#FASuccess Ep 111: Why The Right Advisory Fee To Charge Is The One That Not All Clients Say “Yes” To, With Jim Stackpool

What You’ll Learn In This Podcast Episode

• Where the value of financial advice comes from.  [05:33]
• The definition of enduring and profound value.  [07:38]
• Why Jim is trying to get away from “client for life” thinking.  [15:44]
• Why a goals-based conversation isn’t enough—and what to add to this conversation.  [19:34]
• How to figure out your pricing model.  [28:40]
• What firms should start doing to make advice more valuable.  [43:55]
• How fiduciary regulators are cracking down in Australia.  [53:19]
• Jim’s prediction for the future of financial advisors in Australia.  [1:01:57]
• Jim’s take on making advice more valuable to consumers. [1:09:16]
• What he says is the only way to grow.  [1:20:00]
• Common blocking points for most advisors who want to be business owners.  [1:24:06]
• What’s next for his business and his consulting work.  [1:27:37]
• What success means to him.  [1:31:32]

Resources Featured In This Episode:

• Jim Stackpool
• Certainty Advice Group
• Value-Based Pricing
• ASIC "Fee For No Service" Report 499

Full Transcript:

Michael: Welcome, Jim Stackpool, to the "Financial Advisor Success" podcast.

Jim: Thank you, Michael. It's great to be here. Thank you for having me.

Michael: I'm looking for today's podcast because, as some astute listeners may have noticed in just your welcome and introduction there, you have a bit of an accent. You are a practice management coach for advisors from Australia, and I think our first time in having an international guest talking a little bit about what financial advisor businesses look like elsewhere in the world.

You know, as we're going to talk about today, Australia I think in many ways mirrors the financial advice world here in the U.S. There are a couple of countries around the world that have kind of evolved similar systems: Australia, New Zealand, the U.S., the UK, but, you know, your kind of regulatory ecosystem looks a little bit different than ours. It's had an immense amount of change over the past couple of years. You know, we have been fighting over fiduciary rules here in the U.S. for the past, I don't know, about nine years now since the Department of Labor first proposed a rule in 2010. You've had your own version of regulation there and most of it has happened. It's been implemented. It's been rippling through the system. I know you're now going through the second round of regulatory changes. And so I think it gives an interesting glimpse of what fiduciary regulation may look like in our future to see how it's playing out there and all the unintended consequences or maybe intended consequences from some of your regulators of how that regulation is rippling through and starting to really change the financial advisor landscape there.

So just, I'm excited to talk regulatory change and industry change. And I think the question it ultimately raises for everyone on the other side, which is, "What the heck does an advice business look like on the other side of all this regulatory change, and how do you explain the value of advice?" Which is, you know, when you take away all the products and all the rest, like, surprisingly hard just to explain what's the value of that ephemeral advice thing that we all struggle with? And I know you have spent a lot of time on.

Jim: Yeah. And I think it's important for the listeners to understand that I myself have always been a consultant to advisors, I've never been an advisor, but for the past 26, 27 years here, we've worked with great advisory firms who have been predicting probably the current state of the market here in Australia and how it's been changing. And in some ways, everything old is new again. It's simply just focusing clearer and clearer on the value of the advice the client receives.

Where The Value Of Financial Advice Comes From [05:33]

And even that question you just put there, it's almost impossible for an advisor to articulate the value they deliver because it always comes from the client. And so one of our advisory firms we work with here, they're very, very good each year at identifying the value that the client is seeking, and that's their value proposition. They can talk about what they do, but really, the value of why the client pays their retainer, and we'll talk about I'm sure, all our clients are using retainer fees, the value they put towards that fee, whatever it might be, $80,000 or $100,000, is based on the value that the client is seeking. And so the client give you the value proposition every year.

Michael: Which to me in and of itself is an interesting framing, right? Just to say the value of the advice comes from the client. And I feel like to some extent this is sort of like intuitively, "Well, yeah, of course. Like, I gave them advice on implementing this product and they saved some dollars, you know, and that was their benefit." Or, "I gave them advice about making this change and here's how much they saved in taxes." But I think you're talking about something a little more fundamental in how value is perceived than just like, "I can do the math on my client's balance sheet and see how much financial impact it had on the client."

Jim: Yeah. So we talk about that's expert value. And so, just like I expect my surgeon, she or he, to be expert with the scalpel, I don't see them using a scalpel as very valuable, I see that as a means. I expect that they're good with their cash flow or they're good with their asset allocation. They're good with their underwriting. They're good with their estate planning for aged care. I expect that, the expert value. That's a fundamental value, which whether we accept it or not, most of our advisory firms would say that's becoming commoditized and easier for clients to get distracted on some of the offers that might offer a similar sort of expert value but really it misses all the nuances and the warm and fuzzies and sometimes cold and prickly advice people need to take, which is beyond just being the expert.

The Definition Of Enduring And Profound Value [07:38]

And we talk about valuing what we like to call the more enduring value or even profound value, which is not so much what I'm doing with my cash flow or underwriting or asset allocation, investment portfolio, it's what that is that enables the clients to do from an aspirational perspective. It's what enables the clients to proceed through transitions, as Mitch Anthony spoke about on this podcast quite well. It also helps them get through complexities of events or complexities in behaviors that if left unmanaged, your best cash flow plan or asset allocation is going to go out the window as soon as they leave your office.

And so we see the profound and enduring value, terms we use when we...is much more beyond the product stuff, the tax work, and getting that into probably the heads of the advisors about how much value they really add there. That's almost behaviorally working on the advisor themselves to say, "There's terrific value in that. And in fact, you've been probably overselling the expert bit and terrifically underselling what we call the enduring or the profound bits."

Michael: It's an interesting framing. I love the analogy of, you know, the doctor using the scalpel, right? The scalpel is a means, the ends is whatever procedure or surgery they're using. But clearly, like, the value isn't in the scalpel. You couldn't do the surgery without the scalpel, so we do need it. It is very important that it's here, but the value isn't in the scalpel, it's a means to an end. Which I think is an interesting metaphor for, you know, what happens when you think about all of our financial services products that way. Like, we need to use them, you know, it's part of the process, but the value isn't in the product in the way the value isn't in the scalpel, the value is what you're doing with it, how you're applying it and the outcome that you're achieving it. And just to call that expert value. It's like the value of an expert is, I know how to use the scalpel in a way that gets a good outcome and doesn't just cut you.

Jim: But if you look at most of the websites of great advisors, it's full of scalpels. And that in itself is what I think too the product origins of the current financial planning industry here in Australia, and to a certain extent in the US too and the UK and New Zealand and South Africa, because of our product origins have come from a product conversation, our website still reflect probably a past era of where we were told or were supported or the supplies we've used, "This is the value." And I think that's a transition we'll see. And it's being pushed by regulation here in Australia as well away from that. Not saying that the products are as crucial as the engine in our car, but sometimes I don't need to get a car, use a car to go from A to B, and sometimes we're not actually valuing the journey as people come to those waypoints, and they take the wrong turns because they've been influenced by things that don't help them stay on the best path towards what it is that's important or they need to overcome in their financial lives.

Michael: Well, I think you have a good point that, you know, as you said, like, because of our product origins, you know, we just tend to come at these as product conversations. I'm still struck by it. Even our landscape today, you know, certainly I think the advisor industry here in the U.S., particularly those at sort of the forefront of the advice realm, you know, are really trying to focus on holistic value propositions that go beyond the products, that go beyond the portfolio. But then when you look at, like, literally some of the leading research here in the U.S. that tries to quantify like what is the value of financial advice? So Morningstar did a study, they called it Advisor Gamma, and estimated that 1.8% of the client portfolio is sort of the advisor value-adds, tax advice around the portfolio. We have loss harvesting rules here. You know, just helping clients close the behavior gap and not undermanage themselves.

Vanguard did a version of the study. They estimated the number at I think almost as high as 3%. They called it Advisor Alpha. Envestnet had another one, they called it Sigma. But, you know, all of these sort of getting at the value of advice, you come up with this number somewhere between 1.5% and 3% of the portfolio. And, you know, it sounds great. Like, typical advisor fee, 1% or 2%, value proposition, 1.5% to 3%, like, thank goodness, value greater than cost, this means my client should hire me. But the thing that's always struck me about it is we keep doing this math as a percentage of the portfolio, which was the product. And not that client doesn't need a portfolio, that gets implemented and asset allocated, right? Like, it's important themes. Like, no doctor calculates their value based on how many scalpels they use, and we still calculate our advice value relative to the portfolio that we're influencing.

Jim: And as does our client. And so I think, and listening to...being a big fan of yours for a long time and listening to your podcasts, and I always wait with bated breath, and I do know I need to get out a bit more, but I do wait with bated breath for that, "Well, how do you actually price this?" And quite often is we have it in Australia where the clients are used to paying 80 bips or 120 bips. And so when we are actively presenting it in a different way, well, why are we making it difficult for the client if they're expecting it that way? And I think this is where being at the vanguard of, "Well, let's build something that's going to be long-lasting, give us great careers, give us great businesses, give clients great outcomes, and actually start shifting what I call that pricing lever," because it is a moveable lever. And I think Gary, last week's podcast about podcasting was talking about the different levers, but most advisors are still looking at the pricing lever as being so embedded and fixed in that stone of thumb that I think they're running into all sorts of problems without addressing the real issue. Tell the client how much you're worth in dollar terms and wait for them to say, "Yes, that's fine."

