Kitces & Carl Ep 144: The Success Trap Of Boutique Practices And Building With Intentionality

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

Show Notes

• Small Giants: Companies That Choose to Be Great Instead of Big by Bo Burlingham
• Ikigai: The Japanese Secret to a Long and Happy Life by Héctor García and Francesc Miralles

Kitces & Carl Transcript

Michael: Greetings, Carl.

Carl: Hello, Michael. What's happening?

Michael: What's happening? So we're pretty much wrapping up conference season. And the one question I keep hearing over and over over the past couple of weeks, I guess almost 2 months of conference season, is we haven't seen the blue couch in a while.

Carl: That's really funny.

Michael: Carl has this new backdrop set up, lovely neutral. You have a beautiful camera. I'm very jealous.

Carl: Yeah. My phone.

Michael: But the couch is gone.

Carl: I know. It's upstairs. It's upstairs. We've been holding these retreats at the house. It's funny you should mention this because we've been holding these retreats for advisors at the house. And the one we did that just wrapped up in May, the people in the retreat demanded that we bring the couch down. So 2 people sat on the couch for the day and a half retreat. So I'm going to have to bring it. I'll bring it down here.

Michael: How does your wife feel that people like...strangers sat on her couch? Because for those who don't know, it is Corey's couch. It is not Carl's.

Carl: It is a serious story. It's not her couch anymore because I took it to Vegas and 500 people sat on it when I brought it home. She's like, "Wait, how many people sat on the couch? This is now your couch." So "Kitces & Carl" has to pay for that couch now because Corey wants a new one. But she's part of the retreats. So when we brought it down, all the other women that were there at the retreat were just like...they just looked at her like, "Did he really take this to Vegas?" I'm like, "Yeah, he took this to Vegas."

So yeah, for those of you who don't know what we're talking about, there's this really...you'll have to just go find it now. But there's this story. My wife made me haul this blue couch all over the world. We bought it in New Zealand. We took it to London. It became my backdrop. And Michael started saying, "Isn't that a beautiful blue, Kitces Blue couch?" I was like, "It is not Kitces Blue."

And then everybody started commenting on the couch. I was really grumpy about the need to haul this couch all over the world. And then as we got emails, I had to read them to my wife and she was just like, "I told you." So the blue couch has become a thing. In fact, Michael, I'm thinking of starting a little fun called Blue Couch Capital. And we'll talk about that another day. But I just got a note from an advisory who wants to help with Blue Couch Capital. So we'll see what happens.

Michael: Wow. Okay.

Carl: A little company that funds RIAs or something. I don't know. Something fun.

Michael: Okay. All right. More to be heard about Blue Couch Capital.

Carl: Yeah, that's right. Trademarked.

The Business Calculus Around An Advisory Practice's Margins, Hours, And Growth [02.38]

Michael: Trademarked. So for today's episode, I wanted to talk a little about an interesting conversation I've been having over the past few weeks with advisor friends. We're trying to keep people anonymous. We'll call them Adam. Adam has a really successful, don't know what to call, practice. It is him plus, I think 1 or 2 advisors and 1 or 2 admin team, $1 million or $2 million of revenue. I think it's closer to $2 million. So pretty darn good margins when there's 5 of you pushing $2 million of revenue. And he's got a pretty comfortable practice around good margins, not working a ton of hours, has built a pretty good pipeline into his niche. So he's got a really good steady flow of clients coming in and actually wants to do some additional things back to his community.

Now that the business is in a good place, he wants to do some other membership-style models to reach more of his community. Maybe this is just me and how my business brain works when I look at a practice like this. I'm going to be really curious for your thoughts around this. I look at this practice and I see you've got nice high margins, you're working, I'll call it lifestyle hours. I don't mean that in a pejorative way. I mean that in the like, "Kudos. You got the practice to the point where you can live a very comfortable life and have time for...a lot of time for family and kids and hobbies and whatever else it is that you want."

But he's still growing pretty fast. And ironically, if the new things he's doing actually work, he's going to grow faster. He's not really doing it to ramp up the revenue, I think, but he has a tendency to build things that work out. So, it might "accidentally" work. He's in a really happy place and feeling and looking at it. And I look at this and think it doesn't sustain this way. If you keep growing fast, you can't keep growing fast and keep the hours down and the margins high.

