#FASuccess Ep 389: Generating $5M In Hourly Planning Fees In The Blue Ocean Of Consumer Demand, With Mark Berg

Resources Featured In This Episode:

• Mark Berg
• #FASuccess Ep 064: Scaling Up To $1.4M Of Revenue With (Only) Hourly Financial Planning Fees with Mark Berg
• Timothy Financial Counsel
• A Matter Of Time: Principles, Myths & Methods For The Hourly Financial Advisor by Mark Berg and Matthew Jackson
• Morningstar's Mark Berg: Hourly Financial Planning Is 'A Vast Blue Ocean' Podcast
• Kitces Research on How Financial Planners Actually Do Financial Planning
• Minute7
• Quickbooks
• Garrett Planning Network
• "Say Goodbye To The 1% Investment-Adviser Fee?" (Wall Street Journal)

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Full Transcript:

Michael: Welcome, Mark Berg, to the "Financial Advisor Success" podcast.

Mark: Thanks, Michael. It's great to be back.

Michael: It's great to have you back. I should really say welcome back because I'm super excited about this episode. As you joined us, I think it was a little over 5 years ago now, for a discussion of what, at the time, was basically the largest hourly firm that I knew of. This was, I guess even, 6 years ago, because this was 2018. And you were running this hourly firm well over a million dollars of revenue, multiple advisors, multiple support staff in this industry where I think there's been this viewpoint of, well, maybe you can make an okay income with an hourly model because you get paid for your time, but you can't make a business out of it.

And I know, in practice, not only have you run a very sizable firm then, but it has, I would say, blossomed hockey-sticked in growth over the past few years. And so you're coming back to us a few years later now, not at $1 million of revenue, but cruising towards $5 million of revenue this year, which, to my knowledge, would make you, by far, the largest hourly advisory firm in the country. So I'm really excited to understand, talk about, get to share out with the advisors that are listening as well, what does hourly financial planning firm look like when you start to really scale up?

Mark: Wow. It's a fascinating topic for me, and I'm happy to share anything that I can to help your listeners. And it's been quite a journey. I did not expect it to go in this direction. In fact, we had talked about the last time we spoke that there were a lot of myths that kind of held us back. And I think part of it is just has been breaking through those myths and accepting who we are and embracing it.

And so that's been really the genesis over the past, well, it's been...we're in our 24th year now, so it's not an overnight success. There's a lot of hills and valleys along the way. But here we are. And the scaling has been equally a whole unique journey that I did not anticipate. And hiring, growing, creating new systems, all of that, has been part of this journey. And I wouldn't do it any differently. It's been a great ride.

Achieving Rapid Growth Using An Hourly Fee Model [05:38]

Michael: So I think to kick us off, just help us understand this advisory firm as it exists today.

Mark: Okay. So all of us are in-person in 1 office here just outside of Chicago. And we've got 19 of us currently. 13 are advisors or well on the... what we call the advisor track. So they're either serving in support role, but also taking on clients of their own somewhere along that journey. But many of those 13 are really focused on just the advisory role, which leaves 6, though, of those 6, 3 to 4 are newer hires that will be on that advisor track shortly.

So we really only have 2 that are truly non-client-interacted, more support for the company, our office manager, and then the president of our firm. So that's where we're at this moment, though we have given offers and they have been accepted to 3 more that'll be starting this summer, early fall. And so that'll bring us to 22. And we hope to add a few more before the end of this year.

Michael: Okay, so... All right, I already have lots of questions, but I want to make sure I get the full picture of the firm. So I kind of highlighted approximations on revenue. I guess what were you last year? What are you run-rating towards this year?

Mark: So this past year, we finished at just over $4.2 million in revenue, and that was a 32% increase over prior year. And we are on track to meet...actually, probably beat our goal of $5 million for 2024. One of the nice aspects of our business at the moment and has been the case for the last 3 or 4 years is we've been working off a waitlist. So that gives us the ability to kind of open the spigot or close the spigot as our abilities demand. So we don't want to run at too fast of a pace or too slow of a pace, and so that gives us the ability to match our capacity and also meet our objectives for the year.

Michael: And then, clients. How many clients?

Mark: Yeah, it's a little more difficult to calculate for the way our firm works. We served 750 clients this past year in 2023. 136 of them were new clients this past year. So they were first time working with us. I would say the majority of our clients we meet with on a regular basis at least once per year. But we do have some clients who it's more an every other year, and so they wouldn't be part of that 750 calculation.

Michael: Okay, so you live in a world where 750 is clients we actually did a meeting and engagement, I guess, some unit of time that got billed. So you may have clients that meet you with every other year, but their last meeting was 2022 and their next one is 2024. And so they are in the ongoing cycle, but you didn't actually have them as a billable client last year because that was their off year in the cycle.

Mark: Exactly.

Michael: So I'm struck even as you’re sort of framing this up out of the gate, that that means... I mean, I'm napkin mathing here, barely 20% of your clients were actually new folks that last year, 80% of your clients are people you've already been doing business with who came back for more hours.

Mark: That's correct. And it was a high watermark for us this past year to reach that 136 new clients, and we're on track for even a stronger number this coming year in 2024. Revenue-wise, in the past, we had been pretty consistent at 75% of our revenue being ongoing work clients we've worked with in the past and 25% being new clients, so revenues from new client engagements. And that has changed a little bit to about a 2/3, 1/3. So about 2/3 recurring and 1/3 new. And that's, again, because the demand is so high, and we have staffed up to try to meet that demand. And so, I expect, though, that as time goes on, we'll move back closer to that 75, 25 mix of ongoing versus initial.

Michael: And so, I think of this “only” 20% of clients were new or roughly 136 out of 750, but barely 20% of new clients produces sort of an outsized 1/3 of revenue, assuming that's just kind of our traditional new clients have a lot more work up front to ongoing clients in maintenance mode are fewer hours. So a new a new client is a much higher revenue per client event than an ongoing client. So that's why your 80% recurring clients is not 80% recurring revenue, it's 2/3 recurring revenue.

Mark: Absolutely, absolutely. We do see that. And I would say that's true for the core of our clients. In our vernacular, would be level 1 through level 4 complexity of clients. But the level 5, our highest level of complexity, it kind of marches to its own tune and has a different metric. We generate quite a bit of revenue from those clients because their complexity is so high and their demands for our time are so high.

Segmenting Clients Into “Levels” Based On Complexity [11:57]

Michael: So help us understand more about the...I was going to say kind of typical fees and fee model, I guess, fees and engagement model. There's a multi-level 1 through 5 here. Can you can you break us down what these are and how this works relative to fees you charge in the first place?

Mark: Yes. So if you went to our website, we actually outline all of this for any prospective client. So level 1, which is our lowest level of complexity, ranges between 10 and 20 hours. And so that's the introductory comprehensive planning range that somebody could expect if they hire our services. And then it moves to level 2, 3, 4, and 5. Each level is increasing complexity. And those complexity points could be going from 1 wage earner to 2 wage earners or somebody who has more advanced compensation where they're getting more of an incentive base like RSUs [Restricted Stock Units] or stock options, that adds complexity, or self-employed, or a partner.