Michael: So how do I set those dollar terms? I mean, particularly if you're talking about...I mean, we're even talking about the challenge of quantifying expert value and, you know, trying not to calculate your value in the number of scalpels that you use. But when you start talking about these items: enduring value, profound value, which, like, I love as a label, but, like, I don't know, I guess, like, what is profound value and how do I get any remotely close to valuing that, right? To say like, "Here's my fee in dollars, are you comfortable with that?"

Jim: Yeah. And I think this is where we're still babes with this Michael, I guess, and we've been doing it for a long time, and every time we do it, we find out how much we really don't know still. But we like Bill Bachrach and Dan Sullivan and John Bowen and Ross Levin, Paul Etheridge, George Kinder. We're fans of Maslow thinking. And if we have a conversation, whether it's a Bachrach or Bowen or whoever, Mitch Anthony, about really understanding, the client will articulate in that first 15, 20 minutes every year in a consistent, methodical way using whichever technique done by those gurus, "What is this profound or enduring value?" They'll articulate it to us. Our job then is to have the courage to, when we reflect and replay that back to them, to say, you know, "What is the value for us now to deliver and provide the best possible path that keeps you on path to achieve that stuff?" And when we say it's $5,000 or $50,000, for us to shut up and listen to them to say, "Okay, that's valuable for me."

Michael: So help me understand what this conversation looks like. Like, are you suggesting, you know, literally, as I sit down with a client every year for some annual renewal meeting, like, I'm having some conversations to the effect of like, "What have we done in the past year that was valuable for you?" Or is this more forward-looking like, "What are you hoping I'm going to do for you this year that's going to be valuable for you?" Like, what question am I actually framing?

Why Jim Is Trying To Get Away From “Client For Life” Thinking [15:44]

Jim: So there's a...and this is our approach, and there's lots of different approaches, lots of different things, and so I'm not saying this is the right way, but this is the way we have found with our advisory firms, that we only engage generally. And so, we're trying to get away from the concept of client for life because that's not business thinking, about having a client for life. It's client for as long as we're adding value to the client and the client is paying us enough profits for us to build a firm and have a lifestyle that we can repay that in service and value.

But each year we would sit down and craft a conversation, it's no more than an hour for an existing client, most should be no more than an hour and a half for a new client, where we, in that hour and a half for a new client, we understand the client's life enough to put most, not all of their financial issues on a single page. And we picked this up from Russ Alan Prince and John Bowen's work at CEG Worldwide many years ago, which is really, really back then right ahead of its time, in our opinion. Give the client, "Here's your financial life on a single page." Map it using some sort of mapping software, put it up on a screen, then show them, "If this is all the geography on your life showing the people you need to work with, the process we need to follow, the priorities we need to take, the complexities we need to overcome," then show them the specific path we're going to take this year and maybe five to seven years out from there, again, using a simple graphic.

And then present a document that's taken ideally 45 minutes to hour and a half that has no product recommendation on it at all. We're not making a single product recommendation, which here in Australia is important because if there's a product recommendation, it's deemed to be product advice. And so there's no product recommendation, it's simply a strategy, "We're going to do some cash flow and then we might do some property then we might do some asset allocation." And then we present the fee. And we price that fee based upon, probably in a firm, most of our firms turn over somewhere between 3 million AUD to 10 million AUD here in Aussie. We price that based upon up to six different retainers, and we have a variability on those retainers, which is then presented as a fee. We don't want you to sign now. We love that thinking. We picked that up from Bill Bachrach many years ago. Go away three days, come back, and now let's determine if this relationship is going to add value for you and us.

Michael: So I'm still struggling a little just because I'm trying to vision this relative to our landscape. Like, can you give me an example of what this might look like? You know, say I'm a client that's come in, I'm, you know, a prospective retiree, I'm hoping to stop working in a few years and retire. I've got some portfolio assets saved up. I'm trying to figure out if this is going to work and if I'm on track and I need someone to help oversee the dollars between now and then. Like, if I'm that prospect and I'm coming in, like, what does this process look like for me? Like, what's going to get shown to me or communicated to me?

Jim: Okay. So I think initially, for a new client, we're big believers, again, we haven't made this up, we've picked it up from working with...the many trips we've made, U.S. and UK, the first 30 minutes to 45 minutes is what we call, "Why does it make sense for us to work together?" And it is, as others on this podcast have eloquated much better than I have, the whole why conversation. To identify what we call the fundamentals. Which of those things about, "I want to retire, I want to have cash flow, I want to have lifestyle, I want to have security, I want to pay the bills, I want to be confident in my life?" And then we probe clients to understand what we call the signature outcomes that are unique, unmet and will require money, advice, or planning to achieve. And they're starting to give us what we call the enduring tabs. These are the enduring things. And it's like most classic, aspirational, goals-based, outcomes-based advice, whatever we may call it.

Why A Goals-Based Conversation Isn’t Enough – And What To Add To This Conversation [19:34]

We then find, here in Australia at least, because of the growth and growth of what we call in Australia the industry superannuation funds, which is huge pension funds where people can get advice virtually for nothing, that just having a goals-based conversation is not enough. We have to also have what we call a complexity-based conversation. And so this person heading for retirement, the conversation beyond goals then needs to just understand, "What are those things that are hindering you or stopping you from achieving these things? Is anyone stopping you achieving from these things?" Because we believe that a goals-based conversation without understanding of the complexities the clients face as soon as they leave your office is probably going to leave them with a great plan but hasn't taken to account the behavioral or the psychological issues or simply the relationship, the circumstances the clients are finding. And then we have a conversation about...

Michael: But, I've got to pause you there. Like, that's an interesting point and framing, of, "A goals-based conversation isn't enough, we need a complexity-based conversation that ask clients, 'What's hindering you from achieving these goals that you just said you wanted to pursue?'"

Jim: That's correct. And bear in mind, sometimes they're sitting next to the hindrance. Bear in mind it's their spouse, significant other, it's their family. And quite often, we found in the approach to really understanding who you're treating, I'm not treating the one member of the couple's balance sheet or investment portfolio, I'm treating usually a family, or it could be a business. I could be doing this with a small business and have many partners around the table, to understand that sometimes the greatest complexity isn't trying to find the best investment performing fund, that it's trying to get some sort of alignment between people who have got very different goals, very different behavioral traits.

Because we do immediate debrief. I'm jumping ahead a bit. We do immediate debrief after these discovery meetings, and there are some 24 different complexities we ask our clients to identify which may have been articulated or may have been witnessed or observed without any articulation. Because the greater the complexities, the greater the price. If there's going to be an issue where someone is absolute perfectionist and wants to actually see every cell of their Excel spreadsheet, if we're going to have someone that's been overspending or someone that's been burnt in the past or someone that doesn't get on with their partner, I'm going to put that price up because I'm going to need to do more work on helping them change their overspending habits or...

Michael: Those are some interesting complexities even that you raised, right? I think in the U.S. here, like, when we talk about complexities and complexity-based pricing, we tend to be talking about things like okay, they own a business, that's messy or, you know, they have some, you know, unique investment holdings or properties, like, okay, that can be a little more complex. But, you know, some of your complex terms were...that you just mentioned were things like, they like seeing the details of everything on a spreadsheet, which just makes the process more complex because those engineering clients want a lot of detail and that takes time from everyone. So, like, just literally reflecting the price that way. Or, "This client has a history of not following advice effectively, we're going to charge them more because I literally know this is likely to be a problem client." Those are interesting ways to frame complexities.

Jim: This client is impatient. This client is impetuous. This client feels isolated. This client has had a significant family situation change with divorce or death. This client is highly risk-adverse. This client has been a victim of bad advice. So we literally provide the platform for our clients when they come out of these meetings, grab this.

And it's really important to grab this detail about the complexity while it's still fresh before you go to the next meeting because if we priced it simply on our understanding of what the works need to be done and not the understanding of the implementation of the work then we start having what we call enduring and profound discoveries. That it's not about the best asset allocation, it's about having someone that holds me accountable to do the things I want to do but have never really been put on the table before and identified as my overspending, it's my need for significant control, it's my lack of actually bringing my significant other into annual conversations and having it on the table, as uncomfortable as they are. It's my desire for absolute perfect financial performance, which by in itself is something that's going to be a huge price if you actually want perfect financial performance all the time.

Michael: And is this like a list of complexities that you would, like, give a client as a questionnaire, like, "Which of these things apply to you?" Like, it sounds like a few of these might not be taken well by the client if you label this way, even though it is the reality of their situation.

Jim: No, no....

Michael: Or are these more like, you ask questions to try to get at and understand these things and then when you get to your debrief phase, you're starting to check off boxes on a form?

Jim: Yeah, I think Russ Alan Prince, you know, years ago and this work he was doing with Merrill I think, you know, he started to have this conversation in our head about, "What are the different psychologies of," as he called, "The affluent investor?" And we've sort of looked at that and think, "That's interesting." We've put it to our clinical psychologist that we use and said, "Well, how do we go about really..." It's just simply pulled out from the work that Russ was doing years ago, for us to sort of see that beyond just our glib analysis of what behavioral, financial, and psychological issues the clients must have, we need document so that the firm can consistently, methodically, and specifically make sure that they understand that it's got less and less, for some clients, to do with the best asset allocation and more and more about bringing two people who generally want to stick together, love each other but have got terrifically different habits and approaches and outcomes or even aspirations of what they hope their future life together would look like.

