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Turning clients into friends is often easier than transforming friends into clients. In the first case, your financial advisor expertise works in your favor. In the second, the personal relationship is solid, but your skill as an advisor is the big unknown. This often leads to “I don’t do business with friends.” Is that valid?
The risk to friendship can be explained in many ways. If you asked “Why” to the above question, you might get one of several answers.
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I have one, but I could lose both. I have a friendship I value highly. I also have money. If we expand our relationship to include a business relationship, if something goes wrong I will lose money (the business relationship) and I will lose the friendship as collateral damage.
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You can’t fire friends. Perhaps people like this because “fire” and “friends” illiterates. It sounds cool. This problem can be solved.
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Confidentiality. They assume you talk about your clients. They don’t want their personal financial details shared in your social circle or discussed with your spouse.
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I am not convinced you can deliver. Ever notice the “risk to friendship” is always on the downside? If you make them plenty of money, there is no risk. Risk enters the picture when they lose money and you were involved. You did not deliver.
How can the risk to friendship be addressed? Before we do, let us point out a weak point in the “I don’t do business with friends” position. It gets turned upside down if you have something they want! Imagine if there was an “impossible to get” IPO. Somehow, you received an allotment. One of your friends know about it. They would insist you give them some shares. They are ready to open an account. They would “play the friendship card” and explain because of your shared history, this friend should go to the top of the list when it comes to apportioning shares!
Let us get back to addressing the different “reasons” listed above.
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I might lose a friend. Tell them why you never approached them before. Their friendship is important to you too! You would never want to lose them as a friend! In addition, you assume they work with someone already. This other advisor takes great care of them and gives them great service. Successful people often have that kind of relationship with their advisor. They might know someone not as lucky as them. Lets talk about “what I do.” If you someday come across someone without a great advisory relationship, you will know how I may be able to help them. They identify with “successful.” They question if they have the quality relationship you assumed is in place. You tell your story.
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You can’t fire friends. You can if there is a procedure in place to unwind the relationship. Explain you give your clients a report card. (Quarterly reviews.) “If I am doing a lousy job, you should be able to fire me. The quarterly reviews as a report card is an easy concept to grasp. They should be more comfortable because they see a path to unwinding the relationship. They should feel no guilt, because it’s your idea.
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Confidentiality. They do not know you are bound to secrecy. It’s a difficult concept to swallow because they need to accept it on faith. Let your previous behavior speak in your favor. Explain we know many of the same people. Some might be my clients. (They will likely know this is true because these other people talk about their investments.) Mention you have known each other (x) years. In that time, have they ever heard you talk about a client relationship. (The answer is no.) You conclude with “If I haven’t done that in (x) years, I am not going to start now.”
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I am not convinced you can deliver. How can you deliver positive results if the future performance of the market is unknown? You can’t, but you can minimize risk to a degree and get your client to take ownership of the results. This involves a scenario where the friend has become a client. It makes a good point. A retired NY advisor would start a new client relationship with large cap growth and large cap value managers I the equity category. Over time, the client would make suggestions that were industry or country specific, taking themselves further out on the risk curve. (The advisor intended to diversify, but he waited for the client to introduce the idea. If the stock market hit a rough patch, large cap growth and value might “suffer less” compared to the new additions. The client would realize the advisor gave good advice. The client “sunk themselves” with the additions they chose. They assumed responsibility.
The concern “I don’t do business with friends” can be valid, but there are ways of addressing this concern tactfully.
Related: Consider the Lifetime Revenue Aspect of Client Relationships