Executive Summary
New financial advisors often start with below-market fees – sometimes to build confidence that prospects will actually pay, other times to attract clients quickly and establish a base. But as the firm grows, so does an advisor's skill set and the demands on their time. And while new clients often come in at higher fees, early clients may still be paying well below the firm's current rates.
As such, new firms that start with low fees might make plans to raise fees quickly and, in the meantime, avoid promising clients that the fees will stay the same. But what happens when an advisor did make this promise – and now needs to increase their fees anyway? How can they handle the conversation fairly while maintaining trust with long-standing clients?
In the 159th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to navigate the ethics and logistics of fee increases for a firm's first clients – especially when the advisor previously promised them their fees would stay the same.
As a starting point, it's important to acknowledge that many advisors feel a deep sense of gratitude and obligation toward their first clients. These were the people who took a chance on a new firm, often building multi-year relationships with the advisor. However, it's worth distinguishing actual promises from emotional obligations – in some cases, advisors may feel bound to a commitment they never explicitly made.
It's also important to consider the business impact of maintaining lower fees for early client segments. As while one or two clients paying below-market rates may not hurt the firm's financial health, several clients for whom the advisor granted exceptions can spell trouble down the road, either by impeding the firm's growth or the advisor's own capacity to sustainably produce high-quality service.
If an advisor did make an explicit promise never to raise fees but now needs to do so, the best course of action would be to have a direct face-to-face conversation. Acknowledging the past promise and explaining why the fee needs to change with honesty and transparency can go a long way. The advisor may emphasize how the firm has grown, compare the client's fees with the current market rate for financial advice, and help them understand the value of the service they're receiving. The advisor may be surprised by how understanding many long-standing clients will be – but for clients who are unable or unwilling to adjust, the advisor may need to guide them to a firm that better fits their budget.
Ultimately, the key point is that fee adjustment conversations – especially with long-standing clients – are rarely easy but may often be necessary. By approaching the conversation with honesty, clarity, and empathy, advisors can maintain trust and fairness while ensuring their firm remains sustainable… and may even be surprised by the client's reception. At the end of the day, charging fees that align with their value allows advisors to grow their firms and continue delivering great advice to more people!
Authors:
***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 YouTube Music.
Show Notes:
- Kitces & Carl Ep 140: Are You Worrying About Scale Before You Even Have A Scale Problem
- Graduating Clients The Right Way: A Thoughtful Approach To Sustainably Transition 'Small' Clients To On-Demand
Kitces & Carl Transcript
Michael: Well, greetings, Carl.
Carl: Hello, Michael Kitces. How are you?
Michael: I'm doing well. How are you?
Carl: Things are good. Yeah, things are good.
Michael: Ski season is good?
Carl: No. It was 55 degrees yesterday.
Michael: Oh, no. So in Park City, this is not a good thing.
Carl: This is not a good thing.
Michael: In DC, we're very happy when it's 55 degrees because it's a less punishing winter, but...
Carl: Yeah. Not a good thing.
Michael: ...not so much there.
Carl: Yeah. But that should change the next couple of days, hopefully.
Flipping The Script On Firm Profit [0:38]
Michael: So for today's episode, I wanted to talk to you about an interesting question that cropped up from some of our wonderful advisor listeners who... So a couple of months ago, we did an episode talking about the challenges that as our businesses grow over time, as our skills and capabilities grow over time, often, either if you're in an AUM world, you tend to migrate to larger client like bigger dollar clients and your minimums go up. If you charge planning fees, your hourly fee tends to go up or your subscription fee tends to go up. And one of the comments that I had made was, "Look, we see this happen so naturally in our data and our research around advisors that often one of the biggest things that I counsel new advisors when they're getting started is, "Look, if you need to compromise on your fees at the beginning because you're just trying to get initial clients, initial revenue, and prove to yourself that this thing's going to work, you can get people to pay you for your advice, that's fine." Make the compromise that you've got to make to get the initial traction and survive so you can get to the better days later.
But I think I said something to the fact, whatever you do, just don't promise the early clients like, "Hey, you're taking a risk on me. You can have this super special price for life." Nobody really cares that you promise... No one who's starting with you now really says, "Well, I'm not even sure you're going to be in the business in a year or two from now, but I'll totally work with you because you promised in the 2030s that you're going to give me a fee discount." No one actually cares that you're promising a discount like years and decades from now to make this commitment, but sometimes we do it. So I had...
Carl: What was that part?
Michael: Oh, it just comes out of your mouth. You were so desperate to get those clients. You're just…
Carl: ...Just comes out of your mouth.
