Kitces & Carl Ep 126: The Best Ways To Boost Advisor Productivity: New Tech Efficiencies Vs Old Fee Increases

***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 125: Scale Your Business, Leverage Yourself, Or Just Grow
• Kitces & Carl Ep 103: Balancing Client Responsiveness With The Proactive Sledgehammer Of Value
• Kitces & Carl Ep 76: Overcoming Imposter Syndrome By Truly Building Confidence In Your Own Value
• Industry Benchmarking Studies
• Calendly
• Quote By Friedrich Nietzsche, The Will To Power
• Quote by Marianne Williamson, A Return to Love: Reflections on the Principles of "A Course in Miracles"

Kitces & Carl Podcast Transcript

Michael: David Carl Richards III.

Carl: The 3rd.

Michael: DCF III.

Carl: DCR.

Michael: Oh, DCR. Where did the F come from?

Carl: Well, there's a story behind that, maybe.

Michael: DCR. DCR III.

Carl: That's exactly right.

Michael: Well, welcome.

Carl: How are you, Michael Kitces? I'm always surprised. I show up here, I'm just getting ready to go home, I jump in, boom, all of a sudden I'm in a conversation.

Michael: Funny to see you in this Zoom room that we scheduled and pre-scheduled for ourselves.

Carl: I know, it's crazy. It's really weird. What are we...? We got to talk about something. You know what I think we should talk about? Why in the world...what's this deal with running around looking for ways to increase efficiency by half a percent and then...

Michael: Oh, we're back on scaling again.

Carl: No, but avoiding the whole... We could do something different. We could just raise our fees. I heard you caused a little bit of a ruckus recently by daring to suggest such a thing.

The (Financial) Efficiency Limit Of Technology And Process [1:09]

Michael: So, what I see a lot of advisory firms doing these days in our wonderful modern era of technology is we're all on the hunt for the tech tool that will make me more efficient, that will increase my advisor capacity, that will improve my margins. If we're going to talk about this revenue per advisor thing, I get the tech that allows me to take on another 10 or 20 clients without hiring anyone. So, now my revenue per advisor goes from $500,000 to $600,000 because I'm serving more people. And from the business ends, same staff, more revenue means more profits. I add to the top line, I didn't add to my cost, it drops to the bottom line. This is good. And I see a lot of focus on how do we get our tech tools to do this, to make this possible.

And you can see this even some of the industry-benchmarking studies. If you look... Average advisory firm ends out with about 35% of costs in overhead. You just take total revenue divide out all the overhead costs, my non-advisor support staff, my rent, my software, my E&O, professional development, all the different things that go in there. But there's kind of a range around it. Some firms are at 30% and some firms are at are at 40%. So, there's about a 10% swing in how efficient advisory firms get by just getting the right people in the right seats and leveraging technology efficiently to do it, to execute on it. But the interesting thing I find when I look at that, it's only about 10%. If you were serving 80 clients, you still don't even get to 90. If you had $500,000 of revenue per advisor, you get 550. Those are meaningful improvements. Profit margin of the business improves.

But I find we seem to have this idea, I think getting back to one of the comments you made last week, "Isn't there some world where I 10x my business, I don't have to hire 10 times many people?" And that just doesn't seem to show up. And I don't want to be negative on all the cool things that we get from technology and the ways that it leverages us. Yes, it does matter, but there's this idea it's going to be like the panacea and make my advisory firm wonderfully profitable and help me handle a bajillion clients, and it just doesn't seem to be happening that way for 50 years of computers. So, I don't know if that resonates with you that this is...

Carl: Well, the question to me...

Michael: Like, are we...? I don't know, are we putting too much faith in the technology to solve these problems? Because I got some other thoughts about what I think does solve these problems, but I want to start there of, technology is wonderful, robots and algorithms and AI is the future. Do you really believe that as that shows up in our advisory businesses, or are we pretty much still going to be doing the same things that we do for the time and for the clients we can manage?

Carl: Look, I don't know. I do fee there's a mismatch between taking traditional tools that were built for family office-style solutions and applying them to mid-market, if you will. I do think there's a mismatch sometimes between what we think we... And it's often we want to provide because we want to build monuments to ourselves and we want to treat everybody like it's super complex, and it turns out... I remember, I was shocked at how relatively simple my average client between 1 and 3 million, it was just awesome. Once I got clear about this, and we can go back to the Kevin Depi episode again on... Sorry, not Kevin Depi. Kevin, just Kevin. We can go back to the Kevin episode. Again, on the idea of, could we just right-size the services we're providing, I think there's a lot of opportunity there. And I remember that we...

