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Jimmy Williams
Are ticking time bombs on your client list?

Why you should consider terminating some clients—and how to do it.

May 20, 2013
By Jimmy Williams, CPA/PFS

Assume for a minute that you provide tax consulting and compliance services to a client who is an excellent source of revenue for the firm. Then assume that over several years the firm experiences problems with full disclosure of transactions and a lack of documentation provided by the client. Finally, let’s say that although the client is always cordial to you, eventually you discover that the client is demeaning to your staff.

Would you consider these problems to be reason enough to terminate the relationship with the client?

It’s not an idle question. Many accountants have accepted what seemed to be ideal clients only later to have them turn into major headaches. Some may pay invoices in a timely fashion, yet cause significant disruptions with your team. Others request a detailed explanation of their billing, but consistently complain about it anyway. And then there are clients who just won’t pay their bills at all.

If problems like these get bad enough, an accountant may decide that cutting the cord is the best option. The key is to make the move while avoiding the pitfalls of such a tricky situation.

Traditional tax, accounting, and attest services

The decision to terminate a client should be reached through team consensus. That’s because some clients may work better with another firm member and therefore can continue as clients. But if everyone agrees that the relationship is undesirable, immediate termination is likely the best decision. For details on how to navigate the breakup see “Clients: The End Is Near.”

First of all, consider the legal exposure of terminating the client prior to concluding the engagement. You also may wish to discuss with legal counsel the validity of your engagement letter and documentation of your compliance with its provisions.

You can notify the client in various ways. You may want to discuss the matter with the client’s management, though not necessarily the same managers that worked with your staff. The response you receive may surprise you; middle managers sometimes respond in a different manner than senior management. Remember, your duty is to provide ethical services that contribute value to the stakeholders of the company. The purpose of this discussion is to bring attention to management of the business, ethical, or other reasons for discontinuing the relationship.

Written notice of the termination should be sent to the client contact person with appropriate project status and the remaining items to be completed by the successor CPA. Proof of delivery and receipt of the notice is vital. Our firm uses certified mail with a return receipt to confirm delivery. If you are providing tax services, you should include any deadlines and filings that are not complete. Do not provide a detailed reason for terminating the relationship. Brevity is your best friend in this type of notice.

The next step is to alert your administrative staff of the termination and to appoint someone to receive and track any correspondence due to the termination notice delivery. If the termination is due to potential fraud committed by the client, immediately notify your attorney or general counsel of the matter.

Financial planning and wealth management services

Additional considerations must be made in terminations involving certain types of financial planning and wealth management services. For example, you may be providing a financial planning engagement and discover the client is not complying with the required reporting of income. Suddenly, what was a typical financial planning engagement may turn into a criminal tax case. Consult your attorney or general counsel immediately upon discovering the fraud. Termination of the relationship should be immediately pursued under the guidance of legal counsel to mitigate possible criminal charges being filed against the firm.

If you were providing wealth management and fiduciary services for the client, you must provide the client a letter of termination that meets the provisions of the investment management agreement. One of the considerations for the notice of termination should be the calculation of the basis and unrealized gains or losses on the portfolio at your time of resignation. Further, you must provide the client with the contact information for the custodian of their investments. One of the last notifications should be the final computation of investment advisory fees and related account termination costs. Promptly deliver a check for any unearned fees with proof of delivery to the terminated client.

Benefits of terminating clients

While eliminating extremely troublesome clients may affect the top line, there are qualitative benefits to such a move. They include:

1. Improving staff morale. Clients who are rude or unprofessional can place extra stress on staff. No one would purposefully choose to be treated in an unprofessional manner. This is an untenable situation. It frustrates staff and causes additional inefficiencies in operations.

2. Protecting your reputation. An old marketing saying asserts that, “A happy client may tell 10 other people about you, but an unhappy client will tell 100.” Many of us work very hard to develop and maintain an excellent reputation within our markets. The statements of disgruntled and/or unsatisfied clients may cause significant damage to that reputation. Ending an unproductive relationship may help put a stop to some of those statements.

3. Boosting recruitment. Finding the appropriate staff is a challenge. Recruiting is much easier if the current staff are happy with your approach for accepting and terminating clients—because they will communicate that happiness to prospective new hires.

4. Maintaining profitability. An undesirable client relationship can compromise profitability due to uncollectible accounts, staff inefficiency, and increased administrative costs (including everything from legal fees to increased professional liability premiums). Divesting yourself from a problem client may cost you revenue, but it could reduce your expenses even more.

Of course, the best way to deal with a difficult client divestment is to avoid having to make such a move in the first place. Our firm has terminated fewer than a dozen clients over the past decade. One reason is that we require clients to sign engagement letters that clearly communicate our expectations. Such agreements include the following provisions: types of services to be provided, the fees and timing of charges, the client’s responsibilities, the applicable law governing the document, and an arbitration clause.

To limit or eliminate undesirable clients in your firm, you should establish an ideal client profile, obtain a concurring partners’ opinion on client acceptance, and formulate a standard of client relationship expectations to communicate to your staff. Life is too short to continually deal with problems. Make it a goal to work only with those clients that you enjoy.

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Jimmy Williams, CPA/PFS, CFP, is a wealth manager/investment adviser representative with Compass Capital Management LLC in McAlester, Okla. He can be reached at jimmy@compasscapitalmgt.com.

The views expressed are not necessarily the opinion of Cambridge Investment Research Inc. Material discussed herewith is meant for general illustration and/or informational purposes only; please note that individual situations may vary. Registered Principal Securities offered through Cambridge Investment Research Inc., a Broker/Dealer Member FINRA/SIPC. Investment Advisor Representative Compass Capital Management LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management LLC are not affiliated.

The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy, and guidance for CPAs who specialize in providing estate, tax, retirement, risk management, and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all regular members, associate members, and non-CPA section associate members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist credential holder. Visit aicpa.org/PFP to learn more.