Michael: Right. Like, "What's your financial planning fee?" "Oh, well, it's $3,000, but I do it for $2,000. Actually, $1,500 is my final offer and I'll give it to you for life." And they haven't even said anything yet. You just talk yourself straight down. We all do this when we're getting started. We fee compromise. My council on guidance at least has been like, "Just don't promise it forever." And so, of course, as advisors, we have these wonderful ranges of things that we've done in our business over the years. So, I got a question from one of our listeners who said, "So, what if I did promise?" No joke. "What if I did?" I think this advice said, "Now my minimum fee is $10,000 a year, like million dollar accounts, $10,000 a year. But I have some of these clients that came on board that were $100,000 or $200,000 ten years ago. They're $300,000 now because they've grown a little bit. They're way, way below my minimums. They're much lower than everybody else that I'm serving. But I gave my word. How can I possibly go back on it now? At some point, this isn't even a business thing. This is an integrity thing.
Carl: Gosh.
Michael: I can't go back on my word now. So the question became, so what do you do... Yes, we said, don't promise this for life, but okay. What do you do if you really did?
Carl: That's such a good question. And it's kind of humorous. And then I feel this deep empathy because even if you didn't... I want to talk about explicitly doing that, but even if you didn't explicitly do it, there's often the feeling that you did...
Michael: Correct.
Carl: ...whether in your own mind or even in the interpretation of the client or whatever. Even if it wasn't this clear. But let's talk about it being this clear first because in this case, it was. Man, that's interesting. My first response to this, and I'm curious to get yours is that... The first thing I'm thinking is, "Gosh, it's such an interesting. This whole dilemma is so interesting." Profit's really important to me. Making money is really important to me. And it's mainly important because I think of profit as permission to keep making the impact that I want to make. And yet having said that, it's not the only thing that matters in life, that's for sure. So I get all tied up in knots when we talk about always having to move our fees up and charge more money. And I get all tied up in knots. But when I get back to it, it's like, okay, if profit equals permission, if that's the principle, at least in my mind, and I know other people have different views of this... What?
Michael: Can you just explain that? I'm actually not sure how much you've talked about that on the podcast before. What is profit equals permission?
Carl: Yeah. And I want to be clear about this. You can't use this as an excuse to do terrible things. And nobody listening to this would do that. But some people have said, "Oh, so if I make profit, I have permission?" No, that's not what I mean. What I mean is, to me, a whole bunch of things changed about how I feel about sales and marketing, my monthly meeting with my CFO, my income statement, all of those things. At first I was like, "Ah, whatever." Even a little bit of, "That's dirty. Don't get in the way of my creative, impactful work." Once I started realizing, "Hey, man, if you want to keep making an impact, profit is the fuel for making that." The only thing I really care about… the current project I'm working on – and we'll get back to this advisor question – but the current project I'm working on, all that really matters about the current project, the main goal of the current project is to earn permission to do the next one and to keep doing that for the next 30 years of my life.
Michael: Meaning, make sure each project is profitable enough that you can do another thing.
Carl: One version of permission is profit, like audience permission, trust, all those things come in, but let's just narrow in on... So what I mean when I say profit equals permission is profit equals permission to keep doing the work I'm doing. As an advisor, if the business isn't profitable, you will not be able to do it anymore. And so that's where, if we'd be okay, and again, you could argue about this and we could debate it, but to me, that's the central financial principle of running the businesses I think of is once I change profit equals permission, it's, "Well, I need to make this business sustainable or else I'm not going to be around."
So then that's how I would view this question through that lens of, "Okay. Boy, I made a commitment. That's really important to me." Then we quickly devolve into that head stuff that we got to talk about a little bit, like these people took a chance on me and all that stuff, which you hinted at. So then I'm like, "Well, I got a choice." I look at this if it's sustainable and maybe I'd make a decision that I made. I feel like I made a commitment and I'm going to stick with it. Maybe that's the decision I make. Maybe I make a decision like, "Wait, I know I made a commitment, but I've got new facts now. Things have changed and this isn't sustainable anymore." And I have to have an open, "Hey, I know I made this commitment to you, but I can't continue to operate this way." And I make a decision there, and that would involve a very direct conversation, but I wouldn't hide it. I would acknowledge it. So, anyway, tell me where your head goes.
The Sustainability Of (The Volume Of) 'Discounted' Financial Planning Clients [09:11]
Michael: I think it's so as usual, like I follow a different path, but I get to a similar place as you. And again, this was written in, so I didn't get an opportunity to ask follow-up questions. My first question when I hear a scenario like this. Are we literally talking about a client we promised?