Michael: Yeah, I can't remember who it was. I was talking to someone recently that made this I thought incredibly powerful point that, you know, this whole goals-based conversation that the industry has kind of revolved around over the past few years is what was...in their words is kind of nonsensical. Because he said, "Look, at the end of the day, if the clients had a clearer understanding of what their goals were, you know, they just plug them in any number of software tools online, point themselves to that direction and do it." Like, almost by definition, if they're in your office having trouble then either there's a blocking point that's hindering the progress to the goal, in which case the issue is not that they need a plan of how to get to the goal, they need a solution of how to overcome the problem that's keeping them from getting the goal already. Or, they don't actually know what the heck their goals are, and, like, this is a goal discovery process, right?

You know, I had one of these conversations with someone recently where, you know, it was one of these, like, "I want someone to...you know, I want to know if you guys can help me get better returns in my portfolio." And so, you know, we start peeling the layers of the onion like, "Well, why are the returns so important?" "You know, I'm really anxious about retirement." "Why are you anxious about retirement?" It's like, "I've got to get out of my job soon." "Well, why do you want to get out of your job soon?" "Because I'm really miserable." And I was like, "Well, if we could just help you find a different job where you wouldn't be miserable, could we talk about that instead of the portfolio?" Like, "Yeah, that'd be wonderful." And, like, it ended out being a client conversation about finding new and different work. It had nothing to do with investment returns. You know, that was the stated goal, that wasn't the underlying goal. The underlying goal was, "I need to get out of my miserable, crappy job," so you say, "Well, let's just talk about how to get you out of your miserable, crappy job." And it was the wrong goal.

Jim: Yeah. And I think 90% of your listeners have got into the job they're doing today because they want to do that for more people. But unfortunately, we want to do that, and the elephant at the end of that conversation is, "Well, okay, I'll clip a ticket on how much money you've got," because that's, again, the origins of the industry and how we get here and how everyone else does it and how you're expecting to be charged, so I'll do it that way. But that advice to help that person get out of that crappy job, that could be worth 6, 7, I don't know how much the client might put value on that, regardless if they've got $1 in a firm or $1 million in a firm.

And I think giving advisors a path, a community, a process, feedback support for them to build a real sense that, "You know what? There's a lot of clients out there that will pay because I know they're doing it now. They're paying me X thousand every year to have these conversations with them about behaviors that once they pass 35 years old, they're always going to be bad savers, they're always going to find it difficult to...they're always going to be overburdened by significant debt. They're always going to be too conservative or too...money for them is status or privilege." There always is going to be that person and they're always going to need, I think, a great advisory firm that calls them accountable to the paths and the goals and the aspirations and the complexities that need to be managed or overcome. And I think that's having us on a retainer to do that stuff. And yes, we'll handle the events when the tax comes at a time it comes, the wedding comes, the children leave, the parents get old. They're fundamental.

How To Figure Out Your Pricing Model [28:40]

Michael: And so how do you set a dollar amount to it, right, when we still have to ultimately get back to, "I need to price a fee?" You know, it's one of the things that's always fascinated me. You know, for most of our history as advisors, we never actually had to price our services because it was set by, you know, the product providers that dictated what the commission was. You took whatever they gave you. And then even as we migrated to assets under management, at least here in the U.S., the overwhelming majority of advisors are roughly 1%, at least on sizable portfolios, a little higher when you're lower, a little lower when you're higher because it's a graduated schedule. But, like, you could always safely price around that number because it's more or less what everybody else was doing. But the minute you try to charge like just for the advice itself, like, you come off of all those guideposts and it gets really hard to just sort of pluck this number out of thin air like, "What's the value of this conversation I had with the client that may or may not have changed their life?"

Jim: Yeah. We're big fans of Ron Baker's work, of Alan Weiss' work, of Nagle's work with value pricing, and so we're standing on their shoulders, and we're just continually doing it. I think also, a key point is that we're pricing 40 to 50 of our clients' files every week, and so we get to see the pre-retiree, the wealth accumulator, the post-retiree, the divorcee, the SME, small business entrepreneur. And we get continually confident amongst our clientele, at least, by seeing their conversations and their debriefs and what we think. When we see a file, we can say, "That's a $12,000 case," or, "That's a $24,000," or, "That's a $1,200 case." But our experts on the other side, our clients, our advisors who are saying, "Gee, where's Jim? And I was doing 1% with this client and I'm not too sure I was adding value for it," now going and saying, "Because you've got $1.2 million, it's going to be $12,000." Where do you get that? And so it's an evolution, I guess is the first point, for every advisor who wants to move across to something that's simply stated in dollar terms.

And be very clear that pricing conversation is very different to the payment terms conversation, but we're pricing it based upon value that takes two things into account. Ideally one, some reference point. And the reference point is simply, well, what's the available hours? It's the whole thing we used to do in accounting 101. What's the available hours? The available resource. I want to make at least minimum of 40% EBIDA every year. And so if I was going, this is the sort of return. So you've got this starting point which is based upon some sort of simple spreadsheet on resources, time available, returns, and profitability.

And at the other level, you've got a demand point, which is not all business is good business. Because if you're accepting 100% of the business, you're too cheap, and if you're not winning any business, you're too dear. And what's the point in between? And being willing for the market, the market of new business and the market of your ongoing business to set that point. And that is probably, Michael, one of the biggest leaps of faith we help our clients, our advisory firms take. That we say, "You know what? If you had three great clients this week and you could help them all and you put down what you think the price is for all three and you want them all, you really can add significant value to them all." But you know, when two of the three are accepting and one is just saying, "You know what? It's just too expensive," your price is about right.

So we're saying up front, when two-thirds of your new business is saying, "You know what? That dollar figure, it's not cheap but it's valuable," then that's about right. And for the ongoing clients, and this a bit more controversial here in Australia, probably less so at the moment with our later stage of regulatory reform, but we don't believe in hanging on to 100% of clients every year because I can't build a business that way if I'm still holding on to a proposition that I sold 5, 10, 15 years ago and servicing those people as they expect 5, 10, 15 years ago whenever they call and still do a proposition today. And so we say when about four out five of your existing clients are saying, "You know what? It's still valuable for me," that price is about right. So you've got to have this, one, the setting at the beginning about what's the capacity, and two, the demand at the top. Because I don't want to work ridiculous hours. I don't want my team to work ridiculous hours. I want to do quality work, but I can't be all things to all clients, and I can't take on all clients.

Michael: And so this is an interesting piece. You know, the first part I get. In fact, I think we did a piece on this on our site a couple months ago as well. You know, if you're going out and pricing your services, you know, just whatever you're charging clients, like if 100% of your clients are saying yes, you are not charging enough. Like, there should be some tension. If everybody likes it, a few of them would have paid a whole lot more and probably still...

Jim: I think it's a good strategy for getting going. Once you're getting going, once you've passed what we call the activity phase, that strategy will kill you.

Michael: That strategy will kill you.

Jim: If you just keep taking them on.

Michael: Oh, yeah, yeah. Yeah. Yeah, early on, like when I've got no clients, I guess anybody who will pay me a fee and generate some revenue is fine. But the moment you start approaching capacity, yeah, like, you want a fee that creates a little bit of tension. You know, I tend to tell people like, well, if nobody is taking it, either you're charging way too much or you really need some sales training classes.

Jim: Yeah. And that level, in Aussie at least, is about a quarter a million Aussie. When advisor is getting close to that quarter of a million, no matter how they charge, commissions or hourly rates or retainers, you've now got to start questioning the yes model, where, "I'll take you on. I'll take you on. I'll take you on."

Michael: Yep, we see the same thing here in the U.S., you know, probably somewhere between $150,000 to $250,000 of revenue, and just you've got enough revenue per client adding up, you've got enough clients, you're starting to approach that capacity point. Once they're nearly, you have to re-evaluate. So if you're getting almost no one, well, you're pricing too high or you have sales skill problems. But you're not going to get that far. If you're at the other end of the spectrum then you've got to start raising your fees because you should be having some people say no.

Jim: That's correct.

Michael: The idea of doing with ongoing clients, though, I think is more striking. You know, for most advisory firms, at least that we see here in the U.S., there's not great data on retainer-based firms because we haven't had a lot of them doing it for a long time that we've measured. But certainly, when you look at the assets under management model firms here, most firms have 90-something percent retention rates. Good firms typically sit in the 96% to 98% range when you look like the top advisory firms in the U.S. that are running that model. And so when you make a statement like, you know, you should only...you know, only 4 out of 5 should stay, 1 out of 5 should go and if you're not turning over 20% of your clients you might be charging too little I think is a...that's a more interesting controversial statement I think.

You know, I mean, on the one end, like, okay, if I had a never-ending stream of clients, sure, I'd love to keep moving upmarket and rotating them out. But, you know, I mean, just that idea like, if I'm going to keep raising my fees to drive out, you know, the bottom 20% of my clients and only keep 80%, like, now I need 20% growth just to stay even on my client count. Like, that just feels like a big growth hurdle I'm creating for myself. Or am I not understanding the way that you're framing?

