Kitces & Carl Ep 153: Evaluating The Tradeoffs That Come With Retaining ‘Legacy’ Clients

***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.

Show Notes

• Kitces & Carl Ep 10: Transitioning Long-Standing Clients To Create Room To Grow
• Kitces & Carl Ep 57: Transitioning "Good" Clients Who Simply Can't Be Served Profitably

Kitces & Carl Transcript

Michael: Well, good afternoon, Carl.

Carl: Greetings, Michael Kitces. How are you?

Michael: I'm doing well, I'm doing well. We are, as of recording, coming to the tail end of conference season. We were both out at XYPN Live a few weeks ago. For anyone who's wondering, I'm very sad to say the blue couch was not there. We did not get to sit on the blue couch together. I will admit I was very sad about that. We really have to fix this, Carl. It has been too long...

Carl: Since Denver.

Michael: ...since the blue couch. Since Denver, since the blue couch, because for those who are following, we sat together on the couch at a conference in Denver. But it's been too long since it even made an appearance on the podcast.

Carl:  Yeah, I will fix that. I will fix that. But I don't know. It'll be interesting to see if the conference is ever within driving distance, if the blue couch can make another appearance, for sure. It's still here, it's still live. Everybody loves it.

Michael: So, we just need more conferences in Salt Lake City area so you can bring it down.

Carl: Yeah, I drove to Denver. Yeah, Vegas, Denver, Salt Lake. Any of those would be great. Would be great.

Michael: So, speaking of sitting on the couch, laying on the couch, I thought today could be a little bit of a therapy discussion day. Maybe I'm framing this...

Carl: Leading a bit?

Michael: ...a little bit too much, leading it a little bit too much. So, here's the core of what I was really interested in talking to you about today because, to me, this is one of those. There's a problem with a really clear spreadsheet answer, give you the answer, almost no one does it, which means they do it for things that you are much better at than I am. So, I want to have that conversation.

How Advisors End Up With Underpaying Legacy Clients [02:04]

Carl: Yeah, what's the problem?

Michael: So, the problem, so, when we start as advisors, as the joke goes, "If they can fog a mirror, they're a prospect," you get anyone you can at any dollar amount you can, at any revenue you can because literally, anything is better than not having clients in revenue. Usually, there's no small amount of gratitude that goes with it. "Thank you so much for actually being one of my first clients." And still today, I know many advisors feel indebted to their early clients who took a risk on them to let them be their advisor. And so, we virtually all build this way. And then the business grows, and we expand. We get to some personal capacity. A lot of us start adding team. We add admin support, we add another advisor. Maybe we even start shifting clients around to increase capacity as the advisor comes on board. And we get to this point where I find for so many firms, the business is doing pretty well, but it's not as profitable as it could be... "as it should be". You're doing all this work, you're entitled to make a profit for the business that you're working in.

And it comes down almost always to some version of...I always thought Bill Bachrach phrased it as well as anyone, "Doing too much work for too many clients for too little money." Because none of us seem to know how to serve any clients at less than our best. So, the whole like, "Well, just do less for your C clients," I find none of us really know how to do that. Maybe you can deliberately schedule fewer meetings, but I'm not going to not answer questions and help a client that calls. And so, as I view, we get stuck in this realm, where, simply put, there's a whole bunch of "small clients," lower revenue clients, usually, it's that whole bundle of people that we started with at the beginning who don't pay enough now to cover what it takes to run the business, especially once we are to start adding team, and staff, and infrastructure, and office space, and more software, and all the things. There's a lot of flexibility when it's literally just me serving clients. But the moment I've got other team members and overhead, this starts to change a little bit. And so, we end out with these books of clients that have a base of clients that don't pay enough to cover what it takes to run the practice and have them as part of the practice.

And then the business is marginally profitable, and it's not making as much it should, and it feels like, "I'm working really hard and a lot of hours, and I'm making okay money, but not what I'd hoped it was going to be. And I can't figure out what to do."

