Your typical financial advisor or insurance agent would rather lose a finger than fire a client, but then the cost of keeping them on is near zero, and who knows, one day they may wake up and buy something else. However, the overworked and under-compensated tax professional has to burn time and energy on every client, whether it’s routine 1040 prep or the kind of client who provides income to the firm all year long.
Having come up through the advisory channel, I was completely taken aback to hear a CPA tell me their number one goal for the next year was to trim their client roster. That was years ago; since then I’ve heard the same thing from just about every established accountant I’ve spoken with, and that’s a lot of accountants.
Recently I was fired by my CPA of long-standing. They explained that their business model had shifted, and they were choosing only to work with businesses that needed yearlong accounting help. I could hardly complain; I’ve been advising CPAs to work with fewer, more meaningful clients for years. (Read about my experiment with hiring TurboTax to do my taxes this year).
That I got fired really wasn’t that surprising. After all, I was a once-a-year tax preparation client that billed a little under $1,000 annually. However, when I spent some time thinking about things, I realized that my former firm had made errors both of commission and omission, and I thought it would make for an interesting blog. So I talked with my colleagues and partners and came up with a list of dos and don’ts for firing clients, and I hope you find it useful.
First Do For the CPA: Know Your Client’s Lifetime Value
A client’s lifetime value is the present value of your billings in the future. To derive the number, you’ll need to forecast how many years they’ll be your client, the growth rate of your annual billings, and the discount number. For example, you might think I’m good for another 20 years of tax prep, and that 5% is a good discount. But will my billings grow annually, or are they more likely to shrink as tax prep services commodify? Might they fall in the race to the bottom initiated by Big Tax and accelerated by artificial intelligence?
In a business that only does tax prep, the rational answer is to value your clients directly to their annual billings. In other words, a client who bills $1,000 per year is twice as valuable as one who bills $500, provided the amount of time it takes to do the work is the same. You’d want to replace the lower-value client with a new, higher one.
This is where our first “Do” gets complicated. So far, we’ve just been calculating your client’s lifetime value to you. But, what if you were to calculate their lifetime value to all of their other financial professionals, their bankers, advisors, asset managers, and insurance agents? In the case of someone like me, and like many millions of other Americans, my lifetime value to those other people is twenty to thirty times higher than it is for the tax pro.
A good rule of thumb is multiplying your client’s net worth by 2%, or $20,000 for every million. By calculating their total lifetime value to all financial services professionals, you’ll have a good sense of exactly what you’re giving up by firing them. Do the math first.
Don’t Assume Your Client Is Happy With Their Salespeople
DALBAR, the consulting firm that publishes an annual report called the Quantitative Analysis of Investor Behavior, found that the average American equity fund investor significantly underperformed the S&P 500 in 2022. The underperformance in 2021 was over 10%.
To my knowledge, the average equity fund investor, as represented in the QAIB, has never equaled or outperformed the standard U.S. benchmark. In addition, and again in my experience, the typical investor cannot tell you what their total costs are for financial products, and often there is little to no tax efficiency engineered into their portfolios.
Investor dissatisfaction is widespread. Due to all kinds of psychological factors, but perhaps most notably the phenomenon described by prospect theory, people are wired to suffer more from a unit of loss than they would enjoy an equal amount of gain. Don’t be surprised to find that many, if not most, of your clients are not just unhappy with their investment performance, they are deeply concerned and quite open to a new approach.
Underperformance and dissatisfaction are not just the result of high fees and low tax efficiency; it can also be downstream from the conflict that exists between salespeople and their customers. Persuasive salespeople, offering the single solution set their company creates, have incentives to narrowly frame options, following the doctrine of suitability and not the fiduciary standard. Why not make a habit of asking your clients how satisfied they are with the progress they’re making?
Do Offer Advanced Tax Strategies And Planning Services
If you’re considering letting a client go, at least ask them if there is anything you can do for them first. You may be surprised at how eager some people are to get quality advice across the spectrum of finance and investing. They may have a question about selling their business, changing retirement plans, or a relative or close relationship you don’t know about.
Over the 40 years or so I’ve had a CPA do my taxes for me, I can’t remember a single time anyone asked me any questions about any of that. If it wasn’t on the questionnaire I filled out, it just did not get asked. Asking an open-ended question about any help your client may need, or providing examples of how you’ve helped others, is not being a salesperson. It’s just being smart.
If you have access to a tax-planning platform that scans returns in search of possible tax avoidance strategies, you might want to offer that service before firing your client. Clients are not tax experts and may have no idea how much they are overpaying, but you are and do. My company makes a proprietary tax strategy solution we call the Tax BlueprintⓇ that tax pros can use to create comprehensive reports based on live client data in just minutes. The cost to you is very low, but the impact on the client can be significant, and this is a service you can charge for. We have tax pros who routinely charge $10,000 for a Blueprint.
Do Offer An Exit Option To Another Tax Professional
There are many other tax pros who would love to gain a new tax prep client. Before firing your client, why not establish a referral relationship with one? This would be good for your client, who may feel abandoned and a little lost about whom to turn to for tax help, and good for you, as the receiving tax pro will typically pay you a referral fee.
In an ideal world, that tax pro who is looking to build their tax compliance clientele would need help with more sophisticated clients who need help that goes beyond the scope of their service infrastructure. Wouldn’t it be nice if they had a client to refer to you? Other financial professionals often create networks of this type, and hundreds have joined Tax Master Network, a subsidiary of Financial Gravity.
Don’t Miss Out On An Historic Opportunity To Become a Family Office Director
Thousands of American tax professionals work in single and multi-family offices. These are specialized forms of wealth management firms established to support a very wealthy client or client who has the means to employ their own dedicated professionals to direct and manage their assets and risks. The tax pro plays a leading role in these organizations because taxes are a major concern for wealthy families.
Taxes are a major concern for the mass affluent, too, and the millionaire next door. Yet these families—and there are millions of them, and likely quite a few among your clientele—can’t access a multi-family office. This is where you come in, with your objective decision-making discipline, your natural fiduciary nature, and your grounding in financial analysis. You can take on the role of Family Office Director if you can find a firm that can provide the estate and financial planning, risk management, and portfolio allocation partner to handle the non-tax work.
The great news is that such companies exist, and the cost to partner with them is very low. This brings up my final “do”: do consider your tremendous advantages when offering strategic planning prescriptions to your clients, and imagine having the control to direct their implementation. This can be an absolute game changer for you and may change the lives of your clients. You can enjoy a massive increase in your share of wallet, and your clients’ costs can go down, while their transparency goes way up.