Why a Tighter Budget Shouldn’t Mean Investing Less in Client Hospitality

By: Larry Palmer, CFP, CIMA
Managing Director
The Palmer Group at Morgan Stanley

With the Lakers and Clippers – though unfortunately not the Kings -- back at Staples Center after a long off-season, there are several things we see returning with them: super-star players, rowdy fans and a whole lot of cheering and booing. But there’s one other thing you’ll also undoubtedly see – luxury boxes full of men and women in suits talking about business.

Ever since the invention of the luxury box, businesses large and small have been investing hundreds of thousands of dollars a year reserving them as a prime setting to entertain clients, recruit talent and discuss current or prospective business with associates.

Over the years, many companies – especially those in the client services business – have found this kind of expense worthwhile, because hospitality often means a good impression, and a good impression often means more business.

But with the tough economy tightening budgets across the board, and with more and more business being done remotely, it’s worth considering whether large-scale investments in client hospitality are still worthwhile for the return they offer.

It may seem like a simple cost-benefit analysis, but answering this question can be tricky because it’s so difficult to quantify the return on investment (ROI) of client hospitality. While it’s often impractical to precisely determine this ROI, there are certainly ways of thinking about it that can help you decide whether a specific investment is worthwhile.

First, it’s important to remember that the ultimate goal of offering client hospitality is to develop a stronger personal relationship with your current or prospective client.

If, for example, you’re planning on taking an out-of-town client to a Lakers game at Staples’ Center, or the symphony at the Disney Concert Hall, you might first want to consider whether the setting will be conducive to the kind of face-to-face interaction that helps strengthen the relationship between that client and your company.

On one hand, your client might be impressed by the gesture of the high-dollar experience, and that impression is certainly valuable. But if it doesn’t translate into progress in your professional relationship, the value of your investment is significantly less.

The most important goal of client hospitality is creating a social setting, rather than a strictly professional one, that allows you to develop a more personal connection and a sense of mutual respect and trust. It’s not necessarily an opportunity to show how much you know, but rather, how much you legitimately care about their interests.

In my personal experience, I’ve found that even the priciest outing doesn’t mean as much as attending a daughter’s bat mitzvah or making a personal gesture that shows you have a genuine interest in their personal and professional success.

Keeping the costs of these efforts down is a particularly important consideration for smaller businesses with tighter marketing budgets. For small businesses, it may be a better idea to think about hospitality experiences and settings that don’t cost as much, but that allow an even better opportunity to build a stronger relationship.

But whether you’re a small business or a Fortune 500 company, it’s a good idea to be thoughtful in how you show your clients a good time. The best and most valuable hospitality experiences are the ones that say something genuine about you, your company and the products or services you provide. Whether that means treating a client at a quirky, unique restaurant in your community or finding a quiet coffee shop to go over your ideas, the important things are being truly thoughtful and applying a genuine personal touch.

At the end of the day, we all want to treat our clients to extravagant, special experiences. After all, there are certainly tangible benefits to showing current and prospective clients that you’re willing and able to wine and dine them.

But as you make your decisions about how to invest in client hospitality, it’s crucial to remember what you’re investing in – a better professional relationship and a stronger sense of mutual trust. Those aren’t things you can buy with money alone, and in fact, it’s often investments of time and thought that truly yield the best results.

Larry Palmer is a Financial Advisor with the Private Wealth Management Division of Morgan Stanley in Los Angeles.  The information contained in this interview is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.  Investing involves risks and there is always the potential of losing money when you invest. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice.  Investors should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney, LLC, member SIPC.