Because at some point, if you don't want to load up your own clients, you need more advisors. If you're going to hire more advisors, that starts to pressure your margins, and if you need more advisors and more support staff because you have more advisors to support, you need a little bit more staff. And then at some point, you need an operations manager to manage all the people because the firm's getting bigger. And to some extent, that just the natural growth of practices. But I kind of found this dynamic to me that was emerging that if I sort of think of this triangle of high margins, lifestyle hours, grow fast or launch all the things you want to launch if you're the fast creator type. You can design a practice that does any 2 of those well, but I don't know if it's realistic to expect all 3. And I worry it's even dangerous to try for all 3 because if that doesn't actually work, then you're going to have some challenges later.

Carl: There's an old saying in the bike...I think it's in the mountain bike world. Strong, light, cheap. Pick 2. So you can have a strong and light bike, that's going to cost you some money. You can have a light, cheap bike, but it won't be very strong. Pick 2. I like that.

Michael: I feel like there's several things. Look, you could run a high-margin lifestyle hour practice. Just don't add very many clients. If you're not growing that much, things are pretty stable. Clients mostly get in the maintenance mode. Your team gets well-trained. It runs really smoothly. You can run a high-margin, fast-growth firm, make a lot of money, and grow really fast, but you're going to work a lot of hours. The lifestyle hours thing isn't going to hold. Or you can run a practice that's growing fast and you're still working lifestyle hours but you're going to have to hire a lot more people to replace the things you're not doing in the business and your margins are not going to hold. And it doesn't have to necessarily be a negative thing.

In this business, even firms that don't have the highest of margins make some pretty good money when your practice gets to a critical mass of revenue and clients. So none of these have to be bad scenarios. And to be fair, for a lot of advisors I know, they don't even have 2, they have 1.

I'm growing fast but my margins suck and I'm working a million hours. I'm getting high margins but I'm still not growing that fast and it's chewing up a lot of my time. So even getting 2 out of 3 is actually pretty good. And I think it's something to aspire to and maybe even a challenge for advisors.

If you only have 1 of the 3, you might need to make some changes to your practice. There may be some opportunities for improvements to the practice. But if you've got 2 out of 3 and you're trying to get to 3 out of 3, I really question whether it holds. If only because in the purest sense, if you've really got a fast-growth firm. And when I talk fast growth, I'm talking about numbers like 40% growth. If you've got 40% growth, the business doubles in less than 2 years. Just rule of 72 compounding. And we're a service business. If you double your business in 2 years, you will double your headcount. You pretty much have to. You need people to do the things for the clients that get served. That's the reality of the business. You can get a little bit of incremental improvement with tech and systems and process.

But if you want to double a firm, you basically have to double its headcount to the service business. And if you double your headcount every 2 years, I'm sorry, but working limited hours and having high margins, you can't stack both of those when you're adding that many people that quickly. Especially maybe you can do it once over 2 years, but then the second 2 years, you double again and now you're 4x the size and things just get a little harder and more complex, or potentially a lot harder and a lot more complex. I guess I'm even curious how the game does that. Does that ring true to you? Do you see that? Do you not buy that principle?

The Importance Of Being Intentional Around Business Design [10:21]

Carl: No, it totally does. I just my questions are always around "why", and "intention", and "design". So it's so hard. There's this Lao Tzu quote that has been chasing me around for more than a decade. "Be who you really are and go the whole way." And I think it's really hard to figure out who you really are and what you really want as a business. And that maybe that sounds some sort of drum circly thing, but it's not. It's just really hard to figure out what you want because there's all the cool kids telling you what you want. Growth is always the answer. There's the startup culture. There's only the paranoid survive. There's all these things. Grow, grow, grow. Really? Is that what you really want? And so they're just intentionally asking the question.

And the other thing I think is important is that then you design around what you think you want. And so because I've tried to find the source of this. I heard somebody say, "business design is lifestyle design". They didn't say this part, but the way you design your business is how you're going to design your life. It's going to bleed over. And then I love John Bowen used to say that often if you kind of stick around for 10 years, you'll be successful. What he said was, "often we're successful by accident". He would say the successful by accident part. And then I think his implication, and I can't remember exactly how he would say it, but would be like let's now be intentional about...

Michael: You were successful by accident. You just did a bunch of things and God bless, it turned out to work. Now let's be intentional about what you want it to be.

Carl: Yeah. And let's be intentional about what you want it to be. And all answers are okay. And really pointed to your thing, 2 out of the 3 answers are okay. Oh, sorry. The last thing I was thinking of was trade-offs the whole time you're talking about... This is not a trade-off-free decision. It's not possible, which is how you've kind of structured this framework around picks any 2, is you don't get to pick 3. It's not an option. And so you're going to be thinking, I think, intention, design, and trade-offs is what I was thinking as you were talking.

