Kitces & Carl Ep 80: How Advisory Firms Evolve Their Specializations Over Time

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

Show Notes

• Kitces & Carl Ep 79: Finding Your Future Specialization By Interviewing Your Current Clients
• #FASuccess Ep 140: Transforming Your Advisory Business By Shifting Your Mindset After Hitting The (10-Year) Capacity Wall, with Adam Cmejla
• Kitces & Carl Ep 78: Communicating Hard News To Clients (When You Plan To Relocate The Business)

Kitces & Carl Podcast Transcript

Michael: Well, hello, Carl.

Carl: Greetings, Michael. Nice shirt!

Michael: How are you doing today?

Carl: Love the color of your shirt today.

Michael: It's feeling blue. I was in a blue mood, given that today that ends with ‘Y’. So, I figured why not? Let's splurge on the exact same blue shirt that I wear every other day...

Carl: So that's how you...?

Michael: Not the exact... I mean, I have several of them. So not literally the same shirt...

Carl: That's how you decide what to wear is if it's a day that ends in Y you just wear the blue shirt.

Michael: It's a blue shirt day.

Carl: Oh, perfect. Got it.

Michael: Very safe formula.

Carl: That clears everything up. Perfect.

Michael: It really simplifies life in some helpful ways.

Carl: Yes.

Michael: Yes. So, Carl, last episode, we did this kind of deep dive into picking a niche like how to pick a niche, how to actually start the conversation around the people you're going to talk to try to figure out like the niche or the niche thing or what the heck you're going to do for the niche. And I thought it'd be interesting to a follow-up this week.

So I had kind of an interesting conversation with an advisor recently who had asked this question of... Like the question was, are there advisors who plan in advance to intentionally evolve their niche over time as their personal or business circumstances change? And I think just the context for this advisor was that eventually, he was envisioning doing a lot of work with clients who need a lot of college planning, student loan planning because he was a younger guy. And at some point, he was going to start a family and he knew, like, he's going to get immersed into that world. And so he expected, his niches business was going to move that direction as he went that direction, he would serve clients along with that as well.

And so he sort of had, I guess, like this master plan, like, I'm going to do this thing for now but I know I'm probably going to end up somewhere else eventually, and I'm just going to build a thing that kind of paths from A to B.

And so I thought it was sort of an interesting question or an interesting discussion for two reasons. In part, just, you know, there's kind of this question of, is it okay to start with something knowing you're going to plan to go to something else later?

And then I think there's the second theme to it, which is just the fact that the thing you start out with might not be the thing that you end with, right? That niches can evolve, whether it's sort of the intentionally planned evolution, the way that he was highlighting, or whether it's the just life happens and circumstances change and things evolve.

So, I guess I'm kind of curious to hear your thoughts on both of these. But, let me start with the first part first. So this was a question from Kevin just because it's easier to talk about him by name. I'm not divulging anything. He actually asked us on Twitter. So it was in a public forum.

So, Kevin had kind of set up this question of do advisors plan in advance to intentionally evolve their niche over time as their own circumstances change? So how do you think about that question of can I plan for my niche to evolve to something else that I'm planning to go to over time?

How To Evolve A Niche When The Future Is Uncertain [03:45]

Carl: Yeah, I'm just thinking about all the plan... Like, what's that old saying? People make plans and God laughs? So can we? For sure. You know, will it turn out that way? Highly unlikely, but the fact that we're making the plan to head that direction is...

In fact, you can do... I would suggest doing anything you need to do in order to take the next step anyway. Right? And just realizing that almost for sure... And there was that... What was the other quote since we're throwing quotes around? Mike Tyson, "Plans are great until you get punched in the face."

And whoever the general was that said no plans survives first contact with the enemy. So I think that idea of, like, it's still great to make the plan, that's fine. And once we have the plan, we back up. The fear I have sometimes with these plans, especially around marketing and doing things that involve public scary things, the fear I always have when this kind of stuff comes up is that it's really easy for us humans, I know it's easy for me, to use that process of developing and getting really sure and really using that process of really building out the plan and thinking about everything, and I'm still working on my business plan as a place to hide from doing the really scary work of, I'm going to call one person, see if I can go interview them to learn about what they do.