Jim: Yeah. I think there's a couple of things. And this is where the strength of this, as I called it, the fee lever is so locked in stone in our thinking that conversations continually come up about, "Shouldn't 96% be our target for retaining? You know, isn't that absolutely logical? Isn't it like a real estate rent roll, where I want to keep these clients coming back? Isn't it like a drug company's revenue stream on a line of drugs?" No, it's not. At this point I want to say, "No, no!".

Michael: I don't know if I would frame it in terms of drugs, but, yeah, I just look at it like, you know, funds under management fees are very profitable. You know, once I've got the client, like, frankly, it costs me a lot more to get an advisor to get a new client than it does to get an advisor who will just give fantastic service to my existing clients, even if they're not good at getting new clients because I don't need them to. And so it just creates this temptation, maybe it's a faulty temptation, I don't know, of saying like, "I've got this base of clients, I know they can be served profitably, often more profitably over time because I can remove myself from the equation and hire another advisor who is maybe paid a little bit less than I was as clients rotate through. And, like, why wouldn't I want to keep every darn client I possibly can?"

Jim: I think understanding my biases is really important to understand the answer to that question. My bias and I guess for the firms that we are appealing to is fundamentally around building firms that wish to be a principal advisor. So they wish to build a proposition that's consistent and specific and methodical in the delivery of their clients' lives as the clients' principal advisory firm. In that, if there's an issue of a financial matter, our firm is going to be the go-to firm. So we don't, Michael, have firms come along to us and say, "I want to be a much, much, much better investment advisory firm," or an insurance advisory firm or a credit advisory firm. They come to us on this principle of us, "We want to be the client's principal for a couple of reasons. One, commercially, it makes sense if we're controlling the whole of wallet financial decisions."

And so if we are the primary influencer, I'm not saying we're experts in estate planning or the law or the underwriting or the investment strategy, we can bring those people to the table. Our clients will never delegate the project management, the client management, the strategic management aspects of their clients' work, but they're happy to delegate, depending upon if they're an accounting regional or insurance regionally or investment regionally. But they want to be a principal advisor.

So under that thesis, excuse me, as being the principal advisor, and if we hear they've got retention of 96%, we say, "You are going to run out of lifestyle before you know what happened to you. You're not going to be able to fund your growth. You can't keep as a principal advisor unless you start wrenching this lever that sit in your rock about what you're worth. You're going to be building a great return for all your clients but you yourself are going to need financial advice to get you out of the hole you're putting yourselves into."

Michael: Because ostensibly, like, I'm just...the implication is, like, I'm going to hit capacity and not be able to serve these clients?

Jim: I can't. I won't be able to fund growth. I won't be able to control the hours I work. I think most of our advisors are really good. Well, all of them are really, really good at what they do, and they generate a very good natural momentum of good referrals. And not saying that sales are just falling in their lap, but they're continually having to handle the constant conversation about, "Are you available? Can you help us?" And as they build their own base, the clients want to keep coming back. But unless we start levering this pricing mechanism and not simply just put on more software and put on more people and open up another office, which simply doesn't...it keeps the worth conversation out of the future, it's just...when you get to that level of whether it's half a million, $1 million, $2 million, $3 million and you still think for a retiree that's got a bit of assets, maybe a bit of cash flow issues, maybe some health issues, they're going to be charged $6,000, we might put it up to $6,600 next year and $7,000, if you're still thinking that way as you grow your firm, you're severely depleting the real worth you can build and also significantly undercharging for their access to you.

Michael: So I'm struck that...you know, I think to some extent, this is perhaps a particular conversation around retainer models. Because, you know, for the classic assets under management model, the reality is, on average, my fees do go up every year. They go up by the base of the real return of the market because I'm charging a percent of a portfolio that's invested in the markets and generate some real return. And maybe then that's down slightly for my retired clients because they're drawing a few percent out. But, you know, at least with classic accumulator clients, like, if I just get a 40-something client and I'm working with them and they're saving and investing, my fee may double in the next 10 years just because the portfolio is kind of accumulating and I'm charging a percentage of the portfolio and it's going to grow with market returns and they may be saving on top, and so my fee just naturally lifts, which, you know, perhaps hides a lot of other sins along the way or not.

But, like, yeah, I guess we almost get the best of both worlds. Like, we get our 90-plus percent retention rates and we get clients whose revenue may double simply because we're charging on a portfolio and the portfolio is growing. But when you're in a retainer model, that natural lift doesn't happen. You do have to actually be much more conscious and proactive about, "How is your average revenue per client going to lift over time?" So, like, it's just sort of it's registering for me that this conversation seems perhaps even more salient in a retainer-oriented model than an assets under management model because that natural lift that portfolios happen to give in the AUM model isn't there with retainers. You have to be more conscious in figuring out how your fees are going up over time.

Jim: But there's a Kodak moment coming, isn't there?

Michael: How so?

Jim: Like, if we're not doing much for the client and we're continually having our fee retainer models doubling and tripling, the new entree into the market, the new fintechs are not going to allow that vacuum to go unfilled.

Michael: True. I think what ends out happening for most advisory firms is, at least what I see here in the U.S. that go down the road of this model is, as their clients grow and their average revenue per client grows, they often end out reinvesting back into the firm to do more services, to do more things, to give better advice, to hire higher quality advisors, you know, whatever means it is that they can upgrade their service and value proposition over time. And it gets pretty straightforward to do because the revenue is growing and the revenue per client is growing, so, you know, there's this...I think there's this mechanism that occurs of, "My firm's revenue is growing and my average client is growing, so I'm going to reinvest some of these dollars to make sure I keep these clients." And the service then start trying to lift up to meet the growing revenue, which I suppose is paradoxical, right? In the classic world, you lift up your services to justify a higher fee, we end out charging higher fees and then try to lift our services to justify why we should keep the client, but we just sort of end out getting there, at least on average, some firms more than others.

What Firms Should Start Doing To Make Advice More Valuable [43:55]

Jim: I think Mitch Anthony on your podcast said quite nicely, you know, they're now paying us more, so let's give them four meetings rather than two. If they don't value that, so if you sit down with them once a year and understand, "What's the value you're seeking?" And I might go from two to four meetings because now you've got a portfolio of X compared to Y, but that might be valuable from where I'm sitting thinking they're now getting the access as twice as much. But if understanding what's profound and enduring for them, well, that doesn't add much more value to me as compared to keep me on the path as to what I've described to you. So it might be valuable as the advisor, and this is the danger part about if we step too far away from that fundamental conversation, what does the client value? And having this consistent, methodical, specific approach every year that we can pick up from the gurus such as Bill, Bill Bachrach and the Kinders and the Bowens and the Etheridges, etc, and then relate that value, not by what we...I don't value whether there's anesthetic before the surgery, I just value getting my knee working again.

And I think the Kodak moment is coming, and it certainly...we've also got another issue in Australia, the regulatory moment, which I'll come to in a minute, but where I can get that level of service and my friends can get that level of service for 15 bips, not 150 bips, and just relying upon a growing portfolio, it's a dangerous longer-term strategy for anyone looking for 10 to 15 years ahead of them in this industry.

Michael: Well, and I do think you make a very powerful point that even or perhaps especially for those firms that, you know, are operating on models like assets under management where there is a natural lift in revenue per client simply because the market is going to carry us there over time, that you may be saying, you know, "I want to reinvest into my business and these client relationships because I want to retain them because they are financially profitable and lucrative and naturally growing," but you still have to be really careful about how you reinvest in your clients to try to lift your value to the fees that happen to be going up from the markets anyways because what we think of as value may not actually be valuable to the clients, right? And I think extra meetings is a fantastic example.

You know, we're in the metropolitan Washington, D.C. area, which is pretty well-known here in the U.S. for being one of the worst traffic cities across the country. And I have seen a phenomenon with a few clients over the years regarding them saying, you know, "Hey, you know, you had your business liquidity event, congratulations. You moved to another tier with us." We don't just call them A clients. Like, you know, "You're now at the A client tier, you get to meet with us four times a year," and had a client at one point basically say something to the effect of, "Oh, so great, now I get to sit in traffic four times a year to come to your office." Like, this was not good. Like, we're all excited like, "You get to see us more," and it was just really, I don't know, at least awkward to me moment of like, "But what if I don't want to see you anymore and I hate the traffic of coming to your office?" Like, we were completely not prepared for that moment of the conversation.

But, it is a striking point, like, "Oh, crap, what if we're actually doing such a good job in two meetings that that was all they needed? Now I don't know what the heck to do with them when I'm supposed to give more value and move up the line but they don't actually want more meetings from me because I happen to be going well with the two we were having."

Jim: Yeah. And I think it's such an infantile area, Michael, and I think, in some ways, the more we do it, the more we don't know what needs to be done. But I think the opposite is also true, that in a very, very, very short period of time, literally minutes, you can give advice that's worth $10,000 because you've been doing it for 30 years. And this is where we're not fans of the hourly rate model either, because, again, it's commoditizing the hour as compared to the value of what you may deliver in a minute or two. And so, it works both ways.

Michael: That's a striking way to frame it. That, you know, the hourly model commoditizes into an hour what you might do that's even more valuable in just a few minutes.