Carl: Right.

Michael: And so, 'spreadsheet me' comes in like, "This is a relatively simple problem. Make a list of your clients, how much time you spend on them, how much revenue they generate for you, find the ones that are literally unprofitable – there's a bunch – and find a way to do something about it." We can graduate them. We can do a partial book sale of a segment of the client base to some other advisor for whom they would be great. We can institute minimum fees and say, "If you're willing to pay here so we can service you profitably, then we'll do that." So, there's a lot of choices.

And I find most advisors don't do them. They don't do any of them because of a lot of reasons. Like, "They took a risk on me. I owe it to them. If I let them go, they've referred other people, I don't want that get back to the other people. A word will get out. I'll get known in the community as one of those people, whatever quite that means. But apparently, it's bad." All these different ways, I find that that firms get stuck. Any analysis will say, "You're having trouble being profitable or growing or reinvesting. You can't hire the team that you need to get to the next level or even to free up your time and make your business better for you because there's too many clients and not enough revenue." And yet, most of us are remarkably unwilling to do something about that. And I don't mean that in a judgy way.

Carl: Sure, sure.

Michael: Not doing the thing. But that's real. When almost all don't want to do the thing, clearly there's more to the thing than the thing.

Carl: Yeah. I think just for context, I'm still surprised at how common of a problem this is. You said everyone has a legacy client issue, and obviously "everybody" who's been in the business a little while has a legacy client problem. But I'm surprised at how often it comes up. And for the people who are listening who are like, "Wow, what a great problem to have!" ... Well, it's coming your way soon. And I think it's important that we can talk a little bit about how to think about that, too. But for context, I think, there's real deep empathy around this because all the reasons this problem exists is because we're like, "These are good humans trying to help people."

Michael: Yeah. Like, "I got in the business to help people."

Carl: For sure.

Michael: What does it say when you got in the business to help people and then you out...?

Carl: Fire someone.

Michael: You outgrow being able to help them anymore.

Carl: And we've all come up with all this language to avoid firing. We call it graduating or transitioning. And I think that's helpful and important. But it's in the end of the day, the answer almost always is there's a group of households, human beings that live in houses that you may even know where they live that you're going to say, "I can no longer serve." But I want to paint the other side of the picture, too. This has real implications. The retreats we've been holding at my house, every retreat, there's one, if not multiple people, who end up getting quite emotional about how overwhelmed they are. Like, "I can't do this anymore. It's affecting my health. It's affecting my family." And when we say like, "What is it you can't do anymore?" and we dig in a bit, it's almost always, "I have too many clients. I have too many clients, I just can't."

Michael: Too much work for too many clients for too little dollars.

Carl: Yeah. And they're aware, too, of like, "The burden is also partially because I can feel that I'm not doing...not only is it having an impact on my health and my family, I can feel I'm not doing the job I want to do. All of those things." So, it's real. It's real. And so, what we want to talk a little about today is why because we've talked about what, or are we talking about what as well, what to do?

What Are Common Business Tactics To Use With Legacy Clients? [9:51]

Michael: So, again, to me, there are tactics out there about how to deal with this.

Carl: Right, right. Lots of them.

Michael: We talked about some of them prior episodes, graduating clients, and how to do it gracefully, implementing minimum fees so you're not firing them. You're just saying, "Here's what it costs for us to provide you ongoing service." And if they want to, they can fire you. It's easier to help them fire you than it is to fire them. So, some of us go that route. What has struck me is the stories we tell ourselves to not have to deal with this, to not have to face this. I was at a conference last week and talking to an advisor. Absolutely, there's a version of this. Grew a wonderfully successful practice, has not let go of a single client since the day he started. And so now has a zillion small clients in addition to some very high-dollar, very profitable ones.