So, yes, it's good. Yes, we can plan. And then to your point, more specifically, will niches change over time? Of course, you should almost count on it. And you should almost count on, it's a process of being a little less wrong, right, instead of a process of trying to be right today.

Michael: Yeah, I mean, I was struck by this question that, on the one hand, I mean, yeah, I have seen advisors that do this in multiple steps. The one that I probably see most often is a version of what we had talked about, on the podcast a couple of months ago. You know, it's the advisor, who says, you know, I've been living in this cold climate place, I think, in a couple of years, I want to relocate to warm-climate place. I'm going to have to figure out how I manage relocating myself to a new location and building a practice in new space. So I'm going to start setting the seeds of the clientele I'm going to work with at the place that I plan to destination to eventually.

And they do kind of have a multi-year plan about how to transition from where they started their practice to where it's going. I don't necessarily think of that as like a niche here with a plan to evolve the niche there. That to me is just acknowledging, like, if you've got a plan about where you're going, there's nothing wrong with starting to skate to where the puck is going. Like, here's where I want to be in three to five years, I'm going to start doing the things that take me down the path to get to where I want to be in three to five years. I don't think there's anything wrong with that, I actually think that's good strategic planning, if you can create that level of clarity about where you want to go in a couple of years, then start taking the steps there, that's great.

I think for a lot of us the challenge is the opposite, which is I'm not really actually that entirely completely certain about where I'm going to be in three to five years to the point that I want to make the commitment to do the things over the next three to five years. And so, we have a little bit more of a wandering approach because we don't want to pick the wrong thing and get stuck in the wrong thing. And then sometimes we get stuck in the wandering instead.

But, you know, I think of this in the context even of my own journey, all right, of really, I would view like a career that has spanned a whole bunch of different niches. So, like, if I go all the way back to when I started trying to build, like, my expertise domain, like, I originally started with alternative minimum tax planning.

Carl: Ah-Ha! Of course, you did!

How To Recognize A Potential Niche [07:57]

Michael: Like, that... Well of course... It was 2004. It was right after President Bush's Second Tax Act. And the big thing about the 2003 Bush Tax Act was that it shifted the regular tax laws in a way that made a whole bunch of people subject to AMT for the first time, AMT frequency just like blew out of the water, it became a big planning thing relatively quickly because it just happened from the tax law.

And for years, like, literally years, the only thing I was doing, writing about, talking about, even like focusing on with clients was AMT planning, like, that was the thing. And I point that out because I have not written or done anything associated with AMT for like 10 years, like, it was my thing for many, many years. And now it's not my thing in any way, shape, or form because it evolved away from that. That niche sort of moved into the adjacent niche of I became more focused on anything related to tax planning for retirees, like our firm was focused on retirees. I took an AMT tax planning thing and made it a taxes for retirement thing and then built on that for several years.

Then that turned into, well, it wasn't even just the tax research of retirement. It was the withdrawal research and retirement. And then for about three or four years, I did a lot of work on withdrawal rate strategies and withdrawal rate research and did a whole bunch of stuff there. That was about when Nerds Eye View blog got going. After a couple of years of that, I started watching a bunch of tech trends happen in the advisor worlds, like I think I want to actually do a little bit more with like technology and advisor practice management. And that was actually the blog one.

So the origin, the Nerd's Eye View blog was I needed a place to write about technology and practice management things because I was writing a newsletter that was all nerdy retirement research and tax research, and just was seeing some other stuff, wanted to do some stuff on something that was kind of adjacent. And so I went that direction. Now I spent many, many years in that direction. And the point is being, you know, like, our niches or our specializations... They shift, they evolve, they often extend a little bit deeper, right? We usually don't just completely go a random different direction. It tends to be either, as it goes like, we tend to either zoom in to the place where we are. Like, we're there, we just get even deeper where we are, or we kind of go adjacent.

Like, I was playing in this space, but I notice this other space, like, right next to it. There's actually something really cool happening right here. So I'm just going to, like, hop to the other side of the tracks here and do something right over here on the other side instead, and start moving off in this direction. But it's not as though I said, like, "Hey, I've got this idea, 15 to 20 years from now, I think I'd really like to be doing a lot of work around advisor technology and practice management. So I'm going to write an article about alternative minimum tax planning so I can get there 18 years from now.