Carl: Yeah. Yeah.
Michael: Or are we talking about a big swath of clients...
Carl: Yeah, I love that.
Michael: ...that we promised? Because the first thing I do think about is really what is the impact on the sustainability of the business in the first place? The reality is, I was saying sometimes, growth in business forgives a lot of business sins. There are things that we've done that maybe weren't ideal that we can grow our way through. Okay. I've got a couple of clients that aren't profitable, but I'm growing now with the core who are. I make sure that all new clients come in are sufficiently profitable. And if I've got a little base of people that maybe are from the past and legacy, maybe are exceptions, maybe are accommodations, maybe you're just people that I want to serve in the community and it's really not about the profit, you can always make the decision for the business to say, "I've got some segment of either literally pro-bono clients or substantially below market fee clients because reasons," whatever reasons you want those to be.
This is a pro-bono thing, this is a community thing, this is a give-back thing, this is an honor your commitment thing, this is a legacy thing, whatever it is. There are a lot of different ways that we might want to say, "Hey, a segment of my clients are going to be knowingly less profitable or literally not." And as long as that's a not terribly large segment, okay. If you want to make the decision to run your business at slightly lower margins or you've got partners and you've come collectively to decide that it's okay to run the business at slightly lower margins, to manage this, you get to do that as a business owner, as a practice owner. You really do get to make that decision up to a point. And the point is when there are so many of them that the business isn't really viable and sustainable and now you can't grow, you can't hire, you can't promote people, you can't delegate and free up your time.
I've seen some advisors that go through versions of this challenge and it's like, I've seen your business, a few of them, I've seen your financials. You're doing fine. Just ride it out, call it a gracious thing you're doing for a segment of clients to move on. And then I've seen some others and you're working 60 hours a week. I am watching you burn out because you have so many of these clients that are so far below the fee that it takes for your business to be sustainable that you are literally unsustainable. The business is not economically viable or it takes so many hours from you to do it that you are not sustainable on this path. We don't really have very capital-intensive businesses usually. We don't go under because we can't make payroll. We go under because it takes so many hours from us to do the thing that we burn out and we don't have enough revenue to hire people to delegate it to because of these scenarios.
So my first question becomes, really how many clients is it? How much impact are we talking about? Because almost by definition it's either not enough clients to matter, so then peace be with you, make whatever decision you're going to make, and move on. Or it's enough of them that it does matter and threatens the sustainability of the business. And at that point, then just all the stakes change because now you're literally talking about burnout, sustainability, the ability to support and keep doing this business and serving people the way that you want to serve and I guess I'm intrigued by your profit equals permission from that. And if you don't run a business that's profitable enough because you have too many of these exceptions, you're not giving yourself permission to sustain this great service that you're doing and this great thing that you're trying to create for your community.
Carl: I love that.
Michael: Then it has to change.
Carl: Yeah, that's really helpful framing just in, what are we talking about here? Really helpful framing. Two things I want to mention. One is there's a population of people who are listening right now that are like, "Totally relate." They come to retreats here. We do the Society of Advice retreats here. And every retreat there's a good chunk of people, I would say is 30%, 40% of people who are in this place where they're in tears, "This is unsustainable. It's impacting my health. It's impacting my marriage. It's impact..." All of these sorts of things. So there's a group of listeners that will resonate deeply with and they'll be like, "Yeah." And then there's a whole another group of listeners are like, "Whatever. Nice problem. I love it."
And I think it's really... It makes sense unless you've experienced it. It feels like a problem I would wish to have. And it might be maybe. I just want to point out that it's a real thing that this burnout issue of trying because so many of us are so service-oriented and so committed to impact and wanting to make a difference. All those beautiful things we just have to guard. Guard's not the right word. We just need to be thoughtful about. I always try to remind people, "Yeah, but if you're not around five years from now, you're not making an impact on anyone."
Michael: Well, you're not going to be providing them advice of these fees indefinitely if you have to shut down your business in another year or two or three...
Carl: Exactly right.
Michael: ...because you're burning out because you can't hire the support that you need because you don't have the revenue where it needs it to be because there's too many clients that just are not economically viable level to sustain.