Jim: And so this whole, again, trying to loosen this grip we've all got and paradigms we've had. And for some of us, it's just too hard. It's just been there for so long. We're so ingrained that...and we hear it all the time, "Well, Jim, you know, my clients are in-country, New South Wales, we're a small town, you know, they're not going to pay city prices. And yeah, I can..." And we say, "Look, you've got to make a leap of faith." We say try it five times, share the recordings with us five times, let us write the engagement documents five times, and if at the end of those five times none of it gone ahead then okay, I'll buy it. But if we can get one of those five, well, can you do it again? And that's held us in pretty good stead for 25 years.

Michael: Just give me an opportunity to prove it with you for one of your next five clients.

Jim: You know, but it's just...because you're working with fundamental beliefs here, Michael. Not in the eyes of the client, but firstly, in the eyes of the advisor, that I've got to do stuff to add value as compared to just be here. The advisors, I'm sure most listening on this podcast are like our advisors, they know their clients' lives better than the clients know them. They know the market better than the clients know them. They know the laws better than the clients know them. They know the complexities better than the clients can see because they're blind to quite often the unknown, unknowns in their own life.

And so with all this knowledge, if we can just have a proposition, we call it the no surprises proposition, whilst you're with us, paying a retainer, you can expect a no surprises approach to your financial life to achieve the things we've agreed to, overcome the issues we know are coming and those that are unexpected and keep you on that best possible path. And if you're worrying too much about your money, you're not paying us enough money. Because that's our job, we'll take all the worry away. Because we're in that position objectively to know the market, to know them, to know the issues, to know the laws. It doesn't mean we don't toss and turn at night over their lives to ensure they're on that path, that's what we're paid for, just like a surgeon would before he or she does any significant surgery. But that's what they're paid for.

Michael: So I'm struck by this. I mean, a lot of what you're talking about I think is very much the same, you know, sort of struggles and challenges that we're trying to figure out here in the U.S. about charging for financial advice. You know, we still have a segment of the industry that's predominately compensated by the commissions of the products they implement. We have certainly the fastest growing segment of our industry that's getting compensated for their funds under management and, you know, frankly, deliver a wide range of services. So some firms really are just tending to those portfolios and not doing much else. Some firms are doing quite holistic financial advice propositions and simply happen to charge under assets under management, because as we said earlier, it works. It's what consumers are used to. We don't hear a lot of objections about it.

And then there's a front-end of that group that's trying to start just charging for advice itself. You know, I broadly label that category just fee-for-service advisors, right? Just advisors who are directly paid a fee for those planning services. And some are trying hourly and some are trying retainers and some are annual retainers and some are monthly retainers, but a lot of us I think are going through the same kinds of struggles and framing issues that you're talking about here of, "How do we price those services? How do we adjust the pricing?" You know, I love your complexity factors and complexity factors that aren't just factual complexity, they're client relationship complexities as ways to try to figure out, "How do we set that price?" And then start adjusting it for the particular prospect we're sitting across from.

Jim: Yeah. Yeah. And I think really another couple of important sort of biases, we always say that it's not a debate between if I'm professional or not. Everyone's professional. Well, most people are professional. They're acting in the clients' best interests. Like a great asset manager, she wouldn't put the client in the wrong portfolio that benefits her. She'd act in the best...a great underwriter, again, he wouldn't underwrite them incorrectly or say he can underwrite something he couldn't. It's not like a professional car salesman. They're professional in saying, "No, you know what? This car is not right for you. It won't be in your best interest."

And so all these people are professional, it's just fundamentally, what's the core value driver for you? If I am delivering great, really excellent, sophisticated and I love to deliver great investment portfolios and a fund model for pricing is knock yourself out. I think that is probably the logical attachment point based upon what you're doing. Or risk, no one can underwrite like you can for your specific niche and you're professional at it, you wouldn't underwrite things that don't fit the client's best interest then price on the underwriting. But our clients are aiming to be their clients' principal advisor, where there's no real or perceived, or perceived conflict with the advice that's being given. And therefore there cannot be, in our opinion, anything that might ruin that perception, that you're only recommending me to that approach because that's how you get paid. And we can't have that. And that's, again, another bias we have, not par casting any stones that anyone is saying the rest are unprofessional at all.

How Fiduciary Regulators Are Cracking Down In Australia [53:19]

Michael: And of course, the dynamic there in Australia is your regulators are kind of pushing everybody in this direction.

Jim: Yeah, I don't think they know where they're pushing at the moment. And we are at a very, very crucial juncture.

So coming back to the other point about, you know, funds under management model, it's quite comfortable to believe and assume in the past that once I get clients on, they've got a $100,000 or $1 million, I'll get a trail from that, and it'll just keep going, provided...you know, you've got to do something wrong to actually get rid of them or lose them. Well, now in Australia, I only am eligible for that renewal every two years. And so I've now got to go back, and potentially, this may even change even further subsequent to the Hayne report coming out in the next couple of months, that I have to be far more...I can't sit on a trail. Sort of the centerpiece of our huge inquiry we had in Australia last year was a report called 499, released by the equivalent of the SEC over here called the Australian Securities and Investments Commission, which fundamentally put out a report back in 2016 called the Fee for No Service Report. And it really was shooting fish in a bucket, aiming at the big institutions here in Australia.

And we have some very big banks here in Australia compared to the U.S. Our four biggest banks are part of our top 10 companies in Australia. And because we've got such a...how would you say? I suppose the closed market in some way. We've only got four major banks, and three of the four banks are now exiting advice even before the findings of Hayne are released because the brand damage. Our fifth, supposedly the fifth pillar of the financial services industry, a company called AMP, its share price has been decimated. It's lost its chairman. It's lost its CEO. It's up for potential criminal charges. And so Australians, by reading the headlines.

Michael: All stemming from advice indiscretions.

Jim: Yeah. And these were known. I think this is the interesting part. The Australian Securities and Investments Commission, the SEC equivalent, they found these indiscretions back in 2016 and they issued a report, 499, and it was in the press. And at the time they had fines of somewhere in the midst of hundreds of millions of dollars as a consequence of it. Nothing really happened. There was a bit of what we call enforceable undertakings here in Australia, which means, "Well, I'm not going to take you to court about it, but we're just going to have some ASIC officers oversee the advice and make sure we're just really on top of your compliance procedures."

Michael: Yeah, we have some of those too. You know, paid a substantial fine without admitting guilt.

Jim: But now, thanks to the headlines and thanks to the process, that couple of hundred million is now in the billions of compensation and remediation that now needs to potentially be paid. And they will put people...well, you have to see. We haven't had the Enron effect out here. We put people in jail. And so the fee for no service, and my clients have been telling me, "You won't believe what we now have to do to substantiate the service and show the meeting notes and show the diary notes and show we gave advice and ask them to come in and they didn't want to come. We've got to have those file notes, otherwise, we're going to be hit with fee for no service."

Michael: And so just for context, like, I think fee for no service sounds like it's sort of the functional equivalent of what we here in the U.S. would probably call reverse churning, which is just you charge an ongoing fee for the client, but you didn't actually see them or do anything for them, so why are you still charging this fee?

Jim: Well, you send out newsletters, you offer them to come in, they didn't come in. So you had your systems working. You had your database punching stuff out to them, "Here's the investment update, please come in for our briefing. We've got an expert coming in to talk about markets." We had all that going out, but in terms of a certain level of, "Was there actually...?" So people were being paid an ongoing trail and they weren't getting any of the services that were being promised. And so they were getting the...

Michael: Because they were, like, trying to have the meetings and couldn't have the meetings or just the advisor said, "Sure, you can come on in for meetings," but then the client never came in, and now the advisor gets, you know, punished for charging a fee when they never met with the client because the client didn't come in for the meetings?

Jim: Well, I think it's a combination. And I think the institutions are more, "Here's, we're charging you a fee for ongoing service." The services offered were not deemed to be more than simply rudimentary. The meetings weren't offered and the clients were charged, unbeknownst to the client. And so I think one of the recommendations, and again, we've got a federal election coming up, is be far, far more transparent in terms of understanding what the ongoing price, not simply in percentage terms, which, again, starts to play to people's understanding of what they're paying in percentages compared to in dollar terms. I think the overall, and I haven't really done justice in terms of what is really going on with the Hayne Commission, but the overall consequence is the assumption that I'll continue to get paid for work done in the previous years is very much being tested regulatory.

Michael: Well, and, you know, again, just for kind of context for advisors here in the U.S., you know, Jim, you kind of mentioned only briefly at the beginning of that point that, you know, in Australia now, every two years, clients essentially have to re-up their advisory agreements. Like, here in the U.S., this is equivalent of, if you want to continue to charge AUM fees for your client base, every two years your clients have to re-sign a new investment management agreement. Like, you have to do a new IMA every two years or your AUM fees stop, have to be terminated. And just imagining kind of A, the sheer paperwork effort of, every client has to re-sign an investment management agreement every two years. And, like, even if the client just is being slow about returning the paperwork, if they don't return it in time, you don't get your fee. And then on top of that, even if they do sign, you have to actually demonstrate what you did for the past two years for the fees that you were getting or you're still under threat from the regulator for charging fees for no service.

Jim: Yeah. Yeah. But I think the bigger consequence for change is not regulation but I think it's fintech, in making it, using it...I think the fintechs that are starting to get or are probably having a lot of funding and more and more capital being raised to come up with alternatives to some of these big, huge funds that we've got here in Australia, because we have had compulsory pensions here for some 21 years. It's mandated that we have to put money away for our retirement. And our pool is currently 2.7 trillion AUD and it's growing. And so we're forced to save. And the Australians are now saying, "Well, hang on, these guys, we're being forced to save, and sometimes the biggest beneficiaries of being forced to save are those who've been charging us fees for doing very little." And Australians hate that. Absolutely hate that with a passion.

