Retention Risk at the Liquidity Event
The most dangerous moment in an advisory relationship is the moment the client has the most money. A short, uncomfortable note for advisors.
This is a short piece and it makes one point.
The relationship you are most likely to lose is the one belonging to the client who just had the best year of his life.
Why that is
For most of a relationship, a client is not shopping. He is busy, he is reasonably satisfied, and switching advisors is an inconvenience with no obvious payoff. Inertia is on your side and it is a considerable ally.
A liquidity event removes it.
Several million dollars lands in an account. The client's situation is suddenly more complex than it has ever been, and he becomes aware of that complexity in a way he never was before. At the same moment, he becomes visible. Property records are public. Business sales are reported. Brokers talk. Within weeks he will hear from firms he has never met, and they will not be junior people.
Those firms will arrive with a presentation built for his exact circumstance. They will have specialists. They will have handled situations like his before, or will say they have. And somewhere in the first meeting, gently, they will ask what his current advisor did about the tax.
The shot across the bow
That question is not really about tax. It is a test of whether the incumbent was ahead of the client's situation or behind it.
If the answer is that nothing was done, the prospecting firm has established a gap without having to criticize anyone. The client draws the conclusion himself, which is far more durable than any argument the firm could have made.
I have watched this happen from the outside more times than I would like. The incumbent advisor is usually competent, usually well liked, and usually has no idea why the relationship cooled. Nothing went wrong. Something simply did not happen, at the one moment when its absence was measurable.
What closes the gap
Being early. That is the whole of it.
If the tax question was raised eighteen months before the transaction, if a written comparison was produced, if the client's CPA and attorney reviewed it, and if the client made a decision with the numbers in front of him, then there is no gap for anyone to find.
Note that the client does not have to have engaged in any strategy. He can have looked at the analysis and decided that conventional treatment was fine. That is a complete answer and it defends the relationship just as well, because what is being tested is whether he was informed, not whether he acted.
The list
Take twenty minutes this week and go through your book for clients who are likely to have a transaction or an unusual income year in the next twenty-four months.
Business owners approaching an exit. Property owners who have mentioned being tired of managing. Anyone with a concentrated position they have talked about reducing. Anyone whose compensation is about to be unlike previous years.
For most advisors that list runs to five names or fewer. It is not a research project.
Then have a two-minute conversation with each of them. What is coming, roughly how large, and where it stands right now.
Four of those conversations will produce nothing and cost you ten minutes. The fifth is the relationship you were going to lose in April without ever understanding why.
This information is general and is not tax, legal, or investment advice. Every situation is different.
Questions people ask
Why are clients most likely to leave after a liquidity event?
After a major liquidity event, clients become visible to other advisors and suddenly face more complex needs. Competitors arrive quickly with tailored proposals, and clients question if their current advisor anticipated the tax implications. At this moment, loyalty drops because the client’s inertia is gone.
What triggers a client to consider changing advisors?
A liquidity event triggers reevaluation. When a client receives several million dollars, the complexity of their situation increases and they become aware of it. Outside advisors often approach quickly, and clients look for signs that their advisor addressed tax strategy in advance. If not, they reconsider their relationship.
What can an incumbent advisor do to defend the client relationship?
Being proactive on tax is the key. If the advisor raises the tax question well ahead of the transaction, provides a written comparison, and ensures the client’s CPA and attorney review it before a decision, the relationship is defended. Even if the client chooses a conventional path, being informed is what counts.
Is it enough to simply raise the tax issue before a transaction?
Yes, raising the issue early and presenting the options protects the relationship. The client does not need to pick an alternative strategy, just knowing the analysis was made and considered is the complete answer if asked later. What matters is the advisor was ahead of the situation, not behind it.
How should advisors identify which clients are at risk?
Advisors should scan for clients facing a possible large transaction or unusual income year in the next twenty-four months. This includes business owners near an exit, property owners considering selling, and anyone expecting an abnormally high compensation year. A quick review and short conversation with each can identify the key risks.