Michael: This is all like, I'm doing all this work and sending quarterlies out to my clients and then one quarter...

Carl: And then don't even want them.

Michael: ...I send them and nobody noticed, and then it's like, why was I spending all that time...?

Carl: And I remember that guy... I can't remember who it was, he was in that Virginia Beach or something saying to me, "I don't understand what all of you do." He's doing all of it himself. Incredibly high margins. Build 700, kept 600, whatever. So, I think there is some there. I think there's some things there, like, who do we serve? What tools are we using? Can we clean this up? Can we delete things? And then of course there are, can I schedule a little bit more efficiently because I use Calendly? Of course, there are things like that, but to me, it's sort of missing... If we've defined what... Most of us never do. I know I never do. If we've defined what we really want to build and what we're trying to optimize for, if the goal was really to go from 500 in revenue to 600 in revenue, there's a better way than technology

Michael: One, so yes, I would agree in that... So, I had a version of this come up with an event I was doing a couple of weeks ago. So, imagine the advisor who's charging $3,000 for a planning fee, which is about where a lot of advisors are for upfront plans. $2,500 – $3,000 is fairly common. A lot of advisors are doing ongoing fees in the $3,000 range. So, imagine with me for a moment. You're doing $3,000 planning fees and you want to figure out how to improve the profitability and efficiency of your business. So, what most of us do, we gripe that "Insert financial planning software vendor here," your software's too clunky. It's got too many clicks. "Oh, I hate doing all the data entry. Can we get clients to do it? Can I get a team member to do it? Could we get the output a little faster, more efficient? It's so tedious to run the scenarios I want to run in blank." We get frustrated. All the things that make the planning software take as long as it does. And I'll just go back to what I said earlier. At the end of the day, if you look at where...

The difference between really operationally efficient advisory firms and really operationally inefficient advisory firms are, so it's about a 10% swing in overhead. So, I kind of figure that's our opportunity at the end of the day. I could move this number by 10% if I can figure all the stuff out, if I do all the stuff. Yes, maybe I'll save a little bit more time on my planning process, but that's only a part of what I do year-round, so that only moves the numbers so far. Then I got to find something to make my review meetings more efficient, I got to find something to make my client check-ins more efficient, and so on down the line, if you want to do this business-wide.

So, look, I love me some good technology and I love the idea of getting 10% efficiency back, but the thing I get stuck on pretty quickly when I talk to most firms of what's going on, tell me about your firm and your revenue and your team and your client base, yes, you could spend 6 to 18 months, find the tech, get the tech, implement the tech, rebuild your systems, make them super efficient, get your 3%, 5%, 10% efficiency, or you could just charge $3,500 for a planning fee instead of $3,000 for a planning fee, which is more than a 10% increase, and you can just do that overnight. Just change your advisory agreements, change...

Carl: Boom. How long?

Michael: Just...

Carl: How long do we have to wait to get to the punchline of this? This is like the longest setup for the joke the whole time. Charge more.

Michael: Just fix your fees.

Carl: I feel like you were caveating, hiding, yes, just charge more fees. That's what you said somewhere, and it caused a little bit of a ruckus. Why does that cause such a ruckus?

Michael: Because I can't raise my fees because, because, because.

How Advisors Fall Behind Right-Sizing Their Fees For The Market [12:28]

Carl: I have this crazy story from a firm that had been around, I want to say 15 years, maybe longer. The guy had started it, he was a son of a preacher and deep service ethos, and he started by teaching... He was doing something else. I think he was a teacher. He started by teaching personal finance classes in the public library.

Michael: Cool.

Carl: After doing it for a while, he asked, "Would you like to donate 25 bucks?" He was like... the money was just not a thing. People were like, "Please, manage my money, manage my money, manage my money." He's like, "I don't want to, I don't want to." Finally, he sets up an RIA. He charges, as I recall, the AUM fee was 25 basis points. And grows and grows and grows to, I can't remember what the number. At that point, I can't remember if it was a billion, but it was close if it wasn't.

Michael: Woo.