Like, there was nothing strategic about this at all. It was here's the thing that's interesting, where I see some immediate opportunity, I'm just going to do a thing because it's right in front of me and taking a step is better than not taking a step. So I started doing the thing. And the thing led to some more things and being focused on that was very effective because, you know, I quickly became one of the leading experts on alternative minimum tax planning, simply because no one else was doing it.

Carl: Like I was going to say, it's because only two people wanting to write about it.

Michael: That's the point. Right, like that... I mean, to me, that's the whole point of...

Carl: I know, that is the point...

Michael: That's the whole point of niches. Like, you know, what the easiest way to be the world's leading expert? Pick a thing that no one else does. And you will always be number one because there is no number two. But that's the point. Like, that's why niches and specializations work so well. And the further that you zoom in, the more effective it is, and particularly in this world, where we only need like 50 to 100 clients to be wildly successful, right?

If I was trying to make like a global business that needs 100,000 people, you got to be really careful not to pick something that's a little too narrow and sparse because, you know, the technical or like the total addressable market is not big enough for you if you want to make this giant national firm thing.

But for any of us individual advisors, trying to pick a thing, like, anything works. I mean, really, like anything works, as long as it's with people who have enough financial wherewithal to pay you for your services and they have a problem you can solve. But the more focused you get, the easier it is to be distinct because you just literally have no competition if you get specific enough. There is no number two person that does what you do. You're the only one.

But it's not as though I had this plan of doing the journey. I just did the first step of a journey into something that worked because I knew I could do well because no one else was doing it. So why not? And all the steps that come after, what you find when you go down the journey.

Carl: Right. Why do you think Kevin asked about would you intentionally do this? Like, why wouldn't you just get started with one you eventually want to build?

How To Decide When To Implement A Niche [13:06]

Michael: Yeah, I mean, to me at the end of the day, like why, why don't we just... Like, I'd ask the same question or frame the same response back to him, like, if you know where you're going, like, why go the circuitous this route? Like, just go for the thing where, you know, you're going now. Now if the thing, you know, you're going, it's going to take you a couple of steps to get there, by all means, like, you know, ladder your way there, get there over time. Like, it may take a couple of steps, you may not be at the point where you're literally ready to jump in and do the thing now.

But if you know where you're going, go where you're going, like, you don't have to go there indirect. I find for most people, when they want to go there indirectly, it usually comes back to some version of, well, I'm not sure the thing or I'm afraid of picking the wrong thing or, you know, it's some fear of regret, that tends to hold us back. And so, to me, like, I guess, the biggest point too, it's like just take the stakes down a couple of notches. Like, you are not picking the thing that will be your career for the rest of your time on this earth. You're picking a thing that will take you a couple of steps forward over the next couple of years.

Now realistically, like if you want to give it a good run in opportunity, I would assume whatever the thing is that you do, you probably going to do it for three to five years. Now maybe after three to five years, you're going to do something that's even more focused and specific there. And so you'll still kind of be in the thing, you'll just be deeper in the thing. Sometimes you go to adjacent things, but you're not making a 30-year decision. You're making a 3-year decision that should be some step better than where you are now if only because you're going to have less competition by picking something that not everybody else already does. Right? World's leading in AMT planning by being the only one who bothers with AMT planning.

And when you get there, you get to make another decision in a couple of years about what you want to do next. Like, do I like who I'm working with now? Do I see another thing nearby that would work better? Like, it reminds me we had an advisor named Adam Cmejla on the advisor success podcast a couple of years ago. Like, he had a version of this journey as well.

He wanted to work with anybody in the medical profession, but he didn't want to box himself in. So he focused on white coats, like, any medical professional who wears a white coat, right? So, like, doctors, nurse practitioners, any possible specialty, like, anything under the umbrella and found that, like, he got no traction in it. It was so broad. It wasn't specific enough to connect with anybody. Eventually realized he had a couple of clients who are ophthalmologists or optometrists, in particular. So he started going after optometrists. And he rebranded his podcasts from, like, white coat podcasts into the 2020 podcast. And not because he did in the year 2020, but optometrists, right, 2020 vision. So we don't have to get the joke. They get the joke. That's the point.