Each of those items add into what complexity level they are for us, which then translates into time, which then translates into cost. And so, as I said, a level 1 could be between 10–20 hours, whereas a level 4 could be closer to 30, 40 hours. And then you apply the hourly rate. If you're working with a non-partner, it would be currently $350/hour. If you're working with a partner, it's $450/hour. So that's generally what people expect when they hire our firm. And we quote firm fees on that initial engagement, but it's an open engagement on an ongoing basis.

Michael: Interesting. So I'm trying to process through this. So levels 1 through 5 are essentially kind of a proxy for how much time it's going to take at the end of the day. These are basically time packages, but no one knows how many hours they need because everybody says their situation is really simple when you're talking to anybody that fills you on an hourly basis. My situation is always simple whenever I call my lawyer or my accountant.

So rather than literally quote hourly packages, per se, you quote complexity levels because you know how much time it takes you to deal with various levels of complexity. And then they get a package that has a number of hours that's realistic, given the scope of the complexity stuff that they're bringing to the table.

Mark: Right. So when they initially call in, after a fairly short conversation we can give them a pretty clear sense of, "Your circumstance sounds like a level 3 or it sounds like a level 4. This is the range of time, and, therefore, this is the range of cost." And that helps set an expectation up front, make sure they want to take that next step. And if they do, then we provide a much more detailed analysis, questionnaire, etc. And from that, we can go from a range to a specific number.

We are going to quote you, say, 32 hours to do the analysis required to get the answers to the questions that you came to us, whether it's cashflow, retirement, investments, estate planning, risk management, whatever the areas that they chose. And it's a firm quote on the front end because we've not established the trust yet. They have not gone through the process. They don't know us yet. And so we want to give them that opportunity to see what we can bring to the table and know upfront, this is what it's going to cost for the services that I'm looking for.

Then after that, once we get into more of an ongoing rhythm in our regular long-term relationships, then we just bill by time. And as you noted earlier, the next year, the following year, the following year, typically, as we get more familiar with their circumstance, typically the time does go down, which means the cost goes down. Though, all of us have life events. And the nice thing about hourly from our vantage point, from our client's vantage point is our cost varies real time with their need. And typically, the value and cost are aligned at all times as opposed to that disalignment.

Michael: So take me back one more... I want to really understand this how it works with the prospect when everybody's trying to figure out what this is going to cost. So I may start by going to the website. It lays out these different levels and the kinds of stuff that's covered in each level. And for folks who are listening, you can literally look at this, it is on their website. So this is episode 389. So if you go to kitces.com/389, we'll have a link out in the show notes to Mark's website.

So prospects can see there's these different levels, and then you even got some numbers of typical ranges at these level. A level 2 plan is like $4,200–$8,700, depending on time. A level 4 is $8,700 –$18,000. So you have this kind of laid out, but there's still ranges and the infamous, every client says their situation is not complex. So then I reach out to the firm because presumably, I'm interested, I know I need the help. I kind of want to know what my thing's going to be in the range, or I think I'm a level two. Maybe I am, maybe I'm not. So I reach out to the firm because I'm interested. So what actually happens next? What is the process?

Mark: So they talk with our client service team, which are typically non-client facing newer people on our team that we have trained, though, how to do our quoting process. And usually, within about 20 minutes of questions, they can get a little bit more granular and translate the person's circumstance into what complexity matches from our level 1, 2, 3, 4, and 5.

So they can think what they want. But when we ask questions like, are you self-employed? Yes. Do you have employees? Yes. Do you have... Are you married? College? How's your estate plan? How many investment accounts do you have? All of those things, that helps create the picture as to what type of complexity could be, which translates into time, which translates into cost.

And so it's not like somebody is picking a package. We're actually placing them where we feel they are most appropriate from a complexity level. So that's on us to quote them appropriately. And it also helps us assign the right advisor to that person because our advisory team has different levels of ability as it relates to the areas of complexity.

And so we want to make sure that we match them correctly. So that initial call is important, just more for them, the potential client, to set the expectation. But the prospect meeting, which is kind of that next step where more information is gathered and we go deeper, that's where we actually can set the firm time, and, therefore, cost.

Michael: So who does the prospect meeting? Who handles that?

Mark: So from that initial call, we take notes on the conversation. We then look at both, what is the capacity of our advisors and their availability to serve whoever is next up on our wait list. And so if a person had called, gave the information, we said, "We think you're a level 3," they said, "That's fine." They fill out the questionnaire, they get on the wait list. When they are up, we then look at who has capacity to take on this level 3 and has the ability to serve level 3. We will then assign that advisor to that prospective client. Then they have the initial meeting where they go over everything together on typically a Zoom call or in person. And that's where they quote the firm fee.

Michael: Okay. So I'm fascinated by this, that the initial call coming in to try to set a client at, so I guess a level, which basically means they're getting a range, because the levels have ranges. So that's not done by an advisor who's fielding the call to close the prospect. This is done by the client service team.

Mark: Yes. We get anywhere from 6 to 10 calls each week from inquiries on our business. And we have such volume of incoming calls that it actually doesn't take a long time to really get a good feel for who fits where. And that's what we found.

Michael: I mean, I'm just... 50 something weeks a year, 6–10 calls a week, 300–500 prospects per year reaching out. My brain just goes to, does this team really know enough about planning to suss out the issues? How often do they tell someone they're a level 3 and then it turns out they're a level 4. When you get to the prospect meeting, the prospect is like, "Wait, you told me level 3." Am I making that up as a problem or is that a risk you've got to navigate?

Mark: I would say there are times that it happens. Sometimes it's because the client wasn't full disclosure in all of their information.

But we have a partner that manages the client service team. So they are with those new hires for the first 3–6 months and they're sitting in on those calls there. So the new individuals to the team are listening in on others on the client service team who are going through these. So they're getting a lot of repetition from that experience. And then as they do their own, they are doing it usually in tandem with the partner who's in charge, and then, eventually, they're released to do it independently.

Michael: Do you literally have joint calls like a Zoom meeting with the client service team member and the partner on the meeting, or is this recorded and post-meeting feedbacks? How do you literally do the sits-in-on-calls part?

Mark: Yeah, the sits-in on calls, again, typically, it's either a phone call or it's a Zoom call. And so it would be like somebody sitting next to me while I'm having this conversation. And so they're observing, what are the typical comments, questions, how does that person assess one level versus another. And there's some tools that we have internally that our partner in charge of this area has developed to help them if they answer these questions.

And I would say we actually have a pretty high success rate at placing them in the right complexity level.

Providing Prospects With Firm Fee Quotes In The Hourly Model [23:46]

Michael: So when you get to the prospect meeting and now you have to quote a firmer fee, I guess I'm just trying to visualize, how do you do this and scope this, particularly when you're quoting a fixed firm fee to make sure you've got all the things in there for the quote and that you don't have a scope creep problem afterward.

Mark: Yeah, it's a great question. And this is really the responsibility of the advisor to do their due diligence. So when they're getting the information in advance of the meeting, they're looking at pay stubs. And from that, you're seeing the different types of compensation. You're looking at balance sheets. You're looking at tax returns. So all the data points that help build the overall picture, those are visible to us prior to that prospect meeting. So it really gives us a head start as we're going into a meeting as to where we need to go with the conversation to make sure we have a clear picture of their circumstance.