Michael: Right. It's, you know, again, sort of in the context here in the U.S., you know, imagine a world where there's, you know, a single nationalized 401(k) plan. I suppose like, you know, federal Thrift Savings Plan is probably closest. But, like, there's a nationalized defined contribution plan, privatized Social Security would sort of be our functional equivalent, and just everybody has mandatory savings into it and it's these giant liquid pools that not surprisingly you put a whole bunch of assets on the table and the asset management industry would like to manage it for a fee. And I guess that's now, the sharks have been circling 2.7 trillion AUD of it for a couple of years and neither the regulators or consumers are happy with what they came out with.

Jim: Yeah. Yeah. And the politicians can't keep their hands off it in terms of the promises about what they'll do for it. We've had a report come out from the government's biggest economic advisor in this country called the Productivity Commission now suggesting that there should only be 10 top superannuation pension funds for which the 450,000 new Australians that start a job every year should be put into one of those 10 to protect their longer-term interests. And you can imagine the plethora of headlines and press about that.

Michael: And in the meantime, you know, financial technology, I guess your equivalent of robo-advisors saying off the side, you know, "We'll be happy to do that for a fraction of the price of what the banks were doing."

Jim: Yeah. "We don't have the bricks and mortar. We don't have the infrastructure. We're fintech-savvy. We know what the wealth accumulators or the people we should be appealing to have got the long-term returns. We know what they want. We're already on their iPhone. It's a very attractive proposition."

Jim’s Prediction For The Future Of Financial Advisors In Australia [1:01:57]

Michael: So where does this take the Australian marketplace in terms of, like, the market for financial advice? I mean, is anything left? Is it regulated out of business? Is this like a new Renaissance period and is something new? Like, what does this look like for you? For advisors in Australia? I mean, at least the forward-looking ones who actually do service for their fees but just want to run a successful business. Because I think it's an interesting glimpse as to what fiduciary rulemaking can potentially look like here as well if our regulators took as hard of a look at some business practices here as ASIC seems to be doing there.

Jim: It's having fundamental ramifications. And be careful any prognostication about what I think may happen, but again, another bias to share with you and the audience is that our average age of our advisor lady or man is late 30s, early 40s. We are generally appealing to those who come along to our program and we price their files and we give them business consulting advice and put them with a community of others who are building valuable advice firms, but they're in that 35 to 45 age group.

Michael: That's the average of all advisors in Australia or that's the average of the folks that your firm works with?

Jim: No, the average of all of advisors in Australia is 55 to 65.

Michael: Okay. All right. Yeah, which is similar to us here.

Jim: So we've got a younger set. And if you also look at them, particularly the latest sets that have been coming in the last two to three years, you would probably look at them and think, "You know what? They look more like an accounting firm than they do a traditional financial advisory firm." They see that the accounting model has just as many hairs on it in terms of the change in the tax legislation, the commoditization of tax advice, the change in lifestyle requirements for the new staff that don't want to work the hours of those that went before them and want a lifestyle earlier and a return early and get equity earlier. They themselves want to maintain a lifestyle having bought out usually an accounting group. They see the commercial value of actually being the one throat to choke for a range of the clients' financial lives, and therefore, having that influence.

And they also see that the old adage that you should have a license, your broker-dealer should be an institution to give you that power and balance sheet and strength, well, you know what? That's a big liability. Now, I don't see that as attractive. And so they're getting their own licenses. They're broadening the proposition of not only their accounting clients but financial advisory clients to call them advice clients. And yes, they still have divisions for tax and still have divisions for financial planning and still have divisions for investment and still have business for business management, but they're actively entrepreneurially building this new, as we call it, the advice lab within some of these firms that aims to be the principal advisor. And they see a glorious future.

The exit of old advisors who are not meeting the education requirements that the new education body wants in place by 2024 for a minimum degree and minimum stipulation and compliance to a pretty much a product-based regulatory curriculum it seems at this stage. But we're seeing an exodus of unfortunately far too much experience who can genuinely want to help people. But following by the letter of the regulator, a lot of them will have to exit, which is a tremendous pity in their mind. We would say that they won't be able to sign a technical document, but they can certainly sign on a strategy document and still keep clients engaged. So we see amongst our clients a glorious future. As the institutions exit, the clarity becomes clearer, but the back-office providers proliferate a cheaper offerings for the product advice, but yet clients still need relationships, we think, to inherently change long-term habits, long-term behaviors to talk about not simply the asset allocation, but the complexities are holding people up from achieving what they want to achieve.

Michael: Yeah, it's an interesting dynamic there that, you know, as you'd mentioned, like, almost all advisors there historically worked for one of your major four bank dealer groups. You know, roughly the equivalent here in the U.S. of our wirehouses. And, you know, it was one of the things that fascinated me as I first visited Australia and the advisor community myself a number of years ago. You know, this independence movement that we've had here in the U.S. started with our independent broker-dealers back in the kind of '70s and 1980s then shifted to our independent RIAs in the 1990s and especially the 2000s through today. There's almost no independent movement anywhere in Australia historically. Like it really was virtually every advisor seemed to work for one of the big four.

And so your landscape seems to just now be building out this independent back-office support ecosystem that we've been developing here in the U.S. for 30 or 40 years. And so, you know, we're decades ahead of you in the infrastructure for supporting independent fiduciary advisors, but your regulations just leapfrogged us by 10-plus years. We've been fighting about a fiduciary rule since still 2010 and still haven't done anything. You know, ASIC already did its first and is now queuing up for round two in the span of only about seven years. So it's a striking juxtaposition for me that our independent ecosystem is well ahead of yours, but your fiduciary regulation that tends to drive independent firms might be 5 or 10 years ahead of us now.

Jim: Yeah. And I think the independent thinkers may have been...well, there have been independent thinkers obviously in the accounting who wouldn't...didn't touch financial planning with a bargepole because of the perceived conflict, but they're now quite open when you sit around and advise them at a board meeting about the opportunities of really going in a la independent with the independent support mechanisms and network that are available to have that conversation not only compliantly but commercially and deliver the advice, increase the fee for client, satisfaction for client, as long as they can keep also managing the price of that proposition so they don't start working ridiculous hours and pushing their team to limits that they won't keep the team members.

Michael: And so, like, how do you see this advice value proposition shifting there? I mean, does it just mean the rest of the Australian advisor base is going to be pushed by regulators into all of these things you've already been talking about for years?

Jim: That's a great question. You know, I think it's a combination of fintech, it's a combination of regulation, consumerism, competition. I guess altruistically I'd say that the objective of us in the industry/profession, the terminology is not as important, but is to make advice as valuable as possible for as many Australians as possible. We would say our big hairy audacious 20-year goal is to make advice valuable for 80% of the Australians and stop the conversation about affordability and start the conversation about making things valuable then talk about affordability. And I think the market will rise to that occasion. And well, let's talk about having an accountant or a financial planner or just have an advisor, then it'd be pushed by all those factors you just mentioned, you know, the regulatory, the fintech, the competition, the consumerism, the education. And we're in front of a golden era of advice, in my opinion, for the next 20 years.

Jim’s Take On Making Advice More Valuable To Consumers [1:09:16]

Michael: I love that framing of like, "Let's just focus on making the advice more valuable first and we can figure out the affordability part next." So what are the gaps then for actually making advice more valuable, right? Like, you didn't just frame that as, "Hey, we need to get better explaining the value of our advice." That sort of started with just making the advice actually more valuable. So, like, what are the value delivery gaps? Like, what are firms not doing to make advice valuable that they have to start doing?

Jim: Well, it goes right back to, you know, what are we trying to do? You know, who have we hired? Have we hired people that can have the EQ that can understand the value the clients are seeking? Not only the IQ, understand the technical solution perhaps. So what are we trying to build here?

And again, going back to our original conversation about our product origins, and there are lots of great people, lots and lots of fantastic people, but moving it forward from here and recognizing that product is the means but not the ends, we have to rethink the sort of people we attract to this, the proposition we're trying to deliver. And I'm a fan of the diffusion of innovations-type thinking, that it just takes ages to bring a real innovation across to change it off, the value is in the product compared to the value is in the proposition. And so changing the people we hire, changing how we remunerate those people, changing the culture we build, respecting greatly what a lot of fantastic people have done to build the institutions that have been stewards of the industry to date, but recognizing subtly that for a whole host of reasons, you have to have a different conversation with different people because there's a real need.

We say that there's no equivalent medical profession in the financial services industry, that the drug companies own all the hospitals. And that's okay. I'm not saying they get bad advice, but the only drugs that come from that hospital are owned by that company, owns the hospital. But we need the equivalent of the medical practitioner who's getting paid on the value they're delivering. And again, that analogy doesn't work, as we see the commoditization of medicine as well. And I'm not sure if I'm answering your question, but I think it's foundational in that the people we hire, the tasks we've got to set ourselves up for to give people to have less arguments in their marriages, to have greater hope for the silly or great opportunities they want to build their businesses into, to live the life for their children or for their aging parents. That at the moment, that unless they've got access to a great advisor, it's a hard conversation for them to have. And we don't have that medical professional, again, to say, "What do I need to do?"