So, the business works in the aggregate because basically, his top 20 clients subsidize the cost to run the business for the rest of the client base. And as he puts it and insisted like, "Well, they just don't take that much time. They don't call that much. Their needs are not that high. I've been working with them for a while. They're in a good place. Their needs aren't that high." It's like, "Cool. So, tell me more about your practice and what that looks like." And he had something like 250 clients that he was working with, like 50 really good ones he probably got in the last 5 years and like 200 that he got in the early years he started in the insurance side of the business. So, you tend to have a lot of small legacy clients from when you did early business, him plus 3 team members supporting all these clients.

And he's maintaining like, "They don't take that much time. This isn't that big of a deal." I was like, "So, are we at least in agreement that pretty much all of your profitability comes from the top 50 clients or something?" He's like, "Yeah, I can acknowledge that." He's like, "But again, the other 200 don't call that much." Like, "Well, if it was literally just you with your top 50 clients, how much team would you actually need for literally just you and them?" He was like, "Well, maybe 1 of my people. He's like, "There's only so much work to do for 50 great clients." Like, "Cool. So, for clients who never ever call, why do you have 2 extra team members? You just said it's maybe you and one of your team to service 50, but there's 4 of you for all 250. So, apparently either your team plays a lot of solitaire, which I'm guessing is not the case, or these folks add up to more service needs than you realize."

And then we started down discussion like, "How much revenue do you think they actually generate?" And we basically came to the conclusion that the bottom half of his book actually generates less revenue than the 2 people he has to employ to hold on to them. And so, he's just flat-out losing money. We talk sometimes about the 80/20 rule, like 80% of the profits come from the top 20% of the clients, and the truth for him is it was more like 120/20 rule. So, 100% of his profits come from his top 20 clients and a 20% excess that he was making because he was losing on the other 80% of his clients. And that was maybe a particularly lopsided version. But it started with, "Well, they don't take that much time," and it's like, "Well, they apparently do because you hire a lot of people that don't look bored because apparently there's a lot of stuff to get done." But it becomes one of the stories that we tell ourselves, to explain... I don't know, I'll say to rationalize, to justify. And again, I say those words as though it's wrong to make the choice he made. I don't want to cast it that way.

It can make the decision to run firms that maybe are a little bit less profitable and do a little bit more service work because we believe that's a good service to do to our community, to the people we serve okay. But the fundamental thing that worries me about how this trends just plays out that I see one person after another is a version of what showed up or what shows up for you at the retreats like, "I'm burning out. It's just so much. It's a constant onslaught of the clients I've got to serve, and the team I've got to manage, and the people management plus the client management, plus all the things. And I can't take a vacation. I've got to constantly be on call for them. And maybe if I hired 1 more person, I could finally get my head above water, but I really can't afford 1 more person. I'm already staffed heavy with 4 people for the clients I've got because I'm subsidizing the lower end of my book." So, the business math doesn't work to create the staff capacity would take for them to get their head back above water. And just I worry about it from the perspective that I'm worried we're going to lose great advisors in the long run because some of us will burn ourselves out entirely before we sort of deal with this issue more head-on.

Getting Clear On The Business And Personal Trade-Offs That Come With Saying 'Yes' (Or 'No') [15:59]

Carl: Yeah. The idea, first of all, it's we get to run whatever kind of business we want. And if you run a business where you want to keep people around forever, including staff and smaller clients, all that stuff, it's like, "Of course." It's just I think here it's a function of being intentional about it, but I'm far more interested in people that know it's a problem, like it's a problem for them, for whatever reason. The burned-out folks are the people that feel like it's a problem and the not changing there is really interesting because that's just a function of in this case that you've painted either awareness just of paying attention to the implications of the decision. But these are trade-offs that we're making. And when the trade-off...what's that great old saying that...? Change only occurs when the pain of staying the same...sorry, the pain of staying the same gets greater than the fear of making a change.