And we also track all our time. So if we've quoted somebody a 30-hour quote and let's say an advisor is consistently spending more time than they're quoting, we bring that to their attention and say, "Look, this is what's happening. So you need to rethink your quoting approach to make sure that it matches the actual." But, in general, we do pretty well in that area. Again, just because we have so much experience and so many reps, we could say, in doing initial plans for our clients.

Michael: And do you bill time for the prospect meeting itself, or are we still a free part of the get-to-know-you phase here?

Mark: That is the free part of the get-to-know-you. We do not bill for prospect meetings.

Michael: Okay. Okay. And so if they say yes at this point, then it was... I guess, how does it even work at the end? I'm assuming the advisor doesn't quote a firm fee off the top of their head in the meeting, you've got to go back and do some math?

Mark: No, we actually are, most often, I would say over 90% of the time, we quote it at the end of the meeting. And again, this is just a lot of experience in doing this. And again, by having that information in advance, especially for a newer advisor, their team lead will often go over the information with them and say, it's probably going to end up maybe in a tight range. So they'll give some free guidance as you're going into the meeting with room for adjustments as needed.

Michael: And when you bill this out, I guess I'm trying to envision in my head how you manage the risk of so-called scope creep, people trying to add things in after the initial engagement and wrap it into your now wonderfully fixed fee. How do you manage that?

Mark: So when we give quotes, we quote in the areas that we're going to give advice in for that initial engagement. We typically broadly break that into cash flow/retirement, investments, risk management, estate planning. Those are our 4 core areas. And then there's some sub areas as well. So if a client says, "Oh, I wanted to spend some time talking to you about my mom's long-term care policy," which is not within the scope, we would just say, "That's not within the scope of this engagement, but we'd be happy to dialogue with you separately." So we just pay attention to what was the scope, is this within the scope.

Michael: So I'm just envisioning a planning engagement letter that just kind of has these areas of cashflow, investments, insurance, estate, and we're just kind of checking off boxes of, "We'll cover this. This is not part of the agreement we'll cover."

Mark: Exactly. Exactly. And the nice thing about the ongoing...well, there's 2 aspects. One is we quote from when we start the engagement up until we present the plan. We do not quote for our meeting time. And that does actually give some flexibility to go, we'll just call it “off script” for them, to delve into other areas, because that's billable time. I mean, we are being compensated for the advice that they're asking for, even if it's not within that scope, we're fine to do that.

The beauty of the ongoing relationship is we can go any direction that they want to go because it's open-ended. And so that allows them to have that control of, “This is important to me, the value that I'm getting to talk about this topic that's been on my mind is worth the cost that you're going to charge me for covering that topic.”

Michael: And rates, you said, is basically $350/hour for all the different advisors, unless you're a partner, and then it's $450?

Mark: Correct. Correct. So our partners, you have to have a minimum of 5 years of experience to be a partner. And so, that's how we created that transition point.

Michael: And what determines what clients get a partner or not? Is that a complexity-level thing? Partners take 4 and 5 and everyone else gets a 1 through 3, or is it more of a client request kind of dynamic, I want a partner?

Mark: Well, we actually will allow, if someone was referred to a certain advisor and let's say they were a level 2 complexity but they wanted to work with this specific partner, that's fine. But it's not going to be at $350 an hour. It's going to be at $450 an hour. And so they have to feel that the value-for-cost trade-off is there. And we're fine to do that because we're being compensated for our time, which is fine. And for that extra level of expertise that the partners have that maybe the associates don't have. And so that's really, just like a law firm, you can hire a senior partner to do your simple will and revocable trust. It might not be the best use of their time. You might be better off, from a cost-value standpoint, using an associate, but you have that choice, if you wish.

Michael: So upfront plans, you've got this range of levels 1 through 5, which, I guess, low end 10–20 hours at $350/hour is basically $3,500–$7,000 for a 'simple plan', a level 1 plan. Level 5, I can be like, well, what am I at now? 40 or 50 hours billing at a higher rates, these are $20,000 engagements?

Mark: Yeah. I would say minimum. So, again, at a level 1, we're looking at their investments. We're looking at their cash flow and doing planning and different scenario planning for them. We're looking at college planning. We're looking at risk management issues and estate planning. So it's comprehensive in its scope. And as you said, as you get more complex, it's just more time. Level 5 is the exception to our normal process. We actually don't quote firm quotes for level 5 because level 5, for us, it's been a kind of an increasing moving target for us.

But right now, I would say our typical level 5, their balance sheet is somewhere in the minimum of $30 or $40 million. And I would say right now the high end is right about half a billion. And so their circumstance is so complex that you can't put it in a box. So you're needing to go in pieces. And sometimes we start in estate planning, and that's because that's the felt need. And we're doing the deep dive in that, and then it'll maybe range into tax planning and other areas. But level 5 is kind of its own world.

Michael: I was going to say that it's like levels 1 through 4, dare I say, kind of a traditional "clients with rising levels of complexity." Level 5 is sort of your off the charts, specialized, ultra-high net worth, call it bespoke services. So we're just going to bill you $450/hour, which as I'm even thinking about that out loud, for clients that are tens of millions or hundreds of millions of dollars, you're actually probably cheaper than their accountant for their return. Those are not clients that balk at $450/hour for specialized expertise.

Mark: Without question. And I remember the first time I was hired by a family who has a full-service family office, and I asked him, "Why are you looking for a financial planner? I assume you have experts on your staff for tax, and investments, and everything." And what he said is, "We have no one on our team that understands how it all fits together. And I don't have anyone..." The way he said it is they're all clerks. They all do what I tell them to do, but I have nobody telling me what I should be doing and what I should be thinking about. And that's why we want to bring you on board. And so that's a client actually I was just with on Monday.

Michael: So then help us understand more what ongoing planning fees, ongoing engagements look like. So I feel like the traditional viewpoint of hourly is, I guess, very transactional. That’s at least the traditional view, right? People come in, they ask questions, you bill them, maybe it's a project, maybe it's just per hour, per conversation. And then you're on to the next client. So this idea that no, no, no, 80% of the clients are recurring, more than 2/3 of the revenue is recurring, I feel like is a very different mental model around what this business is. It starts to feel more like a subscription, retainer-style business where people keep showing up every year. So help me understand more of what ongoing engagements look like. How often do you meet? How long are meetings? Is there a revenue-per-clients target? Just how does this work ongoing?

Mark: Yeah, it's a great question. And again, I think it's one the many misperceptions of hourly, because I could probably turn the question back to you and say, how do you serve your clients? And my answer back to you would be we don't do anything differently, except that we charge them differently. That's it. So we are, when we're meeting with a client, we're looking, each year, at their tax circumstance. We're looking at their investments and making recommendations on asset allocation, specific investments, etc. We're looking at their trajectory. Are we still on track towards the goals that are important to them?

We're doing scenario analysis of, “I'm considering doing this gift to my kids”, or “I have this event that I expect to come up. Is there any tax planning that I need to do around that?”, or, “We haven't looked at the estate plan in a while. Let's take a look at that and make sure that beneficiary designations are up to speed, the titling is on par, and just the way we have the distribution in the documents themselves are still on track.” So I would suspect, I've done all the different models from retainer and assets under management in a prior life prior to Timothy and now have done hourly for about 24 years. And I don't feel that I serve the clients any differently at all. We just charge differently.