Michael: Well, and I am struck by the point that, you know, some of this just starts all the way at the base of the people we hire. You know, I've seen this challenge occur quite a bit in the industry here in the U.S. I think particularly when I look at some of the broker-dealer community here, which, you know, our broker-dealers, their fundamental reason for existing from a legal regulatory perspective is they are intermediaries for product distribution. You know, they are the infrastructure to support the sale of investment products. And, you know, they've been trying to pivot themselves more into the advice business in part because they're losing market share to the independent registered advisory firms that are, you know, solely building around advice propositions. And the challenge for a lot of broker-dealers here is their base of brokers are people that they hired 20 and 30 years ago, right? Because those are the experienced advisors that are with them today, and the people they hired 20 and 30 years ago were people who sold products. I mean, that was the business back then. Like, they rigorously screened for people who were focused on selling more stuff.

And if you have someone that's been incredibly successful at selling stuff for 20 or 30 odd years, they're not necessarily interested in doing something different now. They've got a thing that works and it's selling stuff. And a lot of firms I'm finding are really struggling with how to do this shift from products to advice because the reality is they've just got a giant base of people that are predominantly focused and affiliated around product. And the ones that were more interested in advice often have already left by now because they realized their organizations are fairly product-centric. And, you know, that's not true for all of our dealer groups and I think some are navigating this a little bit better than others, but, you know, for a lot of firms here, I think there's an underestimation of how entrenched sales cultures have become from the fact that that was where they built their roots. And you can't just go back to everyone and say, "Hey, we're going to be in the advice business now," because the brokers in the platform aren't interested.

Jim: But there's a model in the IT industry, which is my origins, you know, back where they used to sell boxes and the old Wang, Sperry, UNIVAC, Tandem, PerkinElmer, Prime, and they might have, well, not all of them obviously, and the neons across the harbor here in Sydney have certainly changed to be financial Services groups now, but they've moved into facilities management. They've moved into outsourcing services. And that stuff still needs to be solved. But as you pointed out, in the U.S., you've had a big growth in these facility firms to make the entrepreneur who's at the coalface going face-to-face, belly-to-belly with the client, make their job easier and easier because they're only offering facilities.

And I think this is where the building of this new, what is the true advice platforms of the future? It's less of a technical license on product and more of a means by which I can deliver the project, deliver the service to client and do so with a strategy that the house approach can be built, leveraging a lot of these skills that the old hardware firms of the product world have now become hardware support firms to the software firms of the future in software being the advice piece who are just building their niches, wanting to build a business, not simply just have a job, and leveraging the infrastructure, the product manufacturing skills, the product testing skills that are so crucial for us, for the great entrepreneurs to deliver upon. But we haven't seen that. And this is where we were saying and have advised a few institutions here in Australia, when are you going to stand up and say, "We want to be the provider of first choice to every independent advisor in Australia? And we get merited by the breadth of our services to allow them to be great advisors in front of the..." When are you going to stand up and say that as compared to clip the ticket on every product they sell?

Michael: And so without this sort of independent platform ecosystem there, like, I guess I'm just wondering, I mean, how do advisory firms sort of go through their growth cycle there? Because I feel like there's a lot that we just rely on for our platforms here in the U.S. that we probably don't even realize we rely on and take for granted until you build an environment like Australia that doesn't have some of the same platforms. So, like, what does it look like as you're just trying to get started as an advisory firm and then begin to build and scale there?

Jim: Yeah. And I think it's...and as you know, I've shared at previous conferences, I think there are specific stages which there are a lot of...particularly the first two stages when firms start out and just literally go out there and start being an advisor and get to that $200,000 level, there's lots of support for those people because that's been the traditional development ground that's been supported by the institutions in the past. And then that person then needs support with the job descriptions and with the compliance software and with the hiring and the threads for how they run their businesses and the forecasts for which funds to pick and the recommended product lists for them to choose from and the IT experts to help them build pages. And so they get to that half a million to $1 million mark with, again, a list of systems.

But then they start getting through the $1 million to $2 million mark, we find that it's not so much the lack of systems, it's just simply the lack of priorities and everything is...and so that's where the institutions have said, "You know what? We're good at building firms to get to that $1 million or $2 million." And that's been their bread and butter. But once the firm gets to that $1 million or $2 million, they then have to lift them to, "Well, how do I determine what my priorities are to build my board to figure out how I can maintain growth and culture and keep profitability at least 40% per annum?" And they let their own devices to then prioritize and drop off sections of their base or for their in-country towns to build up a separate proposition across the road in a different store.

And then that gets them to about $4 million, where they can't grow quick enough internally, they have to start bolting on other firms and they buy the accounting group, or they might buy the estate planning group, the risk group. And then they've got a business now right up to $10 million. But I think from $2 million on, they've had to do it by themselves. And that's where the business people who are wanting will build advisory businesses.

And that's what they want to do. That they're business people and they want to build advisory business, as compared to an advisor that wants to build a business. And they're both great jobs. No one's better than the other, but it's like being left or right-handed. What's your skill? Those that are skilled in building businesses and want to build an advisory business, they've got a business skin sense, and those that are great advisors generally get to that $2 million mark or $1 million mark and they get frustrated as they try to build the business because it's not their skill. But the institution hasn't wanted them to go beyond the relationship they've got with that founder because it keeps them more loyal to that institution.

Michael: Right. I mean, to me, it's the transition that comes when you begin to build a business that's literally beyond yourself as the advisor. Even kind of a similar threshold, you know, here for advisors, depending on the clientele you work with, that might start at $300,000 to $500,000 revenue at the lower end, it virtually always comes $5 million of revenue at the upper end. That just you hit your personal capacity, the only possible way to grow is you have to start adding other advisors that can take on some of these clients. And you grow beyond just a business of yourself serving clients into an actual business of advisors who serve clients that you own and may or may not be one of the advisors. And as soon as you make that transition, as you said, like, you don't have platform and systems problems, you have, like, actual business management problems. Like you have to hire and train and develop staff and manage people and set priorities for the people in the business. And the natural skill set you need is completely different. You don't have to manage clients, you have to manage staff.

What Jim Says Is The Only Way To Grow [1:20:00]

Jim: We'd say there's one little element there if I could quietly challenge you on it. The only way to grow...

Michael: Sure.

Jim: ...is to lift prices. So we would say, before putting on extra team members, lift your pricing to fund it, and not just a 10% or 20%. And so this is where Dan Sullivan's thinking, which I attended 25 years ago, the whole like, "What's the breakthrough price you're working on this quarter? What's the dream price you're working on this year? What's the minimum price you now need to...can't go below unless it's for pro bono work?" And so the way to grow when I get to that $1 million or half a million or $1.5 million is firstly to have the courage to go beyond your current thinking about pricing. And not in incremental steps of 10%, significantly more. Put that to the client, have the clients confirm the value, and then you've got a base of productivity growth, not just more activity.

Michael: Interesting. And again, I guess that's in a retainer fee kind of context, right? Not necessarily saying like, you charge...I mean, like, I charge 1%, I go back to all my clients and say, "Hey, I'm charging 1.3% now?" Like, I can only do those increases for so long before at some point I'm charging 3%, 4%, 5%, and even my regulator is going to have something to say about that.

Jim: Well, again, and this is the issue. We're now going to have regulators saying, "You can't charge more than $1,000." Oh my God, you know, that sounds Marxist. That sounds... It's because, again, this value, it's up to the value of...some people to determine what the price is. And we're coming to that. And that's what one of our fears in Australia is. Because if you want to go to Washington, D.C.'s best orthopedic surgeon and you've got a waiting list of six weeks to get in, they're the best. And so no one is articulating that orthopedic surgeon except the market. Now, let's assume that the orthopedic surgeon, like you, are working in the client's best interest all the time then I think this whole...you can charge 4%. And it's not based upon any comparison, otherwise, they get Michael Kitces. And I think that's what I keep talking about is this thing that's locked in stone, the pricing lever. Because others will compare or I'll compare, or more fundamentally, am I worth it? And we don't let the market define that back to you.

Michael: Or just afraid that I'm going to go back to clients that I've worked with and get rejected. I mean, how do you...particularly when you start talking about this magnitude of fee increase, like, you know, go back to all your clients and raise your fees by 20% or 30% or 50%, like, how do you have that conversation? How do you break that news to a client and not have a whole bunch of them, shall we say, react negatively?

Jim: Yeah. And I guess it's like everything, Michael, it's evolutionary, not revolutionary. And we only need...like it's my golf, look, if I have one good hit over the 100, I hit around the golf course, it'll get me back next year, next week. And so we're just looking for little increments that I was going to go in and charge X, of I've had opinion, I've taken the feedback, I can see the work, and I'm going to charge 1.5X, and they accepted that.

Michael: So you go client by client for client so you've had significant wins and you think you can justify it for as opposed to just saying, "I'm uniformly across the board going to raise my fees for all my clients?"

Jim: The language is important, and we try and keep away from the thinking that you have to justify. I think it's more you just have to show the value. This is, and again, if I've had those touch points, thanks to the techniques that Bill Bachrach or Mitch Anthony or Dan Sullivan have taught us, if I've got those touch points to say, "Is this value for you?" I'm not trying to justify it. Because I think the minute we try to justify that work and the way the price is then you've already lost... I'm simply trying to demonstrate the value, "Is this value to you?" And it's in their best interests. I'm not trying to do something to see how much the koala can bear, which is a phrase that we use a lot here.