And I think if you just start sitting in that for a little while, it's... And I'm so fascinated by this because this is not a tactical problem. This is actually quite simple not to be confused with easy. And the reason it's not easy is because it's an emotional thing. But the simple part is like, "Okay, any consultant/..." There's probably 5 episodes of Kitces and Carl about how to do this, and everybody else could tell you how to do it too. So then, if you become aware that you have that problem, like, "This is burning me out..." And I've had that conversation so many times, like, "I can't do this anymore. My health is suffering. I don't have time to work out." And I went through that. This is really why I ended up selling my firm was because I had to make a choice. "I can continue to do the other work I'm doing and clients suffer, or I can stop doing the other work that I really love and serve clients." And not making the choice was unfair to everyone involved because I was suffering. And clients, I think were getting great service at the point, but they weren't going too soon if I didn't make a decision.

So, I think realizing like, "Okay, getting really clear about the cause of the problem..." I'm going to just call it pain, "the cause of the pain," and then getting really clear about the trade-offs you made. This is always the same case with by saying yes to one thing. I think this is so fascinating about yes and no. By saying yes to one thing, you are saying no to a myriad of things that you don't know about. Like you say yes to those clients, you might be saying no to coaching your daughter's soccer team. You might be saying no to going to your 50th-anniversary party for your parents. I don't know what you're saying no to, but saying no is a precision decision. You're saying no to one specific thing. So, I think getting clear about what the pain is, getting really honest about the trade-offs you're making, and then look them in the eyes. Stop running from the trade-off. Stop hiding from the trade-off. If you look at the trade-off in the eyes and say, "I'm willing to make this trade-off," that's totally within everybody's right to design the business they want.

Michael: I think that's good framing. It still leads to some pretty hard questions or comments, those sort of look-in-the-mirror moments like, "Okay, so, I'm saying yes. I'm going to continue to serve my clients this way, even though there's some challenges to it. But, okay, that means I'm going to say no to working out and getting healthier because I don't have time to do that as I manage my 250 clients and my 4 team members and doing all the things that I do." Or, "Yeah, I'm not going to be able to coach the soccer team because my hours are too long, because I'm doing all the things that I'm doing." Or, "We can't do the vacation that we were talking about because that's a little bit more than I'm comfortable to spend, because the business isn't quite as profitable as maybe ideally it could be."

Carl: And by the way, you should have a list on the other side of like, "But I'm making a huge contribution in my community, and I get to serve these people that have really made a difference in my life." Whatever those stories are, onthe other side of that trade-off equation, and you just have to decide. And that's why I think so beautiful about life, to be honest, is I don't know, I don't know what the right decision is. But I do know that being careful about experiment design around this, being clear about the trade-offs, thinking clearly and not running from it is probably a good idea. That feels like a good idea.

Why Legacy Clients May Be More Willing To 'Right-Size' Their Fee Payments Than Advisors Assume [21:21]

Michael: Well, the challenge to me is just that it...truly, it feels like an inevitability when you grow an advisory business. It's like when you grow a thing where you get better at it the longer that you do it, which means eventually you tend to solve more complex problems for clients who will pay you more to solve those problems, and that eventually creates some challenges around the people that you worked with originally. I can't remember actually if I've told the story in the context of this podcast. So, my mother is the younger of 2. And when her older sister was off to college, a very good friend of hers at college, his name was Stan. And Stan, after he finished school, went to dental school and became a dentist. And because my aunt, my mother's older sister, my aunt and Stan were both a few years older, by the time my mother graduated from college got married a few years later and was ready to start a family, Stan had graduated from dental school and opened to practice. And so, as my parents started their family and had me, Stan got started as a dentist and my parents became one of his first clients. So, I am almost 47 years old, and Stan is the only dentist I've had for my entire life.

Carl: Oh my gosh.

Michael: Stan has been my dentist literally since before I had...

Carl: What's so funny about this is this is not necessarily surprising to me.