Michael: The caveat is just you bill them more in the year that they do more and you bill them less than the year they do less. And the folks that are on the AUM models, yeah, it averages out.

Mark: Yeah, I can't speak to the assets under management model, but I can I can certainly speak to the hourly model. I met with a client last week that she and her husband and I met 2 or 3 times per year very regularly. And we did various degrees of work. They were on the higher complexity level. But the overall engagement, I may have spent, let's say 20 hours per year. Well, the husband died unexpectedly last fall. And so my time for her has gone up tremendously. And I cannot tell you how many times she has said, "Thank you so much for the service that you are providing." Even though I'm charging her more. Well, I'm charging more because I'm bringing the value that she so needs in this time. So that's what I said earlier about it really does move real-time, the value and the cost move in tandem, and clients like that.

Michael: So how do you handle it? So does that mean clients of the firm still have their advisor that they work with? Because when I think about traditional recurring revenue advisory models, it's like, advisor has their clients, clients have their advisor, because we meet every year or 2 years, whatever it is, I want my advisor who knows me and understands my situation. So is there a similar kind of model for you where advisors have an assigned list of clients that tie to them and some capacity of how many of them they can serve before they run out of time? Does that model still exist in your world?

Mark: Yes. Yes, it does. I would say an average advisor at our firm, when they have kind of a fully mature clientele, is somewhere in the 120 clients or so, give or take. And that give or take is going to depend on their complexity. And so if you have a higher level of complexity clientele, you can only service so many clients because you spend a lot more time. And then the flip end, if you are serving level 1s and 2s, you can serve a higher level of clientele.

So, yes, they have that recurring relationship with clients. We do, especially with partners that are moving up in complexity, we work on teams here. And so, especially when they go from being an associate to a partner, there's that rate increase. So we offer to those lower complexity clients, you are welcome to continue to work with a partner, but understand it's at a higher hourly rate. However, you know X who's on his team, or her team, that you have been working with, if you would like to be served by them, you could maintain that lower hourly rate.

So we’re very flexible for the client to meet their financial balances that they'd like to keep from a budgetary standpoint to shift if cost is of higher priority for them versus that kind of ongoing relationship. But again, one of the things that we really pride ourselves here is that team orientation for our client service. And so they get to know more than just the lead advisor. And so it's not a massive shift that I've got to get to know this person or they need to get to know me because they've already been working on that client.

Michael: And just how many hours does a typical ongoing client need? My brain wants to say, they come in for a meeting and you spend an hour and you bill them 350 bucks. But just to get to the revenue that you guys have, I'm assuming, in practice, ongoing clients must be using a larger chunk of hours than that. So is there some average or typical, how many hours does a typical client actually do on an ongoing basis every year?

Mark: So what we do is we really pride ourselves on the quality of the work we do to provide the advice that we do. And so when we're giving tax advice, it's not because we're just rounding numbers and kind of scratching it out on a piece of paper on the wall and making a recommendation, it's because we're using our tax software. We're entering in prior year. We're looking ahead to current year. We're talking through the variations that they could see in their circumstance that might adjust their circumstance. We may even be looking at Roth conversion analysis or charitable giving strategies.

So that's not a 1-hour sit-down type of scenario. And when we're saying, "Are you on track," we need to refresh their financial picture. And so that means we need data and we need to enter that data, and same thing with investments. So I would say, by and large, someone who is more of a level 1, level 2 complexity, it might be 6–8 hours over the course of the year. And that includes clients call us regularly or email us or whatever, and we just track our time. They know that because it's the only way we make a living.

And so, we bill accordingly. And then as you go up in complexity, typically, that time goes up. But I would say, by and large, in a regular cadence year, the second year, it might be about half the original quote. And then it trends down to maybe 1/3 to 40% of the time, and, therefore, cost to keep things moving forward, understanding that these events,"I got an inheritance", "I lost my job", "I'm thinking about doing this…", that obviously adjusts accordingly.

Michael: I mean, even at a level 1 to 2 clients might be 6–8 hours a year, $350/hour, it's $2,000 or $3,000/year. And then it goes up from there. And so just that's a...to me, that's a very healthy revenue per client. That means you're, assuming that your upper-tier ones might be $3,000, $4,000, $5,000/year of planning fees, because they've got 10, 12, 15 hours' worth of ongoing planning work. And then the level 5s are in their own bucket, I'm sure. I mean, I think about that relative to other advisory firm models. And just when you start talking about smaller clients might have $2,000–$3,000 of revenue per client, and ones in the middle might be $4,000, $5,000 $6,000 of revenue per client, that's where a lot of advisory firms are that scale and grow. I mean, that math works, you've got enough revenue to pay your team and grow.

Mark: I think we also benefit, as we've grown, we just noticed that our fixed costs or our software and all that as a percentage actually has declined. And so we really have benefited from our growth. In the way that we design our budgeting, we've just noticed more and more that rent, and software, and, I guess we call it marketing, but we don't really do any marketing, keeping our website up to date and that sort of thing, as a percentage of our total revenue is getting, not inconsequential, but very easy to manage.

Michael: And so going back from... I'm just thinking about capacity, you said your advisors get to a capacity of about 120 clients. You guys live in such a hourly world, though, do you literally think about capacity in terms of clients? Do you think about capacity in terms of hours and some...advisors are expected to bill X hours a year and then you work backwards to say how many clients it is?

Mark: Yeah, we work in terms of hours. And so we've been tracking, for years, everybody's time. We have a pretty good sense of what would a typical first-year person on the advisory track bill over the course of the year, and the second year, and third year, and on and on. And typically, when you balance out the way that we typically want our advisors to have that work-life harmony, the top end of the scale is right around 1,200 hours per year.

That's really, we kind of have as a loose ceiling for billable time. So that's factoring in vacation, that's factoring in non-billable time. But you get a natural efficiency over time because as you meet with less and less prospective clients, more and more of your time is billable. And so 1,200 tends to be about the limit, which gives us capacity for that person to be a team lead, or mentoring a new advisor, or whatnot, that's non-billable.

Michael: Interesting. I'm just struck if you do the rough 40 hours a week times 50 weeks a year, you get to roughly 2,000 working hours in a year. So 1,200 billable hours, basically, you end out with a ceiling of 60% of time is client-facing. Well, I guess client-facing or client work behind the scenes, which, I mean, we do a lot of time studies on advisors as well. From Kitces' research end, I mean, we see the same number across pretty much all advisory firm models that clients plus prospects usually ends out somewhere in the 60% to 70% of hours range.

Mark: Yeah. That's what we're experiencing. Yeah.

Tracking Advisor Hours Electronically To Efficiently Bill Clients [46:43]

Michael: Interesting. Because just, as you noted, vacation, non-billable time, professional development, leadership and team meetings, and just some level of, you can only sit across from clients so many hours. So how does time-tracking work? This is another one of those, I don't know... I feel like there's a lot of stereotypical views of the on-the-clock and usually because of CPAs or attorneys we may have dealt with bill us in 1 hour, or 30-minute, or 15-minute or 7-minute increments, how does time-tracking work in your world?