So he did the 2020 money podcast. So you can get clear vision on your finances. And that took him even further down the optometrist route, where in optometry world... As I learned from him, there's actually a similar thing to what's happening in our advisor space, which is PE firms are coming in, buying up all the independent practices and rolling them up into big giant national organizations.

So, all these individual optometrists are getting PE firms knocking on their doors offering giant buyout checks. And so Adam is now not even just working with white coat scientists, working with optometrists, but working with optometrists who plan to sell their optometry firm to a PE investor in the next three to five years. And he helps them do the planning process, to build up the business value to the exit, navigate the exit, make sure they get a good deal on the exit, and then guess who gets to help them with the money that comes from the liquidity event at the end of that.

And so, you know, now Adam went from "I work with all white coat people and I'm struggling to grow," to "I only work with optometrists who are selling their medical practice or their optometry practice to a PE firm in the next three to five years," and now he has a waiting list of clients.

But he didn't aim for that. He evolved that. He iterated to that. He took a step and said, like, "Oh, I see a thing here that's kind of adjacent, a little better. I see a thing here where I could zoom in a little further and a little better.” And it was just the progress forward that got him there, not like a master plan of, "Well, I'm trying to figure out how seven years from now to work with optometrists who are selling to a PE firm. So I'm going to start with white coats and evolve my way there."

Why Applying A Niche Doesn’t Need A 30-Year Master Plan [17:47]

Carl: Yeah, this is... You're really sort of pointing at one of my... You know, I don't use farm words very often, but whenever I'm tempted to use farm words, one of the areas I'm tempted to use farm words is when... Is this problem? And let me explain that.

My wife grew up on a farm. She taught me what farm words were. They're words you use when you get really, really mad at an animal. So, one of the things I get really frustrated with is when somebody like Adam... Adam doesn't do this. This is why it's a perfect example. If somebody like Adam were to show up and tell the story as if it were this master plan, and we see this a lot on the interwebs, right, like, I've got a sub painted on my chest now because this was a grand plan. I call that “cute story, bro.” You know what I mean?

Like, the reason those cute stories are so damaging is because it leads to people who right now are trying to make the decision about what niche to pursue to believe that there's a way to masterplan this whole thing out. And what Michael and I are trying to tell all of us and remind ourselves even, daily almost, is there is no way, Adam could have never known that. I could have never known that. You could have never known that.

And so I think what you do is you say, "I love the model of treating this decision like a strong opinion loosely held." You know, I'm going to go forward with full energy into this strong opinion and at the same time, no, I'm probably wrong. And the way in which I'm wrong will show up. And when it shows up, the new information shows up, I will course correct. And I'll tweak... Normally it's just a little tweak. It's not often like a big thing, but sometimes it is, but mostly it's a little tweak. There's just no way.

We're so analytical and we're such planners that we think we can map this out. And we can't. My wife, we're doing a remodel...

Michael: We're planners. It is kind of hardwired into us, which I say jokingly but, like, it is hardwired into us. We like to do 30-year plans.

Carl: You and I've talked about even that fallacy, right? Like, the 30-year plan...  Plans are guesses, right? And they're very analytical guesses, really great calculators, like the whole thing. They're the best guesses anybody on the planet could do for their clients, I know...they're still guesses. So I think we just have to treat our marketing, and especially these niche exploration projects with...it's just a dose of reality.

And the reality is you can't know. So, do a little bit of research. And a little bit for you could be this, you know, an inch wide. For somebody else, it could be 12 feet wide, whatever is right, make a decision, and it's in the decision that you'll learn the new information. And so, yes, just get started and you'll learn new information. And that applies to niches as well, or niches as you like to call them.

Michael: Well, because there's riches and niches. Just... that's how you remember.

Carl: Now my friends in the UK taught me that you remember this way. Niches, witches, or niche, quiche, which one would you rather have?

Michael: Riches. I'd rather have riches.

Carl: I said witches!

Michael: If I have riches I can buy all quiche I want.

Carl: Niches and witches.

Michael: Niches and riches let me buy all the quiche.

