Executive Summary
As a solo advisory firm owner grows their practice, they may reach capacity constraints that prompt them to hire an additional employee. While this can be a logical step in scaling their firm, some advisory firm owners may not anticipate the managerial challenges that come with hiring additional staff. And even though some firm owners may have originally thought they were ready to expand and take on an employee, they may later determine that they actually prefer operating on their own as a solo without support… leading to the inevitable task of letting go of the person they hired in the first place.
In our 112th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss best practices for gracefully letting an employee go when the advisory firm owner decides they no longer want to grow into a business but would rather revert to being a solo advisor instead.
Letting go of an employee, especially when the reasons are not related to performance issues, can be an uncomfortable experience for all parties involved. While the firm owner may feel guilty and worry about how much the decision will impact the employee and their family, it is important for the owner to put aside their own feelings and instead focus on approaching the situation with objectivity, directness, grace, and compassion. Being clear and direct will help the firm owner communicate why they are terminating the associate advisor, and instead of trying to express remorse or regret (which can lead to confusion, anger, and/or resentment, making the situation more difficult for everyone), the advisor can instead act with compassion by making an offer of severance pay (depending on how long the employee served the firm), providing a recommendation letter or serving as a reference, or even making a referral to other advisory firms that may be looking to hire additional staff.
While contemplating the decision to terminate an associate advisor, an important consideration to make includes the past growth of the firm’s client base, especially since hiring the associate advisor. Because once they are no longer supporting the firm owner, capacity constraints will change, which means the owner may also have to downsize the number of clients to maintain a sustainable practice. And if downsizing clients offers a beneficial capacity lift for the owner, the owner might also consider offering the associate advisor an opportunity to buy the book of clients they no longer wish to serve, possibly helping them either launch their own firm or ease their transition so they can bring revenue with them to their next firm position.
Ultimately, the key point is that it is generally in everyone’s best interest for the firm owner to be clear and direct when the decision has been made to let someone go. And while the discussion will probably be difficult and uncomfortable, delivering the information with clarity, directness, and grace will make the news easier for the employee to understand and accept, and can also relieve the firm owner from the burden of having the sensitive conversation more quickly. And offering transitional tools like severance pay, a recommendation, and/or a referral to another firm can add compassion to the process, ultimately leading to an easier process of moving on for both the employee and the owner!
Authors:
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Show Notes
Kitces & Carl Podcast Transcript
Michael: Well, hello, Carl.
Carl: Greetings, Michael Kitces. How are you?
Michael: I'm doing well. I'm doing well. How are you?
Carl: I'm good. And for those of you just tuning in, last time on the show, we hired people, and today on the show, we're going to fire people. Is that right, Michael? That's what we're doing today. We're going to fire some people.
Michael: Yeah. It's a wonderful thing. So, the conversation in our last episode about what it looks like when you want to do the first hire. And thinking about what that first role is, and what are some of the metrics around it, and just why do you want to do this to yourself? So, I got a follow-up email from an advisor. We'll call her Sarah, so.
Carl: I love Sarah. Love Sarah. Sarah in Accounting.
Michael: Sarah. So, Sarah went down this road like, "I grew, I hit capacity. You're supposed to hire an advisor. I hired an advisor. I have realized I don't like training and managing people. I don't want to do this anymore. How do I get off the ride?" Just essentially, I hired the associate advisor, so how do you fire the associate advisor?
Carl: Well, for the love, just don't. Avoid conflict, pretend like it's fine. Be miserable for the next decade. Don't.
Michael: No, no. These are not family gatherings. This is business, Carl.
Carl: Exactly. Exactly. Did I just describe a family reunion? I apologize. Sorry about that. Let's move on.
Why It’s Not Helpful To Imagine The Worst When Firing An Employee [01:41]
Michael: So, yeah. I love the question aside from just you maybe will talk a little bit of just dynamics of how do you think about capacity and terminating people and such? You know what I mean? It's funny, we talked last time around, why do you want to do this to yourself? Why do you want to start hiring people and building up? And just, are you clear on the reasons and what you're doing? And I feel like it was almost like giving people permission. It's okay to not add team. Again, mathematically, you can grow other ways. You can grow every year. Just add clients above average, remove a client below average, your income will go up every year, and you don't have to hire. But I feel like there's a whole other level that comes in with, "But is it okay to fire someone?" What does that mean as an advisor if you're going to fire the associate advisor that you hired?