But I also think it's evolutionary. We're not taking to all our clients. I think the harder conversation is sometimes for those clients we have considered pro bono. They've always been there, always, always want to keep them there. And when we lift the lid and look under the bonnet, 50% of the client base is pro bono. And that's the conversation of saying, "Well, are you running a social justice business here or are you trying to run a commercial business?"

Common Blocking Points For Most Advisors Who Want To Be Business Owners [1:24:06]

Michael: So what do you find most advisors that want to be business owners, like, don't understand? I mean, where are the blocking points that come up? You know, as you said, like, the ones that think like business owners tend to power through that $1 million or $2 million revenue phase. The ones that are advisors who were trying to grow a business or have just sort of found themselves growing a business tend to struggle more. Like, where do you find most of those blocking points come up? Because I suspect they're quite similar here in the U.S.

Jim: Yeah, I think you're right. Look, I don't think it's too. I think the biggest problem is ourselves. I think we just fail to see that we are sometimes and our limiting beliefs is the biggest issue. "Yeah, my clients won't pay that. Yeah, I'm just not ready for that. It's too far outside comfort zones for me. I'm just not good at that stuff. I know I need to do it." It's ourselves. And I think the business-minded people are more about, "This is what I enjoy, I'm good at this stuff," and they run it with a bit more confidence, not an arrogance but a confidence. But I think the biggest challenge is trying to get across to someone who's seen by their clients and is truly successful and truly genuine and truly professional to say, "Look, what you've been doing is great, but what you need to do is a bit better to achieve some of the things that you still consider to be valuable." And when we test and we wait to see the transcripts, sort of what different phrases in it, we wait to see the copies of their engagement dollars with different pricing in it, they still come back and have got reasons why that particular client couldn't do it. It's still ourselves every time.

Michael: So what advice would you give to newer advisors looking down this road who maybe don't want to get caught in these traps in the future?

Jim: Oh, I had this conversation this morning. I'd say, look, you probably can't remember 1979 but I can, you know, when the PC was released. And that will change the mainframe industry forever. And we're at the same point in 2019. It's not the PC this time, it's simply just comprehensive advice. The new platform has been regulated in or fintech is going to push it. So view it as 1979, and we're going to have 20 years at least of fantastic growth on this new platform. This is the time to be really serving our client's best interest for all the value you can deliver.

Michael: Yeah, I long have been fascinated by the ways that technology sort of indirectly drives these changes. You know, as we were saying earlier, I think, you know, there was a time when we were all stockbrokers and then computers showed up and scaled the stock brokering business and we couldn't get paid for it anymore, so we started selling mutual funds. And then the internet showed up and anybody could buy a mutual fund online, so we had to start giving, you know, holistic portfolio advice. And now the computers or the robo-advisor is showing up to create the asset allocated portfolios. And, you know, it's the technology that keeps nudging us up the line.

And it's always terrifying when we go through those transitions and not everybody survives or navigates them successfully, but, you know, the mutual fund business for most advisors was much better than the stock brokering business. The assets under management business was much better than mutual fund business. And the advice business that comes next, like, I'm incredibly excited and upbeat about it, but as happens with all of these transitions, you know, you either move up and build on top of what the technology is going to do or the technology starts to replace you.

Jim: Yeah. It's great. Exciting. It's the old Chinese, maybe we live in interesting times. It certainly is interesting.

Michael: So what comes next for your business and just the consulting work that you do? Like, who are you working with and what are you focusing on now?

What’s Next For His Business And His Consulting Work [1:27:37]

Jim: We've just had a bit of a breakthrough recently, which sort of gives an indication of where we're going with the... We've applied over the last two, three years through the group here called the Australian Competition and Consumer Commission, NIP Australia, for Australia's first certification mark for professional advice, and it's been granted. And so we have Australia's first certification mark. So certification mark in Australia is if someone, for instance, this is the way to make organic bread, they get it certified, the process, so the independent third party can certify that it's done in a certain way. Also, people call that organic farm. You get it certified with certain standards that are lodged with the authorities and can be debated. So we've got a certification mark on what we call our formal principal advice, where there's no real or perceived conflict in the advice. It's done in a set way, whether I'm sitting with an advisor inside of the country or the other.

And so that for us has long been our planning about having an important, not only, but important milestone for saying, "We think at the moment this sets a bit of a standard for an advice in this new world for those interested in delivering principled advice to give consumers a clear understanding when they see that label attached to an advisor as a sub-label." It's sort of like the Intel Inside. And that really excites us, for us to help more and more people have that.

Michael: Fascinating. So, like, is that like an advisor training designation? Like, do I think of this as a contrast to something like Certified Financial Planner or CFP mark?

Jim: Yeah, I think. So we'll have CFPs, we'll have CPAs, and we may even have engineers who belong to different...but in terms of the form of advice that's delivered from that firm, they'll have a...we label this to an advisor within.

Michael: You're not certifying an advisor like giving them a certification, you're certifying the advice. Like, literally, the advice process they go through?

Jim: No, we are certifying an advisor. So we certify not a firm but an advisor to say they are. And so we then feed their social media feeds every week. We price their files for them every week. We write white papers with them every month. We do submissions to government. We do press releases with them. We're trying to spread this story about the value of valuable advice. And then we have consumers coming to us and say, "Well, where do I find these advisors?" And that too is on our website. These people, you know, there's no kickback to us, of course, because one of the key issues is no conflict. But if you see this label, you'll know that you'll get this processed for principled advice but without any conflict associated with the delivery of that advice.

Michael: And so then ultimately, you start building a business, sort of marketing to consumers that you've got this certification mark for professional advice and try to encourage them to seek out advisors who have your certification?

Jim: Yes. And we're not an association and not trying to be one. We're simply saying, and we're not saying this is the monopoly in any way, shape, or form, we're simply saying advisors are looking for principled-based advice and there's no perceived or real conflict with the delivery of that advice of a product or a process or evaluation of a business model in any way conflicts with the advisor's environment. Then we'll certify that every year.

Michael: So I guess roughly akin to I guess getting certified here that you're a fee-only advisor...

Jim: Yeah, I think so.

Michael: ...and aren't receiving any other kinds of commissions or other remuneration.

Jim: Yeah. And it's for principled advice. So that's really exciting for us. The growth of our community beyond 120 advisors we've got so far is exciting for us. But it is, I think the other thing, you may have been alluding to on a couple of podcasts, it's a 20-year objective. We've got a long way to go on this.

What Success Means To Jim [1:31:32]

Michael: So as we wrap up, you know, this is a podcast about success, and one of the themes that always comes up is just the word "success" means different things to different people. And so as you look at what you're building going forward, you know, I'm just wondering, like, how do you define success at this point?

Jim: I think if we have helped contribute to 80% of Australians having access to valuable advice in 20 years' time.

Michael: I love that. That is concrete. That is targeted. Like, that's a smart goal. That's specific, measurable, and achievable. Like, 80% of Australians having access to advice in 20 years.

Jim: Yeah. And I think I'm going off Russ Alan Prince's numbers there because I think Russ is right, there's a certain number of people that will only take their own advice. And I think there's a certain number of people that don't take advice at all. And it's a big hairy objective, and that's where the rough 80% came from. And it's not saying they'll all get [inaudible 01:32:32], but hopefully in 20 years' time there will be other brand names doing similar things, seeing that this is a viable model and more and more Australians have access to what I see is equivalent to medical profession and they're having less arguments in their marriages and they're having greater hopes with their small businesses or what they hope to achieve, not falling as much as we are today to the financial behaviors which have been pushed by in some ways just their own behavioral traits that don't really handle money or the money conversation that well.

Michael: Well, amen, I love the vision. I hope we can see a similar evolution here in the U.S. over time as well. I think our challenge probably in both markets there and here, I don't know if we have enough advisors to advise that many people.

Jim: We don't. We don't. No, we don't.

Michael: I guess that just makes it all the more great opportunity.

Jim: Yeah, that's 1979, the PC industry. We don't have enough PC people, you know, I think, but we'll get there.

Michael: Well, thank you for joining us and just sharing some of these perspectives around I think interesting parallels between what's happening and happened in Australia and maybe what's coming here in the U.S. and just thinking through, you know, what does pricing look like? How should we be pricing our services? And those tensions that come up between, you know, what happens if you charge more and some of your clients say no but some of your clients say yes?

Jim: And Michael, thank you to you. I think you may not know, again, and this is where the same brush applies to you, you're probably undervaluing the value you are adding by services such as this, which I know by those that listen to it. And my team and my clients listen to it. You are doing a tremendous service in promoting the conversations and building a community of conversation well beyond your microphone and your desk where you're sitting at now, where you're not just giving, you know, knowledge, you're actually helping people understand experiences of really valuable advisors. And that's an incredible value service you're providing.

Michael: Well, thank you. I hope it's helpful. I know we have quite a listenership in Australia and UK and a couple other countries as well beyond here in the U.S. So I hope it's food for thought for everyone around the world.

Jim: It is.

Michael: Well, thank you again, Jim, for joining us on the "Financial Advisor Success" podcast.

Jim: Thank you, Michael.