Mark: It's actually amazingly simple. We have software that we use, online software. We've used GoToMeeting. We currently are using Minute7. It is synced directly to our QuickBooks. And so whenever we're doing billable work for a client, the clock is literally on and we're doing whatever we're doing, a tax projection, or whatnot. By the minutes.

Michael: So Minute7 is literally the name of the software.

Mark: Correct. And we don't round to anything beyond a minute. It literally just tracks by the minute. And so if another client calls while I'm working on an existing client, I will turn one off, turn the other one on. Very, very easy because it has our entire client database in the software. And then once a week...so we tell our advisors, "You have to make sure that by the end of the week, there are 40 hours recorded."

So it has to...any gaps have to be filled with, I was marketing, or prospecting, or doing administration work, or business planning. So we typically, at the end of each day, you make sure that 8 hours are accounted for, some will be billable some will not, by category. And then, at the end of the week, there's a syncing function which syncs then with QuickBooks. And then we do our billing once a week. And when we do our billing, we click which ones we want to have billed. It aggregates all the time into one number and that invoice gets sent out.

So different from a law firm, it's actually probably more similar to CPAs where you get 1 bill with basically 1 line item that says your accounting, and here's your number. And it's all kind of baked in there. Whereas, with law firms, they show, it could be a 12-page long, which shows every activity. So our billing process is quite simple and easy and actually exceedingly profitable from how we manage our business. It's great to have all that data.

Michael: So because the technology is just there to track the time, tie it to a client list, automatically generate a bill because of the integration to QuickBooks. So the end advisor literally just has to be clicking around in the software throughout the day to say, "And now I'm working on this client, and now I'm working on this client."

Mark: Correct. So right now, I have probably 17 clients that I have touched in one way, shape, or form over the course of this 5-day work week that have anywhere from a few minutes to a number of hours, depending on what activity I did for them in a current week.

Michael: So I'm just trying to visualize this, you're billing... So do you literally bill the minute, right, if I spent an hour and 7 minutes, it's going to calculate like 67 minutes of my billable rate?

Mark: Yes, it will.

Michael: So maybe I'm overthinking this because I have to think from time to time. I'm just visually going through my day, I'm working on the client and my brain's a little tired and I want to go refill my coffee. Do I need to pause the clock and go get my coffee and then come back from the kitchen 4 minutes later, and then because the hours have to add up at the end of the week, I need to log “got coffee” for these 4 minutes?

Mark: Fair question. And, yes, we do pause, which is, again, very easy to do. And typically, at the end of the day, I'll look at my timesheet, for example, and say it added up to 6 hours and 26 minutes. So I have to fill the remaining roughly hour and a half. And so I just look at my calendar and say, "Oh, I met with Brian for an hour, so I need to put that in for business planning." And then we have half-hour staff meeting. And so that's going to be...we have kind of certain tags for different things. And I fill those in, gets me to 8, and I'm done.

And so it literally, I would say, if I spend 10 minutes a day on kind of the time function of the tracking, that would be a fair average, maybe even on the high end of the average. We just don't...technology takes care of it for us. So if we have multiple people working on the same client, that'll all aggregate on what works for us.

Michael: Right, right, right. And I'm going to presume, for those of us who have not done time-tracking and not used to time-tracking, this probably sounds pretty onerous to, every time I switch a client to go to a new activity, I've got to go into Minute7 or probably have it up on a tab or something and click the new client and do the switchover. But I'm going to presume when this is your life and you live it, this just becomes really second nature, you don't think about it after a while. It's just like a habit routine, I'm switching clients, click, click, click, next client.

Mark: Absolutely. And I would actually recommend, to non-hourly firms, to track your time, because think about the power of that knowledge to know, "Wow, when I look across my team, that client that we're billing $4,000 to is taking 56 hours of our time over the course of the year. And this client who we're billing $50,000/year to, we're spending 7 hours cumulatively." I mean, think of the power of that information from a business management standpoint. And we have that. That's just second nature and really allows us to data-mine and business plan well.

Michael: Oh, I'm just imagining all of the advisors, you do that and then you get to the end of a busy 8-hour day and you look down at the thing. It's like, "Why does it only add up to 4 hours?" And like, "Oh, maybe that Twitter stroll took a little more time than I realized." Just there, do you find there's a fascination that comes from time-tracking for some of us, and just you don't realize how much time slips for all the various things we do that may have been slightly less productive until you actually start tracking it. And it gets kind of clients, "Oh, yeah, I make all good spending decisions." And then you actually aggregate every single spending decision they make, because you hook them up to eMoney, or RightCapital or Mint.com, or whatever it is. And then you show them their actual spending. It's like, "Oh, I think I need to make some changes."

Mark: Yeah. And again, just think even just for your own self. We talked about this on the other...earlier time that we were together about when you realize how valuable your time is and you actually have visibility on how you spend your time, it can lead to behavior change. And that's really the goal here at Timothy, is I don't want them working more. I want them working smartly. And that's really what we're about.

Michael: Well, notably, you're not setting a goal for them to get to 1,900 billable hours out of 2,000, because you need to get your bathroom breaks down under 5 minutes. Your goal is 1,200 hours. Your goal is 60% time. I mean, on an 8-hour day, that means 5 hours of client-related work and 3 hours of other stuff. I don't think of that as an onerously time-intensive, like task mastery, "Why are you not working harder? I found 3 minutes where you weren't doing something productive." That seems like a very flexible or reasonable target around without having to be onerous.

Mark: That's certainly our goal. And that's been our experience.

Advisor Compensation Under An Hourly Planning Model [56:13]

Michael: So help me understand then how the kind of economics of this works down to the advisor and the firm level, right? If I pull out my calculator 1,200 billable hours as an expectation, $350 an hour, it's like an advisor becomes responsible for $420,000 of revenue, give or take a little if they're hitting those numbers. So how does advisor compensation and profitability at the firm level work now?

Mark: So the way we do it is, I'll use the last year as an example. So $4.2 million was our ending number when we created the budget prior to the beginning of the year. And so we do create a business plan every single year. And hourly, actually, is a really elegant way to be able to build a pretty accurate business plan. So what we do is we start with going individual by individual across the team to talk about what is a realistic hour goal for the coming year. And so we have data to be able to support that. We have their own actuals to be able to support the trend and where they're heading, and obviously their own...their input as to what they want to accomplish in the coming year.

So we take all of that time, bring it all together, multiply it times their respective hourly rates. And what that does is that gives us our topline revenue target for the year. So let's say last year, we actually exceeded our goal, but let's just for this example, say it was $4.2 million. So the hours times the hourly rates equal that $4.2 million. So that's our revenue target. We then broad-brush, say we want salaries, bonuses, benefits, and fixed costs to equal 75% of that target. And the profit to the partners, and there are 7 of us, is 25%. So that is the target for the coming year. As I mentioned, because our fixed costs are a pretty modest percentage, I'd have to look, but I think it was somewhere in the teens for 2023, that leaves us a lot of room to work from a salary, bonus, and benefits perspective.

Michael: So roughly... I mean, if your fixed costs are 15%-ish, about 60% of your revenue goes into staff.

Mark: That's correct. So I look at the studies that say what are average starting compensation packages for new hires on the planning track. We are at or above those averages, which we're really excited to be able to be there. And then we also have what I think is a pretty attractive benefits package.