Michael: Yeah. I found this phenomenon over the past few years where I've kind of started grouping advisory firms into sort of styles about how the firm or how the founder runs the practice. And I'm realizing even as I'm talking about this "pick 2", that it actually maps surprisingly well. I'm literally realizing it live as we're having the conversation here.

Carl: That's what we do here. That's what we do. Make space for insights for Michael.

Michael: I appreciate that, Carl.

Carl: It's the whole goal.

Michael's 3 Types Of Advisory Firm Entrepreneurs [13:55]

Michael: So I framed firms for a couple of years in kind of 3 dimensions. The first I call the lifestyle firms. This is the classic like I was saying, "I don't live to work, I work to live. The practice serves me to create a certain kind of income and lifestyle that I want to live". And that's one segment of advisors. And there's a second group that I call the enterprise builders. They like building businesses and creating enterprise value. They're driven to be business builders. They do tend to spend more hours in the business because it's actually fun and motivating for them and they like to build big businesses.

There's a third group that I find that I've taken a calling The Boutiques. They tend to be very mission and purpose-driven. It maps to Bo Burlingham's "Small Giants" if you've ever...for anyone who's ever read that book, where their wonderful tagline is, "Businesses that choose to be great instead of big". Now, the irony in the "Small Giants" world, and per the book, is sometimes businesses that choose to be great and not big turn out to become pretty big and sizable. They get there over time because they serve a community with a strong passion and focus. And if you do that for enough years with compounding it still actually turns out to be pretty big. But they don't optimize for enterprise value the way enterprise builders do. They optimize for "how best can I serve my community in a meaningful and positive way?" And if I do that repeatedly over time it turns out that my business grows.

But what strikes me when I kind of look at these combinations are lifestyle firms really do end up being firms that, by and large, they prioritize the hours and the margins and downplay the grow fast. They're actually willing to say, "I've got enough clients. I just really don't want to add any more. I'm good. Or maybe I want to replace the one that leaves." Very common for lifestyle practices that your bus gets full, and just like, "This is how many clients I want to serve. It makes me the money I want. I literally don't need more. Why would I add more?" So they live the margins, the hours, and they sacrifice the growth.

The enterprise builders tend to do...their Pick 2 is the growth and the margins. I want to run a strong growth firm that's good profitability because that maximized my enterprise value and I kind of work a lot of hours in order to do that. A lot of enterprise builders, particularly during the building phase, they work long hours. This is your quintessential long-hour working CEO building a business with significant enterprise value.

And then there's this third group of the boutique where you may be enjoying the hours and the growth, but it comes at the cost of margins. Because at some point if you want to keep building thing bigger that you're trying to build, it might not be quite as profitable. Can still be very profitable and do well, but it might not be as profitable. And the challenge I feel like I see most often is for those advisors that are building boutique-style firms, I've got a vision of who I want to serve, I'm serving them really well, it's going so well, more of them keep coming, I'm getting referrals, I'm getting known in my community, the business is growing, it's going really well, lots of opportunities coming, this is exactly who I wanted to serve and how I wanted to do it. So this is amazing.

And then it starts growing faster than they wanted or realized, and the only way you manage that is to slow down the growth. And if what you're doing is driven to serve people with a purpose and a mission, the last possible thing you want to do is start telling people no and slowing it down. And I must feel like it's this successful boutique trap that the thing we're doing that's working so well can actually work too well and undermine the rest of it if you don't manage the growth. And I guess that's essentially my challenge to this and sort of my conversation with Adam was I love this thing that you're creating and how well you manage it, but I think you're underestimating what you're doing is working, and if it actually keeps working, the compounding growth is going to put a lot of pressure on you soon. But it's working, so who wants to slow that down?

Deciding Early On Which 2 Business Attributes To Solve For [18:50]

Carl: It's so interesting. Is this a younger cat problem?

Michael: I don't know. Define young. My frame of reference has changed now that I've been doing this for 24 years.

Carl: Is there something that happens. And I feel like there's something and that maybe age isn't the right metric, but there's something that happens when you start questioning what you really want to build, what really matters to you, and what you really like to do. And the intersection of all, it's just a massive series of experiments, of course. There's nothing you can do to sit down and find this out.

Michael: It's just life, right?