Getting Non-Profit Value From Client Relationships [15:43]
Carl: Totally. And then the other principle I really love is this idea of just being really clear about both value creation and value extraction. And I think value creation, you got to be really clear about the value you're creating in people's lives. And we have spent and we could spend more episodes talking about value creation. But I think it's interesting to just think about what is the value that you as the advisor are extracting from this experience? And you pointed to it. It could be community. It could be I'm keeping my word. Profit revenue is only one form of the value we get out of these relationships. So there could be relationships that takes us a backseat to some other value that we're extracting. I don't love the word "extract," but it's the right word for this. "Man, I get so much out of helping that person because it just makes me feel good" – well, that's valuable to you. That's a value. And you're just going to be intentional about thinking through that in the scenario where you're like, "Okay. What's really going on here? What impact is it having?"
Well, I love adding one more question to that, and so it's like, "What's the value I get from this relationship?" Because in some cases, profit may not be revenue. Profit may not be the most important thing you're getting out of a relationship. It could just be fulfilling a commitment you made to yourself or others, it could be a community. It could be you're learning so much from this one experience because of, I think, lots of reasons. You're learning so much that you're actually getting so much knowledge and impact. Maybe you're helping somebody who's really, really good. I'm thinking of a relationship I had once with a...she was a deeply trained psychologist that focused on executive coaching. And she didn't pay the fee that... It was one of my least profitable clients, but I learned so much in every interaction from her that that was the value I was getting out of the relationship. And that's okay. As long as I can continue to run my... I can't pay my bills with that though.
How To Have The Fee Adjustment Conversation [18:02]
Michael: Yeah. So let me bring us back the other direction, though. I feel like we're all really good at coming up with the rationalization of the reason of why we shouldn't have to deal with this situation or there's an acceptable reason that says we should be able to hold on to this client or these clients.
Carl: Right. Stories.
Michael: Because I'm presuming if it's a problem, we're almost certainly talking about multiple many clients. So let's say it is. We've done the math or whatever. The business is under 20% margins, which to me is an advisory firm that doesn't have a lot of room and capacity. If you pay yourself a fair wage to be an advisor and you pay your staff and the number at the bottom isn't 20% at the end of the day, your advisory firm tends to have some challenges and issues. Or if you're getting to a number that's higher than that, but you're working 60 hours a week because you haven't hired yet. And if you actually hired someone to work a reasonable number of hours, your number would drop below that. You still have that problem. Some of us are like, "I got a wonderfully profitable practice." I'm like, "Yes, but you work a redonkulous number of hours and it is not healthy for you." So if you can't hire the staff to work a healthy number of hours, you've still got this problem. So let's say we're there and we have this problem. How do you actually deal with this?
Carl: Yeah. I think this is really, really simple. Not easy. You just go have a hard conversation. And I think that conversation looks like, "Look, this has been your fee." And if you're really clear about the idea that you now... This I think is important. The email we're addressing here was somebody who was very clear that they had, it sounds like, made an explicit commitment.
Michael: Yeah. The comment we got, "I gave my word."
Carl: Yeah. Yeah.
Michael: "How can I possibly go back on it now?"
Carl: So if that's the case and the business is unsustainable, then I think, again, you have a very... This is a very simple solution, but not easy. And it's even particularly not easy... It's even harder given the framework we've set up here. But you just say, "I know I told you that you'd get this for life." You'd have to say something like this. "I know I told you that this would be your fee for life, but I'm going to just level with you. That's not sustainable as a business for me. And let me walk you through." And then you're back to the normal fee-raising conversation. And again, there might be some objections...
Michael: I think I would be in the same place. You would just come back to them with, "This is where it needs to be." And then it'll be their choice. You don't have to you have to fire the client per se, but this is where the fee needs to be for us to be sustainable or this is where the asset minimum has to be, if that's your model for us to be sustainable, or I'm a fan of set a minimum fee. Either they'll get there by paying it outright or they'll get there with assets and they can make that decision. "But this is where the fee needs to be in order for us to be able to serve you and all of our clients sustainably. Would you like to do that?"
Carl: Yeah. And I think there's two things that are important. One, deep empathy for the change, just understanding. And then don't over-index on it, because what I think will happen based on all... We've both been through hundreds, if not thousands of these...watched advisors have hundreds, if not thousands of these conversations either with an email that went out or... And they almost always go way, way, way easier than you expect. And so I wouldn't over... I would have deep empathy for the idea that you're changing something, but I wouldn't over-index on it, meaning, I would actually be surprised if you sat down and you said, "Look, I know I made this commitment 17-and-a-half years ago or three-and-a-half years ago or whatever and that this would be for life. But as I've built the business, I've come to realize I made a mistake there. I can't run a business on that."
