It’s often been said that the customer is always right. But, it doesn’t take you long in business to realize that’s simply not a true statement. What may be more important is selecting the right customers to do business with, so that you increase client satisfaction, decrease complaints and litigation, and increase your own happiness.
Some time ago, I received a call from a financial advisor. He had been in the business for over fifteen years and had a spotless record. No customer complaints, no arbitration claims, no regulatory investigations or actions. His U4 was clean with no negative disclosures. He called me because he just received a customer complaint – the first of his career. The substance of the complaint isn’t really important for our purposes, and it sounded like the complaint likely won’t go anywhere and will be denied by the FA’s firm. But, it may mark up the FA’s Form U4 and follow him around for a bit. Then, this negative disclosure might impact the perception of prospective clients and might hinder his ability to grow his business.
As we talked, he explained that this customer came by way of a referral source, but wasn’t really an ideal fit for his business. He took on the client anyway, because of the source of the referral, despite the client not being ideal. He didn’t make much in terms of compensation from the client because of the smaller account size, and the client’s aversion to certain types of investing. But, he served the client as best he could, he said, and the account was profitable.
This particular FA is not the first one to contact me with a somewhat similar story. I’ve thought about situations like this over the years and have come to believe that a way to help FAs reduce customer complaints and arbitration claims (and therefore reduce regulatory exposure) is to choose clients carefully, and make sure that there is a good fit. Then, when there is not a good fit, it often makes sense to fire the client and let them get to someone who can better serve them.
Today, someone sent me an article that seems to be to track this concept well, citing to a study by Ryan W. Buell, Dennis Campbell and Frances Frei. I found their working paper online at the Harvard Business School site. The paper, “The Customer May Not Always Be Right: Customer Compatibility and Service Performance” explores the impact of “customer compatibility” which they define as “the degree of fit between the needs of customers and the capabilities of the operations serving them” in respect to client experiences and business performance. In this study, these authors reviewed tens of thousands of personal interactions in a retail bank setting along with nearly 150,000 customer interactions with 166 banks to find that, “Customers whose needs diverge more starkly from those of their bank’s average customers report significantly lower levels of satisfaction on a broad range of operating dimensions. Consistently, banks that serve customer bases with more dispersed needs receive lower satisfaction score than banks serving customer bases with less dispersed needs.” They then go on to report that this customer compatibility also affects financial performance, highlighting a slower deposit growth by bank branches serving customer bases with more dispersed needs.
Elaborating further on the concepts above, the authors state that, “We find the negative effects of customer divergence are most pronounced for firms with customer bases whose needs are less dispersed – suggesting that focused service providers, optimized around the needs of particular customers, are most vulnerable to the negative effects of customer incompatibility.” In other words, the problems brought about by incompatible clients are most significant to a business that is focused on serving a niche as opposed to being a generalist practice. The final point by the authors is that there is evidence that customer compatibility, “has a substantive effect on a firm’s financial performance.” The cite to data from their study that “[i]ncreasing a branch’s customer divergence by one standard deviation resulted in a 1.2% decrease in annual deposit growth, relative to other branches of the same firm. We further find that the branches of firms with more dispersed customer bases experience considerably slower branch-level deposit growth over time.” I take that to mean to support, somewhat, the old business saying that “there are riches in niches.”
There’s a whole lot more data and analysis backing up these points by the authors and the working paper is worth reading especially when considering whether to build a niche practice around similarly situated clients who have similar needs and where processes and methods can be systematized, or whether to focus on trying to grow a business in a very one-off type manner, with a wide variety of client bases, needs, and systems and methods then needed to address those. This study, together with my own anecdotal and totally non-scientific analysis, suggests to me that: 1) a financial advisor may be able to keep a higher level of client satisfaction by focusing on serving similarly situated clients and needs and avoiding great deviations from their avatar (ideal) client, 2) by focusing on the avatar client the financial advisor may see fewer customer complaints and civil claims (arbitration, litigation) from those customers in part due to a higher level of satisfaction and ease of developing and using internal systems to ensure customer needs are well addressed and client communications are effective, 3) as a byproduct of reducing or eliminating client complaints and civil claims, that reduces the likelihood of regulatory investigations and enforcement actions that the advisor has to deal with, and 4) the financial advisor practice may be more profitable as opposed to those serving a client base with very diverse situations and needs. Finally, I might add that if you are successful in accomplishing these four results, I would expect your own personal happiness may increase significantly as well.
I hope I would not need to say this, but I will in any event: Don’t read any of this to suggest that advisors or other professional discriminate against clients or prospects based upon personal characteristics such as race, ethnicity, gender, orientation, age, etc. That’s not what I’m talking about at all, and that is not how I read any of the findings of the HBS study at all either.