Michael: Oh, yes, I am a very like plant roots and set. I also live a mile and a half up the street from the house I grew up in and my parents are still there. We are very plant roots.

Carl: But it is beautiful.

Michael: So, I have had the same dentist for 47 years, or 46, or 45, or however long it was when he went in to check out my first baby teeth to make sure everything was going okay. Stan does not charge me 1977 prices when I go to see him, though. Stan built an incredibly successful career. He's a very sharp guy. He built a great dental practice and some really cool specializations around the work that he does. And God bless because Stan did such a great job, I am 47 years without a cavity. So, I spend a ridiculous amount of money on an extremely high-end skilled, experienced, capable dentist as someone that has never ever had teeth problems because I've never had a dentist besides Stan. And I really don't want to go through the stress of finding another dentist. I trust Stan in everything that he says because he's been my dentist for life, and he has never steered me wrong because my teeth are doing great.

But relative to our discussion, I'm one of Stan's legacy clients. And he's raised prices on me 47 times in 47 years. And I don't begrudge him that. I'm thrilled to see he's successful. I make the choice about whether I want to pay the rates that he charges, even though I don't really quite need the level of fantastic care that he gives because my teeth are in a great place. But I'm happy to do it. I value the relationship. I've got a sentimental attachment as well. And so, there's nothing negative to me about the fact that he prices me at what it costs to run a dental practice today. And I don't think for one moment about the fact that he chose to charge much more than he did in the 1990s, or 1980s, or 1970s when I was born and started with him. It's nothing negative. I don't begrudge him that. I certainly would not for one moment ever actually expect that he would charge me what he was charging 10, or 20, or 30, or 47 years ago as his going rate. And I make the choice about whether I want to pay what he charges today.

And the answer is I do because I value the relationship, which frankly is what I see for most advisors when they actually go down this path. The clients that really like and value what they do, they tend to stick around. They're okay paying more fees. They realize they're kind of below market because they've maybe thought about going somewhere else and shopped around for another advisor and went like, "Oh my gosh, my current advisor charge me so much less than everybody else. I'm going to stick with him or her." But I find for most of us, we still live in this world of, "Because Michael's parents as a young family decided to take a chance on my dental practice in 1977, I'm obligated to still charge them the same fee." And no one expects that.

Carl: Yeah, I agree. And what you're pointing to is sort of the stories we tell ourselves about why we don't do the thing. And those stories are pretty potent, and we've talked about them before, and you can never talk about them enough because just really, it's just stories. So, it's interesting to think about and just ask questions like, "Is that really true? Is that really a rational reason for me to make this trade-off that I'm very uncomfortable with between my, whatever, my life, my health, my family, my practice, my profitability?" Whatever your metric is. And so, I think you just try to break the stories down. One thing I think is really interesting that I'd like to talk about just real quick as we wrap up is there can be an upper end to this. You could define because there's one version of this that was made popular. I think it was probably Nick Murray that was like, "Every year, go in and fire your bottom 20. Make room for 20, and they have to be hot, your new biggest clients."

Michael: Higher than the ones that you let go, and you just keep rotating up. Yup.

Carl: Yeah, there's that version of that. But there's also the...which is fine. Again, as long as it's done honest and openly and in a transparent way, I don't believe there's a moral challenge here, even though it feels like it often. Maybe there is. I don't know. But there's also another version where you say like, "There is enough. We know plenty of examples." My cliche version of plenty of examples is James Osborne, where you're like, "This firm as currently built with these now 80 clients is enough. It's profitable enough. I'm getting referrals in that are..." because I've tried to refer clients to James that I knew were way above his average. And he said no because he knew if he brought in another one, it would start to be a trade-off that he wasn't comfortable with. And his client base is profitable enough for him. That's a beautiful business, too. So, there is an upper limit to this idea of you don't have to continually be making it more and more profitable. There's a place where it could be enough.