Carl: Yeah. Yeah. Listen, I only have a little bit of experience. I've only had to do this once or twice. And there's a reason. It's hard. You made a decision, somebody else's life was impacted, and it turns out that things need to change. And I remember when I had to... Actually, I had to fire someone. I remember getting... I got a coach to help me work through the... There's a whole bunch of technical stuff. But to work through the emotional stuff of what does that mean, and how do I handle that? And one thing that really stuck out to me... And this was over... Yeah, over a decade ago. One thing that really stuck out to me was, everything I was telling myself about the reason... If we want to, we can talk about do you really need to fire? I'm assuming here for just a second that Sarah's made the decision. It's a valid decision. So, how do I do it? Yeah. In my head, the one thing that really stuck out to me, from the coach that I hired to help me do this, or help me work through it, it was almost like a psychiatrist, psychologist, was everything I was telling myself about the negative cons, the negative impact of this thing I was going to do was a story. I didn't actually know.
They may be feeling the same way. Maybe, maybe not. And it's okay in a professional setting and even in personal lives. It's okay for us to decide that something's not working. And it would not be fair. That joke I said at the beginning, "Pretend like it's fine and just avoid it for a decade." That's actually not fair to anyone. So, the idea of just saying, "Okay. Sometimes we have to do hard things. Let's do it with as much love, and honesty, and compassion as we can, and let's do it early and directly because you can be full of love and direct at the same time." That was what stuck out to me. And indeed it was hard. It came out of the blue. I thought the person had an idea. It came out of the blue, and they were literally like, "I am totally shocked right now." I remember the couch I was sitting on. It wasn't the blue one. I remember the conversation…
Michael: No, we don't have bad conversations on the blue couch.
Carl: I got a whole bunch of new pictures from the blue couch, by the way. I can't wait to use them to troll you with. I remember the couch I was sitting on because it was like, "Oh, shoot." It went worse than I thought. And it was absolutely the right decision. And within a couple of weeks, everything was fine. And I heard from other people that it was better for the person that was working for me too. So, anyway, my main take on this is the story around it. Try to stick to the fact pattern. Do it early. Do it with love and be direct.
Michael: Yeah. I agree with so much of that, having been down the road of needing to terminate team members over time as well. And just recognizing there's a lot of stories we start telling in our heads about what's going to happen and how this is going to go. And what I found having been down this road a few times, and also just having seen other people who had to learn and go through the process of firing someone for the first time, it feels awful in the moment. You will feel relief almost immediately thereafter.
How Adding Grace And Compassion Can Ease The Firing Process [06:58]
Carl: Yeah. Let me ask you a question because this is actually something I've thought a lot about and struggled with. The role of feedback there. Do you offer...? Because I have found... Well, actually, I'm just going to ask without prefacing it. Do you offer feedback on why you're making the decision? What it was about the performance it didn't work?
Michael: Yeah, yeah, yeah. So, it depends a little bit into the context. If this is firing because they are actually having performance issues, you may need to reflect some of that back to them to help them understand why. Although, frankly, they're already fired. Telling them they suck at their job while you're firing them does not actually improve the situation. The reality is you don't have a job here anymore. This is not a good fit and it's not working out. And there's not a lot more to say. Almost anything else that's negative feedback at that point is basically just... At best you're kicking them while they're down, and at worst you're actually amplifying what could be anger, and them trying to come back to you and complaining wrongful termination, or something else because the reality is... All sorts of fascinating studies that find that the doctors who get sued the most are not the ones who make the most errors. They're the ones who have the worst bedside manner about the errors that get made because bad things do happen. What actually determines whether this turns into litigiousness is much more about the grace by which you handle the situation, not that magically some people don't have challenging situations that crop up.
So, particularly, if we're in the context that Sarah is here, which is like, "It's not you, it's me. Really, it's not you. It's me. I've decided that I don't want to actually build the team out broader. I've decided I would like to change back to running a solo practice. That's just me. And so, your role will no longer continue at the firm." And that's it. At that point, it then becomes, how can we do this with reasonable grace and compassion? You got opportunities like, "I've decided to offer you severance of X dollars, or X months of compensation." Obviously, that'll depend a little bit on how long they were with you in the first place. "But I'm going to give you an additional month of salary, or 2 months of salary." I'm assuming Sarah said this person's only been here a year or so. I'm assuming you're not terminating someone that's been here a really, really long time. "Look, I'm offering you 2 months of salary, while you find the next opportunity. So, hopefully, your family's not impacted in pretty tight job market. Decent chance you're going to find a new job in the next 2 months."