Setting Short-Term Goals To Put A Niche Into Practice [21:36]

Carl: There you go. Okay. That works. You win. But I think the point here is, I don't know if it's... You know, it might make sense just to tie the loose end. I want just to call out to all the listeners. Like, the two examples Michael gave were topical problems, AMT tax and retirement planning. They weren't occupational. And you'll notice in the last episode, we talked about occupation. And we were very specific that occupation is a shortcut.

You can solve AMT problems. You can solve sustainable investing problems. You can solve, you know... And those things are great. Those things can be great niches and lead to building big businesses. They just don't have some of the benefit of the occupational shortcut because of what we talked about. We know where those people hang out.

Michael: You know where to find them.

Carl: ...we know podcasts they listen to. You know what I mean? So, you know, we all know, Ron... You know who I'm talking about built the giant firm, Ron?

Michael: Ron Carson.

Carl: Sorry, the name of the firm is literally is his last name. Ron Carson. Sorry, I'm having trouble with names today, for some reason. Ron Carson, from what I've been told, Nebraska football, wine, and private pilot. Like, that was the original niche he was exploring. None of them...

Michael: He was passion prospecting. He just did the things he was already passionate about and found other people who like doing the same things and then spent time with them doing the things he already liked doing.

Carl: That's fine, too. Right? But I do think we can make a pretty clear argument that there's a shortcut involved in an occupation. But either way, decide, take a step, see what you learn, course correct. Keep repeating over and over.

Michael: Yeah, and to me, that's really the drive of it at the end of the day. Like, you're not picking... And I guess I know, it's hard for a lot of us that like to set our long-term goals because we're planners, like, we'd like our long-term goals. Like, you're not going to pick your 30-year niche, just frankly, you're not going to know what the heck the world looks like in the 2050s. I mean, imagine what the world looks like today if you were visiting it from the 1990s, 30 years ago.

Carl: Three years ago.

Michael: Like, you're not going to know what the world looks like 30 years from now, and you're not actually going to know what that much detail the thing is that you're going to be doing. It's okay because you got like 27, 28 years to figure out what your 3 years plan is going to be for the last 3 years to get to where you're going to be in 30 years.

The question is, like, what are you going to do in the next three years to put yourself in some position that's better than today? For which, you know, the main impetus to all of this is, if you really want to be differentiated, if you really want to be distinct, if you want the marketing and sales process to be easier, just try being good at one thing that no one else is good at, then you don't have to compete with anyone else.

It's like the easiest way to be the smartest person in the room is to be the only person in the room who really knows anything about the thing, because you don't have to be that good. You just have to be better than anybody else in the room at it.

Carl: And to realize that that bar is relatively low when it comes to a specific occupation because very few people will do the work to interview even 10 people. Like you interview 10, as we used last time, architects, you're going to know more about the unique financial challenges than probably anybody else. Certainly anybody else in your area knows about architects because nobody takes the time to do it. So it's not a very high bar.

Michael: So for those who are, I guess, like hopefully helped by this now, go back and listen the prior episode, where you get the advice about how to take the first steps to start down this journey, right? This is not 'what do you do to pick your niche 30 years from now?' This is what do you do to move in a direction that puts your business in a better place three years from now and start taking the steps in that direction? And a couple of years from now, you'll reset the goalposts.

Carl: Yeah, totally. Yeah. You know what, the last thing I mean to say is, we did multiple niches, not because it was a good business decision, but because I got bored. Right? So that's another way to think about that is, like, if you love solving problems, once you solve a problem, you build a business around it, you may want to solve another one. That's okay, too. All of these things are fine and they're all called reality. And the only way to deal with reality is to iterate, right? To start and get after it. So hopefully, that's helpful.

Michael: Awesome. Well, thank you, Carl.

Carl: Cheers, Michael, super fun.

Michael: And just remember the riches and niches let me buy all the quiche.

Carl: You know what? At this point you've won, we just have to talk to like Alan Smith in the UK or a couple of those. You know...

Michael: We're going to get a lot of messages from our friends in the UK after this episode. I'm sorry, but I'm sticking with it. The riches and niches let me buy all the quiche.

Carl: Those guys and gals are going to come after you but for me, you've won. I give up.

Michael: Thank you, Carl.

Carl: Yeah.