The Power of No: Streamlining Your RIA’s Clientele for the Eight-Figure Exit

As your business has grown, it likely became more complicated. You started off with just a handful of clients who were willing to put their trust in an upstart. Now, you find yourself serving more affluent clients and seeing that they provide a more efficient path to revenue growth. Unfortunately, your book is full, and bringing on more clients would require a significant investment. Fortunately, there is an answer. It can be found in the power of “no.” Just as every garden needs pruning for the healthiest growth, carefully pruning your client list could make room for the growth you desire. In this entry, I’m going to look at the power of “no,” and how such a small word can have a big impact on your firm.

Follow Along With The Financially Simple Podcast!

This week on The Financially Simple Podcast:

• (00:42) The eight-figure exit requires the correct client base

• (03:27) Business constraints

• (05:56) The Pareto Principle and Dunbar’s Number

• (09:50) Learning the power of “No”

• (12:47) Reasons we “outgrow” particular clients

• (15:14) RIAs don’t scale the way other businesses do

• (17:30) Disqualifying bad fits

• (25:23) Segment your book of business

• (31:25) A question to consider

• (36:31) C-listers typically refer C-listers

Working With Anyone Who Can Fog a Mirror? Use the Power of “No”

When I first started out, I was willing to work with anyone who could fog a mirror. It makes sense in the early stages of business when you just need to increase your revenue. But as my firm grew, I knew that this wasn’t a sustainable model. Chasing every potential client leads to inefficiencies which can create growth-related problems in the long run. This is because your business has constraints.

In his book, Theory of Constraints, Dr. Eliyahu M. Goldratt states that, “Constraints determine the performance of a system. A constraint is anything that prevents a system from achieving a higher performance relative to its goal. A system is any collection of interconnected parts sharing a common goal.” The truth of the matter is that your business has many constraints that you must negotiate in order to improve and grow. One of those constraints can be found in your client list. If you’re honest with yourself, you know that not all clients are created equal. This is where the Pareto Principle, known as the “80/20 Rule,” comes into play. It suggests that around 80% of your profits stem from just 20% of your clients.

So, why can’t you just add more clients to your book? Well, let’s take a closer look at that.

Dunbar’s Number and the Illusion of Connection

Anthropologist, Robin Dunbar, introduced the concept of Dunbar’s Number. Dunbar highlights that there is a physiological limit to how many meaningful relationships people can maintain. Typically, this number hovers around 150 people. Now, you might be tempted to believe that technological advancements have increased this number. However, my dear friend and colleague, Michael Kitces, says, “Even as financial planning businesses become more efficient, and time becomes more leveraged with technology, it may be unrealistic to expect that planners will ever be able to maintain more than about 75-125 real client relationships”

At this point, you might be thinking, “Okay, Justin. How do you explain social media influencers with thousands of followers?” Once again, social media might connect us with many, but meaningful interactions are reserved for a select few. Here’s what Michael Kitces has to say about it…

“Some of Dunbar’s own research into Facebook has found that even when we have hundreds or thousands of “friends” that in reality most are “mere voyeurs looking into your daily life” – all but a core of about 150 who you interact with and maintain true relationships with. In fact, across all of Facebook, Dunbar would suggest it’s no coincidence that the average user has about 120-130 friends, as that result itself fits Dunbar’s number (almost precisely if you assume a dozen or two friends and family members who don’t have Facebook accounts but are part of your real-world social network). Similarly, a recent research article on Twitter also found that while many people have vast Twitter followings, most people still only regularly engage with a maximum of about 100-200 stable relationships.”

Knowing When and How to Say, “No”

Now, we know that your business has constraints and that your top 20% of clients account for 80% of your profits. Likewise, we understand that you can only truly maintain around 150 relationships. What does this have to do with the eight-figure exit? Well, until you embrace the power of no, you’re going to have a long and difficult climb to your eight-figure exit.

You see, you’ve reached a point in the life of your RIA where you’re going to have to make some hard choices and have some difficult conversations. Friends, I get it. Nobody likes to have tough conversations. In fact, according to the 2022 State of Client Engagement report by Ignition, 89% of respondents said they’ve avoided or delayed having an uncomfortable conversation with troublesome clients. But knowing when and how to say, “No” is vital to your future success. So, let’s dive a little deeper.

The Pitfalls of Unfocused Growth

As I said before, I used to work with anyone who could fog a mirror. However, as my business grew, the firm and some of our clients naturally outgrew each other or fell out of alignment. However, this often leads to greater problems. In fact, Michael Kitces had something to say about this as well.

“In the early stages of an advisory firm, owners often accommodate specialized needs of clients out of the sheer desire to generate any revenues whatsoever and get their business off the ground. And the direct result of that is cost inefficiencies and profitability problems. Accordingly, those issues are best addressed, not by trying to grow the business itself – which can only compound the problems – but instead by changing the business.” I think Michael stated the problem brilliantly. As we grow, working with any and everybody can pull us in multiple directions, leading to greater inefficiencies. In turn, those inefficiencies lead to diminished profits on the bottom line. So, how do you fix it?