Carl: Yeah. I wish I would have been more thoughtful about those experiments earlier on if somebody just explained it to me. But what do I want to do? What am I uniquely good at? Of course, what I make money out... That's these 3 that show up, or 3 or 4 that show up in whatever that great book is, the Japanese book, "Ikigai." It's like, what am I uniquely good at? What do I get paid well to do? What gives me energy?

I've been surprised at the number of conversations I've had lately where people are like, "This isn't what I wanted to build." You know what I mean? And I'm thinking all across financial advisors. I remember having this discussion a lot 2 years ago with builders and contractors. They were like, "I got my dreams all came true and I'm miserable," when the building world went crazy, at least in our part of the world. Like, "I got all my dreams. All my dreams came true and I'm miserable."

It's just interesting because it's... And I think it's just such a fascinating problem of, "Okay. Well, what's your intention? What is it that you really want to build?" It's cute that you think you know. So it'd be more like, "What do you think you want to build? And then how would you design it if you...?" And these are all fine answers. How would you design it if you were being intentional about it? And then what trade-offs are you willing to make out of all the trade-offs you pointed to?

And if one of those trade-offs is what you ended with there was, but it's growing really fast who wants to slow it down, one of those trade-offs maybe I need to put the brakes on this thing because I'm not willing to trade my life or my time at home or whatever else for that. I got to put the brakes on this thing. But the point is, and we've got to be careful in our industry and I'm certainly been super guilty of this in the past, I'm trying to get better about it, believe it or not, that there's no right answer necessarily. That all answers can be okay. It just needs to be intentional.

Michael: That to me in part is sort of the framing of pick 2, you get to pick which 2. No one's telling you which 2 to pick. All of them work. All the combinations work and can make things that are successful and meaningful and economically rewarding. Some might have slightly different financial implications than others but candidly most advisor jobs, once established over time in a practice, the math is pretty good with any of them. But to me the striking part if you're only getting 1, you've got an opportunity to get to 2. If you've got 2, you can pick which 2. But be wary going for all 3.

And again, this doesn't mean that you can't grow. I really frame this in the frame of it's what happens when you try to either grow fast or launch and do a lot of the things in your head, if you're more of a proverbial shiny object person, you like building more new things. Firms that are growing at 15% can keep plowing along with steady growth for a long long time to come. It moves at a manageable enough pace. You can develop team and work up to it. I'm really talking about around where the revenue of the business is growing 30 or 40% or more and does it for a number of years in a row. It's when things start going a little wonky. Because now you're doubling every 2 to 3 years at 30 to 40% growth rates. And that's just a lot of growth. At some point, it's just a lot of people. Because the other day, we're are service business. You want to 2x or 4x your business, you're going to 2 to 4x your headcount.

Carl: And Christie Raines, one of my favorite financial planners, talks about which problem do you want to have. It's not an option to have no problem. Which problem do you want to have? And problems in that sense, I like to think of problems in that sense is just puzzles, like which things do you want to have to deal with and solve and work on? It's not a problem like, "Oh, no. Terrible." Just which problem do you want to have?

And I think John Bowen's successful by accident, let's just turn that around and let's be thoughtful. I think the thing I'm really trying to point out here is if something's causing you pain repeatedly, it might be a good idea to look at it and figure out if you still want to make that trade off. But just running around expecting the pain to go away. Building a business unexamined might be something we want to consider changing.

Michael: Should be like calling back to what is it, a life unexamined is not worth living, a practice unexamined is not worth running.

Carl: And then there's that another great, I think it's a Freud quote, which was, "Until we make the unconscious conscious, it'll run our lives and we'll call it fate." And I think this is the same thing, until we make these trade-offs explicit, out in the open we're thinking about them, they're going to run our lives. They're going to impact our families, they're going to impact our health and we're just going to call it business. "This is work. This is work." Until we say, "Wait, wait, wait, wait. Actually, there's some trade-offs here. I've got some choice here. I can design something I want." And let's just be intentional about that.

Michael: And I guess I'll put it out to folks who are listening as well. If you think my pick 2 is off base because you got 1 and you don't even see a path to 2 or because you're doing all 3 and you believe you can really keep doing it sustainably this way, send us a message, [email protected] really does come into my inbox. If you think we're off base, let us know. But the more I look at firms, the more I see this pick 2 phenomenon crop up. And again, they're all good things, but if you've only got 1, let's see if we can get you to 2. And if you've got 2, just be clear and intentional about which 2 you're trying to solve for.

Carl: Amen to that.

Michael: Awesome. Thank you very much, Carl.

Carl: Yeah. Cheers, Michael.