You might even go as far as like, "I will give you any introductions that I can to other advisory firms I know in the area to try to help expedite your job search, so that hopefully, by the time you work through the month or two of dollars I've given you, you already have a new job, a new salary. So, I have not adversely impacted your family." The reality was, "Salary is going away from my payroll. So, I can deal with the month or two to give you transition, to give you grace, to own a little bit of my mistake in regretting this decision, so that you still get to continue to your next opportunity without having your family materially, financially adversely impacted because I gave you a bridge until the next place." And then it ends.
Carl: Yeah. And this really...
Michael: And it feels awkward, and an hour or two later you're going to feel like this giant weight that's been lifted off your shoulders.
Carl: Yeah. I do think this particularly points to go back and listen to the last episode, "The Walk In The Woods." The preference for everyone is to prevent this experience. I think especially for the person that you've hired and are now going to fire. You made some changes in their lives, uprooted things. All that stuff. And you feel that weight. It's genuinely okay to feel that. You should feel that weight. And so, the preference obviously, is that we are really careful about this decision. And in spite of all that it happens. And we can be really... I thought this was a good idea. I was careful about it. And all of that, still occasionally, this happens. And I think the idea of being direct and as early as often, and as gracefully as you can, and really trying to be helpful is exactly right.
Michael: And again, we start telling all these stories in our head. You're so right in what you were saying, Carl, "If I fired them I'm going to ruin their career because they're going to have a short stint on their resume." No, they'll be fine. There's a high demand for advisors, and a lot of firms they're desperately searching for talent. And they're going to go and explain that they got hired by an advisor who changed their mind and fired them after a year. And if the firm wants to call you to corroborate that story, you will corroborate that story and it's fine. Their resume will be fine, their future career opportunities will be fine. If you feel the financial guilt of impacting them and having them lose their salary, give them some severance to transition the period. So, the reality of what's going to happen from their end, is they're going to say, "Yeah, I was at this firm for a while, but it turned out the firm owner didn't really want to grow it, which means I was in a dead-end job that was going to have no career-impact opportunity anyways. But I got some great experience, I found another job that's got a better opportunity, and it didn't even cost me anything because they gave me enough severance during the transition." That's the positive story that can come out of it.
So, you jumpstarted their career, they found a new job at a firm that's an even better long-term fit. They had no financial adverse impact during the transition while they got great experience, and you're happier than you've ever been now that you don't have to manage the person that you don't want to manage after all. There's very happy positive stories that come from this when you handle it with grace and compassion. That doesn't mean buckling on terminating them. That just means handling with grace and compassion, being direct, being succinct, because frankly, more words in the moments are almost never really helpful and helping them transition and find a new home.
Why It’s Important To Be Clear And Direct With Employees [13:35]
Carl: For sure. For sure. Yeah. It is interesting how more words aren't helpful. I'm just thinking back to the couple of experiences that I've had like this that are close to... Ending a business relationship is close. And how tempting it is to fill in the awkward silence. And how it's actually not helpful. I think in that moment, this is... Maybe I'm just too far out there, and my house is too close to California or something. But I do feel like there's room in there just to absorb a little bit of the, listen empathetically and even not speak empathetically, and be okay with that. And part of the job is to just be empathetic.
Michael: Well, because the reality, once you get past the, "Your position is no longer required at the firm. I've decided that I'm not going to continue growing and scaling with expanded staff. I'm going to revert back to a firm that's just me. And so, your role is being ended. I'm going to provide you 2 months of severance so that you have an opportunity to make the transition. And I'm happy to a positive referral and recommendation for you. I can give you a letter of recommendation. I can even introduce you to some firms. I've so appreciated the time that we've been able to work together. And I'm sorry it won't continue." Anything that you say after that, as we start trying to fill in the void, anything I've ever heard anyone say after that, basically comes down to, "I feel awful because I just fired you, and now I'm going to say words that try to rationalize what I've just done so that I can feel better about the fact that I've just fired you."
And the truth is, for the person on the other end of that conversation, they don't give a crap about how bad you feel about firing them. It's like the video that went viral a few months ago of the CEO with tears coming down his eyes talking about how hard it was for him to have laid off those 100 people. They don't care how sad you are that you feel bad because you fired them. They care that they have to go home and tell their family that they got laid off, and they're freaking out about where their bills are going to get covered. They don't care about you. They're in themselves in that moment, and processing the fact that they just lost their job in a way that they may not have been expecting to come at them. So, anything you say to fill the void after that moment, you're saying it for you. You're not saying it for them. And to put it mildly, it doesn't come across well for them when after the moment after they've been fired, you start saying things to try to make yourself feel better about it.
