Choosing Your Clients Wisely

Advisors explain the red flags they see in potential new clients.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

This article originally appeared in our September issue of ETF Report.

If only there were a Tinder App for client selection—swipe to the right if you like the person, to the left to pass; when the liking is mutual, voila, a connection is made.

If technology has made finding your soulmate easier, it has done little to help advisors build client rosters with individuals who see investing the same way they do. And the truth is that finding the right client is just as important to an advisor as finding the right advisor is to a client. The right fit is crucial if the partnership is to be fruitful—for both parties—in the long haul.

To quote Joe Goldberg, wealth advisor at BAM Advisors and part of the BAM Alliance—a vast advisory group that can manage accounts of all sizes: "The wrong client can have a sizable portfolio but lead to an unprofitable relationship if the expectations aren't appropriate, or behaviorally they are not comfortable with the service model or strategy."

Mutual Expectations
To Goldberg, this mutual relationship centers on having the right expectations on both sides. So how do advisors know when a client is that right fit?

Today the client selection process in advisories across the country is pretty old-school. They often begin with a referral, follow up with meet-and-greets, conversations and questions upon questions, and end in a good number of potential relationships that never get off the ground.

If you thought finding the right client was easy, consider that at Harbour Financial Resources—an RIA in the Chicago area with some $135 million in assets under management—about 40 percent of the time, prospective clients don't make the cut for one reason or another. And Harbour is the rule, not the exception.

"We turn away potential clients quite often," Harbor Financial wealth manager Mike Vieceli said. "I would prefer to spend a little more time sizing up a prospect than getting into a relationship that wouldn't be mutually beneficial. I just chalk it up to marketing time/expense."

Unfortunately, there's no universal trait or characteristic advisors look for, even if their ultimate goal is universal: to establish a relationship that will be long-lasting and that will grow over time. To each, it comes down to looking for things in a client that reflect what matters most to them and their businesses.

Choosing Clients Wisely

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Minimum Account Size
Perhaps the most commonly used metric to narrow the pool of prospective clients is account size minimums. If an investor doesn't meet your threshold, they're out.

These minimums vary from shop to shop because different advisories have different economies of scale, and to some, it's just not worth the cost of managing money for really small accounts. To others, they see little potential to add value for a fee for certain account sizes.

Kim Nordmo, who founded Artience Capital in San Francisco in 2009, and manages about $55 million today, requires $1 million minimum. The relatively high bracket comes from her firm still being small, and boutique-y. But that doesn't mean she would turn prospective clients away on that metric alone.

Choosing Clients Wisely

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Understanding Of The Basics
To find the right client for her business, Nordmo looks for what investors have done in the past; what has and hasn't worked for them in prior advisor relationships; and what their portfolios have looked like up to that point. Just as importantly, she looks for a certain level of expertise.

"To me it's important there's a certain level of client sophistication; an understanding of basic tenets of investment management, but also an understanding of themselves," Nordmo said. "There has to be a willingness to communicate and a willingness to learn."

"We are so geared to sell, to talk about all of the wonderful things we bring to the table as advisors, but there's a point where you have to stop and say this relationship isn't going to work," she added. "But sometimes I think these things naturally evolve. It's a mutual process."

Like Nordmo, Harbour Financial's Vieceli also looks for clues from the investor's past, but his focus is on whom a client has relied on for advice before.

"We explore the experiences they have had working with other advisors and whether they have actually followed their advice," Vieceli said, noting that a red flag here would be clients who turned to family members, work colleagues or "hot tips" for investing advice.

Ghosts In The Portfolio
Also on his radar are a prospective client's account histories.

A review of someone's account statements—where trading activity, position shifts, use of obscure investing vehicles and an overall level of involvement can be easily identified—says a lot about the type of investor a person is, he says. Lots of action is usually a red flag.

Ultimately, what Vieceli is screening for are clients who want to be adequately involved with the process of investing, who are willing to deal with the details, and who are willing to put the time into assessing their financial situation in its entirety—not just performance chasing.

It's perhaps unsurprising that in the world of ETF-focused advisors, the concept of chasing performance is often construed as a major red flag in prospective clients. You hear this from advisors everywhere.