And in fact, market, here, here, here, and here. You can go into all the rationale on why, in this back-to-value creation, you're really clear. And this is the same conversation we have any time you're raising fees. You got to be really clear about it. And then I think it's really easy to say, "Look, I would love to keep you. I've enjoyed working with you." But this is what it needs to look like going forward. And so I'm committed to two things. One, I hope that works. And two, if it doesn't, I will do everything in my power to find a great home. I'll help you with that. Go interview advisors. I'll tell you what I think. And so we're just deeply human acknowledging both sides of the situation. Don't you think?
Michael: Yeah, I very much agree. It's just one of the crappy realities that hits almost all of us at some point in the grown-up world. When we're kids, you learn a promise means a promise. And when you're an adult, sometimes you get to that point of have to acknowledge, "I made a promise that I'm just not going to be able to keep." And I have to have the... You as you said. What was it? A simple, but not easy conversation of, "I'm so sorry, but I made a promise that I really can't keep. We cannot sustain the service that we provide to you and all of our other clients at the fee that I promised you originally to hold. And we need to update our fees to reflect current business realities so that we can serve sustainably. And this is where the number needs to be for that to happen."
Carl: And again, even hearing you say it, a promise that we can't keep, I just want to recognize this is hard because I'm the same.
Michael: It's awful.
Carl: Nothing drives me more crazy than seeing people lie and call it marketing. These boundary conditions and these lines are really, really fuzzy, but I think one of the important parts of what you're pointing at is you, I think one of the parts of making it a promise that needs to be changed as an adult is that you do owe it to the person you made the promise to to acknowledge the situation. Rather than, "Hey, we're changing our fees." That may be the normal discussion. But in a situation where you felt like you made an actual promise, an actual commitment. And I think, look, the reality is if we were to stick with this commitment I made back then with the information I had at the time, we can't run a business.
When Charging (Some) Clients Less Actually Isn't A Business Problem [25:18]
Carl: And then I just want to soften things real quick. Let's get outside of the narrow band of "I made a commitment." There's so often we feel like we made that commitment.
Michael: Oh, yeah. They took a chance on me when I wasn't that experienced and maybe didn't even really know as many things as I know now. I feel like almost all of us have this debt of gratitude feeling to the first few clients that were willing to work with us, that took a chance on us, that got us to where we are because I wouldn't be at the place where I can work with these somewhat more complex higher-dollar clients today if they hadn't been willing to be one of my first clients back then. I feel like virtually all of us feel some very significant debt of gratitude to the early clients and want to do something with them.
Carl: Yeah. I think that's similar the thought process as you talked about. And I want to point out one really important part, which I just think the framing you set up was really, really good, which is, what are we talking about here? Because I do know plenty of advisors who are my... One of my favorite answers to this is, "You know what? I don't even think about it anymore because those 10 or 15 clients. The business is profitable."
Michael: That's why I start...
Carl: "I'm making more money than ever. It's not a problem."
Michael: That's why I start...
Carl: I love that answer.
Michael: ...is it really a problem for the business? And I've seen it both ways. Sometimes it bags at us like I've got some clients that are really below market and I made some promises. Okay. But is it actually creating a problem for the business? If it's not, you can still change it because it's your practice and you get to decide who you work with and what you charge them. But if it's not a problem for the business, it's not a problem for the business. But if it is a problem for the business, it is a problem for the business. And to be forever and always like one of the defining characteristics of successful business owners is that they make the hard decisions, which is the thing. I feel like it's thrown around a lot of us and say, "Well, I've had hard things where I had to make hard decisions." No, no. This is one of those actual hard decision moments. Hard decisions means decisions that don't always feel great, but they need to be done because it's the right thing for the business to be sustainable, to be able to continue to serve.
And that's the mindset I think about it in. This isn't a, "Well, I didn't take on all not-for-profit distributions last year, so I think it's time to raise your fees." Maybe if you want to do that, that's your prerogative. But I very much think about this in the vein of there's a point where you just decide to be a little less profitable or not. You get to decide what margin you want to run on your business. And there's a point where you're running the business at margins and profitability so low that you're burning out, you're spending too many hours, you can't hire the staff that you need. You're at risk that in the next bull market and market decline or fee decline, you're not going to be able to make payroll. There is a threshold where you're just giving up a little bit of profit or not because you choose to and there's a point where there's so much at risk that you really could tank the business, and then you're not helping anyone.
Carl: Super interesting. And I love... Even you mentioned it again in that last couple of sentences around, can I continue to have the impact I'm having? And everything that goes into sustainable, all of it. So, yeah. I think that's great. I love that framing. Thanks.
Michael: Awesome.
Carl: That was really good.
Michael: All right. Thank you, Carl.
Carl: Yep. Cheers, Michael.