So we have a very good health insurance plan. We match their 401(k) dollar for dollar, up to 10% of their total comp. So it's a pretty generous retirement offering. We have a health club allowance. We have a technology allowance, and then we have their bonus.

Michael: And comp to advisors itself, is this salary-based percentage of revenue, like a cut of your billable hours? How does that work?

Mark: Yeah, we're salary and bonus. So a typical approach to compensation. They like the known aspect of that. We have a track. And we have compensation ranges for each step of the way. So they know where, as they get promoted to that next level, where their compensation will likely fall. And those get adjusted each year.

Michael: Curious, can you share what those look like? What are the stages and what kinds of compensation ranges are associated with them?

Mark: I could generally say starting salaries are usually in the $60,000–$70,000 range, but our benefits, the total package, it usually puts it well over $100,000 when you look at all the different areas that we are paying for. We pay for their CFP, we pay for all of their continuing education. So it's a pretty robust package. And then it goes up from there.

Michael: How high does it get?

Mark: So we will go up right now into above $200,000 in salary. But really, those partners who are in the 6-figure range, the other component of their compensation, if they’re partners they’re owners and they're sharing in that profit, and that's a meaningful part of their compensation as well.

Michael: Very cool. And from the advisor end, no one is out hunting for their own clients because your marketing brings in, I guess they have to close them as they work. So you have to sit in the prospect meeting and determine the quote and make sure the client is actually on board to sign up. But all the opportunities come into them and they're effectively all screened by the client service team before you even have to talk to a prospect as an advisor.

Mark: That's correct. I had mentioned earlier that we've been working off a waitlist for several years. So we're not closed to new clients. We just need to pace it to the point where we don't affect our current client service. So they're just pulling off the waitlist.

The Mechanics Of Offering Partnership Stakes In His Firm [1:02:41]

Michael: And then, how does partnership work again?

Mark: In our world, 5 years is the minimum time, but there are other elements: how you're doing in billable hours, any leadership that you're taking on, your competency as it relates to doing our financial planning services. So all these factors come in together and then the partners vote as a whole, whether to give them the opportunity to buy into partnership. And so we have a staged buy-in where they can buy up to 2% at that year 5 or that first stage. And then there are different activities that they can do over time. Earliest would be an additional 4 years where they can get up to 5% ownership in the business.

Michael: Okay. Who sells as you're doing this? Are you issuing shares or are you divesting yourself as a founder/owner and this is part of your liquidity events over time?

Mark: Yeah. I am, right now, the sole seller of ownership and we've structured in such a way that it's very attractive to buy into the partnership financially.

Michael: So they get an internal discount for being a part of the buy-in and team.

Mark: Well, it's more that the pricing itself is...and the way that we do our annual valuation is, especially with our growth rate, it becomes a very lucrative, both yield and growth. So the combination of the yield and growth of their ownership, last year, I think it was over 50% between the yield and the growth. And it probably averages right around 30% over the last 5 years. So it's definitely something that people aspire to. And that is my goal. I mean, my goal would be to have everyone be partners because they have that level of quality and expertise to be able to serve our clients.

Michael: And the valuation itself, it sounds like is an internal formula approach, you're not like going out to third-party valuation service.

Mark: We do a 2X of a rolling 3-year revenue calculation. So it's a weighted 50% most recent prior year, and then 30%, then 20%. So a 2-year average rolling is what calculates the value of the company. And then from that, the percentage or the units is how they purchase. And then, again, they're sharing, this is actual ownership, not phantom ownership. And so they benefit directly from the distributions and profitability. And it grows in value because if our revenues continue to grow. And you can also pretty easily calculate the EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization] because of our target of 25% profitability, which we typically do better than that.

Michael: So nominally, if I'm buying 2X revenue with 25% margins, I'm buying 8X EBITDA, but it ends out being a little better for them because our 3-year rolling average of revenue means they're not paying 2X the most recent revenue. It's a little lower as a percentage of recent because the prior year's growth pulls that number down.

Mark: Right. And the profit, the EBITDA, is growing quite nicely because our costs are fixed, our revenues are growing. It really, over a pretty short period of time, becomes a very, very attractive economic model for them.

How Mark’s Firm Attracts Clients [1:07:01]

Michael: So, now, help us understand where all this growth is coming from where you have millions of dollars of hourly planning fees and a ginormous waitlist. So where does growth come from?

Mark: Yeah, it's been something that we, again, we saw in small part in the past, but it's just expanded so dramatically. And there's really 3 main sleeves that we see these calls coming from, because we always ask, "How'd you hear about us?" I'm sure most firms do that, and we track it. And it doesn't work exactly a third, but it gives you a general sense. So number 1 is client referrals. So that's pretty typical as we have a growing base and they like our services or they're referring their own family, even their kids. We continue to grow in that area. That's one of our strongest areas. Another area, which can be somewhat of a surprise to maybe your listeners, is other financial planning firms. That's a really significant part because it's not uncommon…and I used to be in that world where somebody calls and they say, "I'm looking for this." And you realize, "Well, I don't do that." And then they typically...

Michael: I can do an hourly thing, but this is really not a good fit for me because it's not my core model.

Mark: Exactly. Exactly. And so they often then say, "Well, who do you recommend?" And even though we don't do a lot of self-promotion, because I think of our size, I've been asked to be on podcasts and whatnot. And so we've gotten more known. We also like to volunteer. And so we do things with NAPFA and that sort of thing. And so that just has gotten the name out a little bit. And through that, we get a lot of referrals from other advisors. And my sense is, actually, they don't do it grudgingly because it can reflect...well, 2 things. It can reflect well back on them. If that referred person has a great experience, that's a good thing.

But also, it gives them an opportunity. We use the term "gracious out" where it's really not a fit for their firm, but maybe they were referred by 1 of their clients. And so how, do I deal with this? Do I want to work with someone that just isn't a fit? And we become that gracious out for them. Or maybe, we've gotten this, where the complexity level is just beyond that firm's ability and it's within ours because of our level 4, level 5.

So that's... Other advisory firms is really a big part of our clients. And then others, it's kind of a combination. It can be CPAs, it can be attorneys, centers of influence. One thing that we did not expect is sometimes some things that we do like getting quoted in a newspaper or doing a podcast can generate unexpected spikes.

And we've had that in the past few years. I was quoted in "The Wall Street Journal." And I've been quoted, that was probably my 4th or 5th time. As you know, it's not that difficult to get quoted in the major trade magazines and newspapers. And so it had never happened before in about 20 years of serving. But that one article led to over 150 calls in about a 4-month period of time. And we were not prepared for that.

Michael: What was the article? What were you talking about?

Mark: Yeah, the article was... I think it was titled something along the lines of, "Are Low Interest Rates, the Death of the 1% AUM Model." I think it was something along that. And so then they went through all the different models and near the bottom was hourly. And they quoted like 2 lines from me. It wasn't honestly that, or at least my portion of it, I don't think it was that flattering about it, but it was just factual. But that just sparked an interest.

Michael: Interesting. Particularly for that subset of consumers that don't like AUM and are looking for alternatives. And so, of course, they pile onto an article about alternatives to AUM model, and there you are.

