take on and advise clients without insight into their financial personality. You can leverage the data available through the DNA Behavior web app to maximize advisor-client fit, tailor advice and client communication, and ensure retention, satisfaction, and success on both sides of the advisory relationship.

Want to see what’s possible? Take a free test drive of the discovery process to see the type of insights you could have in your client relationship toolbox.

Related: Grow Your Relationship Capital To Expand Opportunities