And I'm not trying to dunk anyone. It's a very human thing. Advisors, we tend to be really empathetic people, and we carry a lot in our relationships. So, most advisors I know carry this heavier than most, but that's why if you look at any management book about how to terminate people when you have to, the answer is very directly, very succinctly, very briefly, and then end the conversation very quickly, because anything you say after that, at best you're saying it for you and not for them. And at worst you're going to say something that unwillingly creates legal, or HR, or employment law, or other issues because you start saying things that you shouldn't say.
Carl: Yeah. And I'm particularly interested in that, not necessarily... Of course, the legal issues are important, or whatever. I'm actually more interested in that advice because it's actually the more empathetic thing to do. And that's why I find that to be true. And this is hard, and it's not as hard as it feels, and the story is in your head. And you're catastrophizing always because you care. And so, yeah, early, direct, and with love.
How Firing An Employee Affects Capacity Constraints [17:30]
Michael: Early, direct, and with love. And the one other thing I do feel compelled to note for folks who are thinking through this, there is the, who does the work on the other end? How much did you grow...? And I don't know in the context here, how much did Sarah grow in bringing clients on before she got to the point where she's going to need to do this downsizing? Because the reality is if you brought more clients on, that you actually don't have the capacity to keep. On the one end you've either got some choices around after you've finished letting the team member go, do you need to let the clients go? Alternatively, I've seen at least one advisor that did a version of this, and regretted what they built after they built up, and they said, "You know what? I'm letting you go. The good news, you can take the clients with you because I don't want them. I don't have the capacity to serve them. I hired you to serve them because I don't have enough capacity to serve them. And if I'm letting you go because I just don't want to manage people and scale up anymore. I can't handle those client relationships anyways. So, let that be the jumpstart for you going off in your own journey."
And I guess depending on the advisor path you want to go down, you can give them the clients, you can try to sell them the clients, and come up with a favorable, reasonable agreement for them to be gracious without completely letting the revenue go. But it's worth noting, you do have to be mindful of what the capacity is on the other end of this. If you had just started building up, and you can still hold on to your clients, then great, just let them go and move on. If the reality is there's going to be too many clients on the other side of this termination, you do need to have a plan for that. Whether that's, "I'm letting go of the clients, or I'm going to transition the clients to the person that's leaving, and let that be either the seed for them to go start their own firm, or at least it'll be even easier for them to get hired if they're bringing in some revenue with them."
Carl: Yeah. Amazing. Amazing. Well, how fun is that? Firing.
Michael: Yeah. That's happy.
Carl: That's the best thing ever. It's super interesting though, to talk about that sort of back-to-back in episodes. I do really love that idea of listening to these together because that walk in the woods becomes important.
Michael: Yeah. But to me, the biggest driver for it... It's a version of the why conversation we had last episode, and saw the alternative version of it here. You can build a wildly successful advisory practice lots of different ways. Yes, you can do it by scaling up to giant enterprise to be like the next Peter Mallouk. You can do it by building a great boutique practice. Some of those get really, really large with a focused clientele and a great relationship with team. Truly, some of the most financially successful advisors I have ever met are solo practices. They have 30 to 50 clients that pay them a really nice fee. They have no staff, they don't even have that much hours to work because they've got 30 clients. They're super awesome for them. They don't work a 30% job. They work 100% job for 30 clients, and they make some of the most amazing livings working fewer hours than anybody that I've ever seen.
Carl: And they ski on Thursdays.
Michael: And they ski on Thursdays. So, don't get caught in the trap that the only way to grow or be successful is hiring staff and expanding capacity in doing that. That's a choice. But just always feel compelled to be caution. Don't grow your firm because you've just got a problem saying no to prospects. And if you made that mistake and you crossed that line, you own the firm, it's your business, and frankly, you got a lot of years left on this earth. You're allowed to hit the reset button as Sarah is going through here. You're allowed to hit the reset button and go back. You don't have to stay stuck on this path that you're not happy on, because once you hired a person, and now you either don't want them, or you're praying that they leave and go somewhere else that you won't have to fire them. Have the tough conversation. It's very unpleasant. It only lasts a few minutes. And about an hour or 2 later, you'll feel like this huge weight has been lifted, and you can get back to the practice that you really want to enjoy.
Carl: Amen, my friend. So good.
Michael: Awesome. Well, thank you, Carl.
Carl: Thank you, Michael. Talk to you soon.