Mark: Right. Well, and interestingly, because it was "The Wall Street Journal" listeners, these were level 3, level 4, and even level 5 readers. So, in fact, that family office that I mentioned that I work with, that was from that "Wall Street Journal" article. So we've had that. I was on a "Morningstar" podcast a year ago, and that led to over 200 calls. So we have, sometimes these events that we don't plan on, because right now, 2023 as an example, we started the year with about 160 families on our waitlist. As I mentioned earlier, we served about 136 of those. And not everybody on the waitlist is willing to wait as long as it takes. It's typically 6 to 7 months before we can service them. And so there is a little bit of attrition. But at the end of the year, we were at 185 families. So we didn't actually make progress as I'd hoped from knocking that waitlist down.

Michael: Despite taking on 136 new clients, you still couldn't make a dent in it.

Mark: Right. And that's why we're trying to hire, train, and grow to meet that need. The challenge is, is even though when we did the last podcast in 2018, I had a headcount of 7, we're now soon going to be at 22. And yet, the demand has more than matched our supply, our ability to service them.

How Hiring A President Helped Mark Scale His Firm [1:13:49]

Michael: So as you look at that journey, I guess, over the past 5 years, in particular, what surprised you the most about this scaling up phase as you go from a million to cruising for $5 million this year?

Mark: I'll say one of the best decisions I made early on, literally in that end of 2018, early 2019 period, was I hired a president. And this was considered to be very early to be hiring a non-billing president of our firm. I had a coach at that time, and that person did not understand why I was doing that. But I really...

Michael: Your coach was negative…

Mark: Yes. So anyway, I did hire this person. They were a former client, or actually, I should say a current client, but they were a client of ours for a number of years and somebody I knew personally well and really respected. So they became our president. And that was really, I would say, the catalyst that has allowed us to scale. Not the only reason, but I would say a core reason to have somebody who's really dedicated on managing the firm at a high level. So it's not just an HR level or a manager level, but actually, at the president level. And it really took a tremendous amount of strain off of me and allowed me to focus on the areas that I feel are the true value that I bring to this company. And...

Michael: So can you help us visualize more? What is this role? What does a president do when you're sort of distinguishing it's not just managing HR?

Mark: Yeah. There certainly... I mean, one of the areas is HR. But I would say one of the most important roles that they fill is mentoring. We have a lot of younger advisors. We intentionally hire people right out of college or maybe 3 to 4 years of experience. We have obviously others that are older or more seasoned, but I would say our core, and if you look on our website, you would notice that, is between late 20s and early 30s now, because they've been with us for a little while. But mentoring is just so important in our business to help them both professionally, but also with specific client circumstances.

So that's been a big aspect of what they do, but also, really, a thought partner with me as I do my area of expertise, which is really that ideation, looking to the future, and how should we weigh different opportunities to implement at our firm. And our president really then carries the water. Not only as a thought partner, but also as the implementer of those strategies that we've agreed to on an ongoing basis. He also chairs our partner executive committee, so he manages the agenda, he runs the meeting.

But then compliance takes care of that when we have kind of more macro things that we're trying to decide, even infrastructure-wise, he handles that. So just a lot of those day-to-day things that were not my area of expertise and really were a drain from an enjoyment perspective, these were areas that actually he enjoyed and was very competent in. And so that was a real strategic boon for our firm. And I think... I know everybody in our firm would say that was really part of that kind of tipping point that has been a catalyst for growth for the firm.

Overcoming Burnout By Creating A Client Waitlist [1:18:02]

Michael: So what was the low point on this stage of the journey?

Mark: As far as the last 5 years, yeah, the low point was definitely when we didn't realize that this was going to be a sustained spike. So we had traditionally, whenever somebody calls, strike while the iron's hot, get them on the calendar. And what was happening is we normally booked out 4 to 6 weeks, sometimes 8 weeks during a busier season with prospect meetings for the advisors that were client-facing. And what we saw rapidly was it was not 4 weeks, or 8 weeks, or 12 weeks, it was 16 weeks, it was 24 weeks. We were actually booking out 7 to 8 months and we were fitting people everywhere we could without even knowing what our future was going to look like over that timeframe and just normal client service.

And we just were burning out. We were just running too hot. And so that was when we implemented the waitlist. And what we did was we implemented it and we halted any scheduling a meeting until we caught back up with what we had already scheduled. And so that took 9 months just to catch up to where we were and then we slowly started adding back because we actually needed a breather just to recover from the intensity of that period. So that was definitely the low point. I mean, growth sounds great, but there is a case to be made that too much growth can be really, really bad at a lot of levels. And it was.

Michael: To me, it's a fascinating thing that when you, from the business ownership and the leadership end, there's often a mentality of, as you said, strike while the iron is hot. If some good stuff and a little bit faster growth comes for a while, it's like, this is awesome. I got to get everything I can while it lasts because you don't know when this is going to go away. It's obviously going to end at some point and it's just mentally built-in, it's going to end at some point, right? That's why we strike while the iron is hot. And I think most of us, when growth picks up and that hockey stick starts, very rarely, do we ever sit down and say, "What if it doesn't stop? What if this is actually a new normal for us?" And if you're not ready for that, you get steamrolled pretty quickly until life teaches you the hard way.

Mark: Right. So that was a really hard season for us. I'm just so thankful for the team because they hung on through that storm, and we survived it. And now I would say we're thriving because that ability to pace yourself, if you know, “I've got these vacations coming up, so I don't want to take as many prospects in this season, but then I can do more in that season”, that ability to pull off the wait list is amazing for business management, which not only helps us individually, but also helps us serve well because we can manage the capacity.

Creating An Effective Hiring And Onboarding Process To Meet The Demands Of Employee Growth [1:21:34]

Michael: So would you have done some of this differently? If you look back in retrospect, what do you know now that you, of course, you could tell you from a couple of years ago about how to prepare or manage through the growth?

Mark: There were many life lessons over that time, for certain. There was one year that we brought on 6 new people in a very short period of time. That was not wise. We were not ready. Our systems weren't in place. Our training wasn't in place. And we were....this was, again, kind of in that desperation time, when you get in those circumstances, you're just looking for anything for help. You know, you're just grabbing for lifelines. And sometimes that can lead to poor hiring decisions and not really doing the full due diligence. And we found that as well.

So that's something that we also really scaled back, both our hiring process, creating better systems for...we started with, let's have their first 2 weeks kind of mapped out. And then we extended that to 4 weeks, and then we extended that to 8 weeks. And now we have a really nice track where we can set somebody's expectations pretty cleanly. This is what the next 6 months is likely going to look like for you as you grow into the Timothy way of doing financial planning.

So putting those systems in place has been transformational in our ability to really train up new hires to excellence in a fairly quick fashion. And we let each advisor or individual who's on the advisor track, we work with them. It's not a, you're not going to sit with clients for 6 to 8 years. It is, let's see how you develop, and we'll decide together when you're ready. And we have... I can speak to one of our advisors that started right out of school, about a year, a little less than a year and a half ago, he is sitting with level 2 clients today. And he is doing a phenomenal job.