Michael: Well, absolutely. I felt a version of this actually not on the advisory side with clients, but ironic of all things, in the speaking business. As the speaking side of my career grew, there was a point where...not dissimilar to how I tried to grow when I was taking on clients. You set a threshold for the value of your time, and I'm not going to do it if that's below like, "This is the value of my time." You draw a line. And as you grow your business or career, you reset that line higher and you lift it up. So, I lift minimum fees over time, lift speaking fees over time. And it got to a point where I realized that my pricing was pricing me out of some of the organizations I really liked to work and was leaving me with some organizations that I was a little bit less excited to work with. They could pay the bills and then some, but it wasn't the groups that I wanted to talk to that gave me a lot of excitement and energy. "I want to talk about nerdy financial planning things with people that want to talk financial planning." And so, I found there was a version where, yes, I kept raising fees and minimums. It's kind of the filter. "Here's the value of my time, and I want to make sure that I only work with people that will value my time." And then eventually, that filter broke.

Carl: Yeah, you mentioned this at XYPN Live. I thought this was a really beautiful discussion.

Michael: And I realized I had to reset the filter. The deciding lens that I would use of what I say yes to and what I say no to couldn't just be based on the price in dollars because it worked fine from the business. I could have kept growing speaking piece further, but it wasn't allowing me to do the work with the organization that I wanted to work with ,and the dollars were enough to solve for the ability to save for my family and send kids to college and retire. And so, yes, I think there's a world where...

Carl: It's enough.

Michael: ...your filters adapt and change. So, on the one hand, maybe you're moving upmarket, up clients enough, that the filter is enough, but at the same time, I think part of the challenge is a lot of us start out with a filter of, "Anyone who wants me to serve them and is willing to pay me is a qualifying client." And we keep that filter. And when you grow to a certain size where you have to start doing things like team, and infrastructure, and overhead, and other costs, that becomes a much more challenging trade-off because it starts to show up much more directly to trade-off. When I have a lot of time and not so many clients and any incremental clients is fine, it's not positive. But once you start hitting capacity, now these become trade-offs of time, health, family, profitability cash flow, ability to reinvest, ability to keep growing and serving more, which I can't do because I'm strangled by the ones that I've got. And to me, it becomes another version of, yes, you can dial those filters too high, but there's also a challenge with not updating the filter and recognizing that your practice now is in a different place than it was when you started 3, 5, 7, 10, 15, 20 years ago whenever it was. And if your filter now is the same thing that you used then, it may not serve you well at this point.

Owning The Trade-Off (Beyond Financial Incentives) [32:59]

Carl: Yeah. It's so interesting. I love these kind of questions because I don't think there's a right answer. I think it's just a tension that will never be resolved. And as long as we're aware of the tension, that's the most important part. Because even on the speaking thing, it's so interesting, like if I say yes to a speaking engagement. It's so interesting that in so many cases we've allowed money to do this weird job of helping us decide what's worth it or not. And if I say yes to a speaking engagement, I've got to realize that I may be saying no to attending something really important. I've missed things because I was at speaking engagements. And at what point is it enough and I can say yes and be okay with it because that's an organization I really want to speak for? That's a tension.

Michael: Yeah. I think the way that you framed it to just own, let's say the tension, but own the trade-off, I think is really powerful to say like, "Yes, I'm keeping a higher client load. And that means I'm not going to be able to get to the gym more often the way I've been talking about." Or, "I need to work more hours," or, "I make enough, and I don't need to make more. So, I'm going to keep some of the smaller clients because I don't need to grow it more." Some of those can be fine, trade-offs and decisions we make. Others may be more binding. And so, I think just owning what the trade-off is is really powerful.

Carl: Yeah. Yeah, I really think that's all there really is to do here, is just be really aware of the trade-off and don't hide from it. You right?

Michael: Yes.

Carl: Hey, Michael, super fun. Thank you.

Michael: Awesome. Thank you, Carl.