Prioritize Your Book of Business

Start by categorizing your clients into “A,” “B,” “C,” and “D” groups. Your “A” and “B” clients are those who bring value, align with your firm’s vision, and engage with your services. Your “C” clients provide revenue but use less profitable services and consume more time. On the other hand, your “D” clients, regardless of financial contribution, may not align with your values, often pushing for out-of-scope services or arguing about fees. Recognizing these distinctions is the first step to decision-making.

Look at the scope of services each client is using. Likewise, you’ll want to assess their total assets, the amount of time they require to service, and how they align with your core values and vision. You should be able to clearly see which clients are truly contributing to your firm’s profitability and which ones are creating drag. The less drag you have, the more efficiently your firm can operate. Ultimately, you want to segment your book so you can identify your “A” and “B” clients and focus on attracting more like them. Unfortunately, this means you’ll have to make room.

Trim the Fat

Friends, firing clients, even if it’s in the best interest of your business, can be difficult. You don’t want to offend them or cause animosity, so you’ll have to proceed tactfully. In order to achieve an amicable separation, there are a few strategies you could employ. Let’s have a look!

Graduating Clients

Here’s where things get tough. The sad truth is that many of your “C” clients are going to end up being those who have been with your firm from the beginning. You deeply care for these people and you’ve gotten to know them pretty well over the course of your relationship. This is why you don’t want to simply fire them. Instead, you can often achieve your desired outcome by “graduating” them.

Basically, you want to sit down with your client and explain that you’ve taken them as far as you can. Remind them of the significant changes they’ve made and habits they’ve formed over the years. Then affirm your faith that they are capable of continuing on their own. This makes ending the client/advisor relationship feel more like an accomplishment worthy of celebration, rather than a breakup.

Once you’ve had the conversation, you should assist in transitioning their accounts to a self-directed platform.

Refer Them to Another Advisor

Another option is to refer your C-listers to a smaller advisor. Being a “C” client in your RIA doesn’t mean they couldn’t be another advisor’s “A” client. If you’re considering this route, be sure to speak with the advisor before having the conversation with your client. The last thing you want to do is to refer them to an advisor that refuses to work with them.

Once you’ve confirmed that your chosen advisor has room in their book, it’s time to sit down with your client. During this meeting, you want to have a similar conversation to the one you would have if you were graduating them. You could tell them that you’re discontinuing the particular service they use, or that you’ve taken them as far as you’re able to. Whichever direction you go, the point is to leave the client feeling good about the move.

Ultimately, this situation should be a win/win/win. You’re winning because you’re freeing up space in your book for more A-listers and becoming more efficient. The referred advisor wins because they’re gaining what could potentially become an A-list client for themselves. Your client wins because they have the opportunity to move to a firm that gives them “A” service.

Raise Your Minimum Fees

Finally, you could choose to simply institute a minimum fee or raise them, if you already have them in place. However, you don’t want to raise your minimum asset requirement. Doing so will send the message that the client just isn’t big or important enough for you to work with them. Instead, meet with the client and explain that your firm is raising its minimum annual fees beginning with the next billing cycle.

Now, if you choose to go this route, you’ll need to be prepared to explain what the client is receiving for the increased price. If they choose to remain with your firm and pay the additional fee, it should be a little easier to offer them the same level of service you provide your A- or B-listers because they will be more profitable clients. On the other hand, if the price increase causes them to fire you as their advisor, you’re still clearing room in your book for more A-listers. But what can you do to attract more “A” clients to your firm?

Attracting the “Right” Clients

Begin by using your existing “A” and “B” clients to create a highly detailed set of client personas for your outbound marketing. Friends, I’m talking about being hyper-detailed here. You want to know your target persona inside and out. How old are they? What do/did they do for a living? Are they married? How many kids do they have? Where do they like to go on vacation? What are their hobbies, religious beliefs, and political affiliations? The more detailed you can get, the more effective your targeted marketing can become.

Once you have your persona, you can narrow it even further by using what I like to call “the three Ps.” These are Passion, Profitability, and Procedural. Now, you’re looking internally for this part of it, but you’re trying to determine whether you want to work with the clients you’re most passionate about (i.e., entrepreneurs, school teachers, etc.), offer the most profitability, or the greatest efficiency.

Once you have clearly defined who your “A” clients truly are, you can design your marketing and your Client Value Proposition to attract them. For the most part, this should ensure you’re only working with “A” and “B” clients. However, you will need to remain vigilant in your screening processes.

Wrapping Up…

Growth is essential for the eight-figure exit, but not at the expense of quality and efficiency. Learning to say “no” strategically can reshape your business’s trajectory. Graduating clients, referring them to smaller advisors, or setting higher fees can free up space for more lucrative and better-aligned relationships. The power of “no” is not just about rejecting opportunities – it’s about curating an advisory practice that thrives in the long run.

Friends, life is hard. It really is, but life is good. Saying “No” to clients can be frustrating, as an advisor because it goes against our very nature of wanting to help people. But it doesn’t have to be. If you carefully evaluate your book and have thoughtful and tactful conversations with your “C” clients, you can at least make it financially simple. Hey, let’s go out and make it a great day!

Reach out to our team to learn more about the power of “No” and other ways we could help you work toward the eight-figure exit you desire!