We have others, though, that they are going to take a longer time for whatever set of reasons. And we will work with each individual to kind of create a custom path. And I think people appreciate that willingness to flex with their learning style, their circumstance, the pace that they're comfortable with. And that's one of the nice things about size, is we have that luxury to be able to kind of customize each person's path. It's still a defined path, but the timing of it can vary individual by individual.

I think also, we've developed teams, and that has created a really great mentorship. It's created a great check and balance on the client work itself to make sure that we are presenting the clearest, most accurate advice that we possibly can, the highest level of quality that we can for each client that we are privileged to serve. So, we've learned a lot. We've made a lot of mistakes along the way, but we've really embraced this new role of growth, that that is, it's missional for us.

And there really to, from my vantage point, is no ceiling. I don't look at ourselves in the traditional way of financial planning like a NAPFA would look at us as a large firm, given our head count. We look at ourselves as actually a very small firm because we compare ourselves more in the law firm model, not the traditional RIA model. And as a law firm, a 20-person law firm is pretty small. And 50-person, still pretty modest. When you get to 100, okay, now you're getting some scale. And when you get to 500, you're midsize, and you get to 1,000, you're large. That's the track that we see ourselves on. And we feel like anyone in hourly could follow that same path if they so choose.

Michael: So out of curiosity, as you go into these team models and advisors, these advisors and training, I'm assuming are supporting on planning software and analysis and such, is all their work still the same $350/hour? Do you tier it out?

Mark: Yeah, that's a great question. So what we do is as we're bringing people on, those that are just getting started, obviously, are doing the simplest tasks, whether it's data gathering, or data entry, and, and they can get efficient in that area very, very quickly. And so they'll start there and then they'll kind of bill from there. So when we quote an engagement, it's based on whoever is the lead advisor. So if you're working with an associate advisor, it's $350/hour. If you're working with a partner, it's $450/hour.

So no matter who is working on the plan, it's at whoever the lead advisor. So that's one of the departures, probably the main departure from a law firm model versus our model. However, because our demand is so high, it's actually, we're trying to get the different steps in the most efficient hands along the way. So, for example, it doesn't make sense for me to do data entry, I would be awful at data entry, even though, wow, we would bill more hours because you're so inefficient. But that doesn't serve the model or the clients, it's going to play itself out. So we really try to put the most efficient task in the most efficient hands.

The Importance Of Pricing Correctly When Using The Hourly Fee Model [1:27:34]

Michael: So I have to ask, as you've seen and scaled this model so well, why do you think there aren't more big hourly firms? What's holding everyone else or the rest of the industry back?

Mark: That's a great question. I think I'd mentioned a few times earlier, these myths. I think there's a lot of misperceptions about hourly, “Hourly only works with middle income” or “Hourly discourages clients from asking advice”, or “You're not going to build a relationship, it's all transaction-based.” All of those are certifiable myths. We build amazing relationships with our clients, just like every other advisor does.

So I feel that the myths are largely what holds advisory firms back. They typically are starting at too low of an hourly rate, $200/hour or $220. You just do the math. You can see why it creates a struggle to build a profitable firm.

Michael: I was going to say, a lot of this feels, to me, just what happens when you get the hourly rate 'right' reasonable in the first place, right? If you took all of the stuff that you're doing and you did it at $250/hour instead of $350/hour, you’d chop your revenue by almost 1/3 and your margins are 25%.

So if you bill $250/hour, you'd be slightly losing money every year. When you bill $350/hour, it's a wonderfully healthy profit margin that you can reinvest and grow into. And it does strike me. I feel like there's a lot of firms out there, they're trying really hard to figure out how to serve a wider base of clients and how to do it profitably and efficiently on models like this.

If you want to serve a wider range of clients, figure out how to bill them $350/hour and solve all their problems in 2 hours instead of 10. And then you'll bring your cost down, but you can't not bill a viable hourly rate. That's what, I feel like, really kills the scalability because if your hourly rate is too low, there's just not enough room to create the staff infrastructure and the rest that you need when you can't bill 2,000 hours a year. You're going to work to bill 60% of your time.

Mark: But again... That's true. Everything you said was true. The one thing you said, though, that I would not correct, but just shed some light to is the infrastructure is actually very simple. To start an hourly firm, eMoney, or whatever your software, and your tax planning software and...the actual startup is very simple relative to some of the other models.

Michael: Well, yeah. You don't need all the performance reporting tools and the custodial platform stuff, all that goes away and just all the time it takes. Granted, tech’s better than it used to be, but that's still a whole bunch of time that vanishes.

Mark: Absolutely. And I do say, I mean, a friend of mine, Matthew Jackson, and I wrote a book a couple of years ago to try to help people recognize the myths, but also give them some tangible steps to how can you build a good starting point from which you can start scaling like we have. And the scaling opportunities are unlimited. It is amazing how easy it has now become to scale when you have the teams model, you have the mentoring, and all the rest. It's really a wonderful thing to see.

Michael: And again, for folks who are listening, this is episode 389. So if you're curious to check out the book, I think it was literally called "A Matter of Time." Because we're all about time here. We'll have a link out to the show notes. So kitces.com/389 and you can check out the book if you want.

What Success Means To Mark [1:31:50]

Michael: So, Mark, just as we come to the end here, this is a podcast about success. And one of the themes that comes up is even that word success means very different things to different people. It can change for us over time.

And so you're on this wonderfully successful growth path, kind of hockey sticking forward. I mean, can't help but recognize I think it's grown more for you in the past 2 or 3 years and the preceding 20 combined cumulatively. So the business is in this wonderful place now. How do you define success for yourself at this point?

Mark: That's a great question. And in some ways, it hasn't changed at all because from when I started Timothy Financial 24 years ago, I did it because there were so many people that were calling my former firm that we couldn't serve. And I wanted to create a firm that could serve those unmet needs. And so clients served, number of clients served, has always been the sweet spot for me, the highest definition of success. It's not revenue. It's not assets under management or low client headcount because they're more profitable or anything. It's actually the more the better, from a success standpoint.

So that has always been a strong driving force for the definition of success for our firm and for me, in particular. I would say some newer definitions of success, this opening up the firm with partnership has been just a joy. It is so exciting to see them be excited and really digging into the current and future success of our firm. So that's just been a blessing to help them see their financial success. That brings me great, great joy. And then I would say, lastly, again, personally, if I can help some people who maybe have never heard of hourly or have heard the wrong things about hourly, and in some way, shape, or form, inspire them to maybe give it a fresh look or even give it a try.

I've had conversations, many, many conversations over the years about our journey, and my hope is that the amount of people that could be served in the hourly model eclipses what is being served in the other models by a factor. The opportunity is endless, to be honest, and the number of firms is so small. We are in this vast blue ocean effectively all alone because there's so few of us.

Michael: Well, that's how you can get a 2-sentence mention in "The Wall Street Journal" and 150 prospects show up in a couple of months.

Mark: Right, right. So I feel that it has been such a privilege to be a part of this hourly movement. It's been a privilege to serve the clients that we've served and it's been a privilege to work with the people that I get to work with every day. This model has been wonderful for me, and for our team, and for our clients, and so, I couldn't be happier.

Michael: I love it. I love it. Well, thank you so much, Mark, for joining us on the "Financial Advisor Success" podcast again for a 2nd time.

Mark: Thank you, Michael. It's been my pleasure.

Michael: Thank you.