The reality is that if you boil it all down, finding the right client is all about finding people who see investing the same way you do, who share the same investing philosophy.

Philosophy Rules
Rick Ferri, a widely respected advisor who founded and runs Portfolio Solutions in Troy, Michigan, has turned his investing philosophy—a belief in passive, low-cost investing—into a $1.6 billion-plus business. Ferri's process for finding the right client begins and ends with a simple but crucial assessment: What's the client's investing philosophy?

"The first question we ask is, 'Do you want advice and have the same philosophy we do, or do you just want portfolio management?'" Ferri said. "If they want advice, we provide from minimal to a full financial plan. But the underlying hurdle everyone faces is on the investing philosophy."

"We don't go on a conversion tour, trying to sell the idea of passive low-cost investing. We wait for people to 'come to school,' so to speak," he added.

When there's that eye-to-eye on the philosophy, "We can work with you on any level of service," he said. But if there isn't, the fit isn't right.

The easiest way to tell when the relationship isn't going to work is when there's talk of performance.

"There are clients who come in and say they want to try us out for a year and see how we perform. That's a red flag," Ferri said. "The question shouldn't be about performance, but about long-term asset allocation."

View From Both Sides
It's important to note that Ferri's keen focus on investing philosophy is center on his client selection process, but he does require a $1 million account minimum, which in itself is a major selection screen.

But what makes Ferri's perspective particularly interesting is that he is now working on launching a robo advisory as well, looking to democratize access to his investing philosophy—and his portfolios—to just about anyone by lowering the account minimums to $5,000. Ferri plans to charge the same 25 basis points he charges at Portfolio Solutions, and for the same portfolios, but the automated service won't have the 12 basis points in advice fees associated with his original business.

If Ferri's robo advisory is about democratization—anyone can come in and play—how does client selection in this setup work? It's not that in the robo-advisory segment philosophies don't matter, it's just that lining them up is incredibly more difficult.

Ferri isn't entirely sure yet how he's going to ensure the client fit is right in his robo platform so these clients turn into long-term investors. That's still a work in progress.

Unintended Client Selection
But we can take clues from how more established robo advisors such as Wealthfront are going about finding the right client fit. To be fair, at this point, none of these firms has a long-enough track record to really know whether today's clients will be there tomorrow.

But for now, Wealthfront, the fastest-growing, all-ETF, automated advisory today, with more than $2.5 billion in assets, has a client selection process that is essentially centered on client expectations—what they hope to get out of investing. But it's a process that's done somewhat by default.

It's the clients themselves who are making the call on whether the fit is right. Wealthfront is just making sure that its messaging is abundantly clear.

"We focus on transparency as the best method to ensure that clients who sign up for Wealthfront know, upfront, what they're getting from the service, how it works and what to expect," said Adam Nash, CEO of Wealthfront. "We believe that the sales-driven process of the traditional industry tends to lead to clients who feel misled."

"We make sure our audience understands that our service is not designed for people looking to time the market or actively manage their portfolios," Nash said. "Wealthfront is designed for investors who are looking for a low-cost, diversified and tax-efficient service that is personalized to their risk tolerance."

Choosing Clients Wisely

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Built To Exclude No One
This hands-off approach to client selection isn't unusual in the robo space. Consider up-and-coming WiseBanyan, where there are no account minimums and no fees, as the firm was built on the notion that everyone should have access to financial advice and portfolios. The firm is built to exclude no one, to select all.

But client selection still happens, even if the process is unintended. The product offering itself serves as a screen.

"By having no minimums and no fees, we genuinely remove the barriers to investing," said Herbert Moore, co-founder and CEO of WiseBanyan. "[But], we have found the most resonance with younger investors—70 percent of our clients are under 35."

That demographic resonance due to the automated, tech-savvy nature of this investing platform has led the company to fine-tune its product and service offering to meet the needs of its biggest clientele. That, in turn, attracts even more millennials to its roster of clients and unintentionally caters to a specific type of investor, screening out others.

"We began WiseBanyan with the mission that high-quality financial advice and services should be a right," Moore said. "But this becomes a virtuous cycle as more millennials are attracted to our product, and we continue to tailor our product to the needs of younger investors."

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.