Carl: Sits down with... Has brought in a bunch of other people, right? Brings in a new partner who I know pretty well, and they were like, "Well, should we rightsize the fees for what we're providing? We're providing..." He was like, "Oh no, no, no, everybody leave, everybody leave." But they finally were like... It took a long time, they finally do it. They send out a letter to hundreds if not more, if not 1000, but hundreds of clients, because there was lots of small accounts and big accounts, and they went from a quarter of a point to 1%

Michael: To 400% price change.

Carl: Overnight. And then number... I was like, "How many people did you get they were upset?" And he's like, "1 hand, we can count." So, I don't...

Michael: So, I can go from 1% to 4%? Though I don't think...

Carl: No, no, no. This is a right-sizing just to market, and maybe some would argue below market, whatever. But my point just simply is if you're providing value, there's a huge assumption that the audience we're talking to here is providing just massive value. They haven't priced in goal clarification, they haven't priced in presence, they haven't priced in listening, they haven't priced in the tax savings, they haven't priced in behavior, they haven't priced any of that stuff in because they're just such good people doing such good work. But the point is, there's room there to say, "Hey, I want to keep doing really great work for the people I'm doing it for, so I'm going to go from $3,000 to $3,500 or $3,000 to $4,000 on my planning fees."

Michael: One, and as you're highlighting, I think so well in this story, I said it a little bit tongue in cheek, I don't know if we can all 4x fees because that's going to break some things.

Carl: Silly example. That's my favorite thing though, is to use extreme examples. I know, I know.

Michael: Well, no, but you make a... But I think the example is dead on because no, most of us can't 4x our average fee. To get there that's going to break some things. But that's not what your story was illustrating. Your story was illustrating what happens when you stick with the fees that you set up in the very, very, very early years of your practice and bind yourself to, which legitimately might be a quarter of the market rate, because as I think about that, I know a lot of advisors that charge $3,000, $4,000 fees that still have clients on the books that pay less than $1,000 because that's what they charge in their first year and they haven't gone back and fixed it. Or advisors that have million-dollar minimums and still have $200,000 clients paying less than a quarter of their current market rate they're actually getting for the advice they're providing in the marketplace. So, I'm talking myself into full circle on it, that not with saying a little bit of the tongue-in-cheek response, I don't know if we can all 4x fees. I think it actually illustrates the point well that most of us really do have a segment of clients that are probably being charged a quarter of what they should be.

Carl: And I think it's important to always state, and that's okay. It's okay. You get to make those decisions. We don't have to be trying to optimize for every single thing, but at the same time just realize that that's a trade off, and it's... I want to say, well, you're not allowed to complain about the other side of that trade off, but that's not true. You can also complain. That's fine. I usually do.

Michael: Say like that. That's where I have trouble. Look, if you want to run a quasi-pro bono business where you give a ton of your services away at an ultra-deep discount and basically get no profit out of your business because you're doing that, you get to do that. You are the owner, that at least if you are actually the owner. That's to say, you get to make that choice. My challenge is then when we start hearing the conversations of advisory firms can't scale. This stuff doesn't work. You can't build a big advisory firm on ‘blank’ business model. I'm like, no, you can. You just have to actually charge your current market rates to all the people you work with. If you make the decision to undercharge a material segment of your clients, you can do that, but... I hate to say you can't, but I have less sympathy for the difficulty that you're now saying you're having in your inability to scale the business, and all the conversations that start, "Well, if only tech was better, then my business would be profitable." I'm like, "No, if only you charge what you are worth, the business would be profitable. Since you're choosing not to charge a market rate, you're hoping tech will be your hail Mary, and it's turning out not to be because it only goes so far and we can only do so much with the tech."

And so I find at the end of the day, a lot of advisory firms seem to be blaming tech for what are ultimately fee problems. And because they don't want to fix their fee problems, they're trying to fix it with tech, and it turns out just you can only get... So, if you are 50% to 75% below market rate – because you need to 3x to 4x your fees to get back to where they should be – the tech's not cool enough to solve that much of a gap. You can get a 10% move. It's not going to solve it when you're at a third or a quarter of the market rate.

Carl: It's so interesting to me how often this comes down to, really, to me, really deep questions around identity and where I choose to hide and why am I not... The identity piece to me is interesting in here because I have so many conversations like this around...like this with authors, other authors, and the complaints aren't about tech, they're about the publishing industry and how hard it is and social media, and if I could just find that... And there seems to be an element, sometimes it sneaks in here, that struggle becomes so much part of the identity it's like the starving artist identity showing up at the coffee shop, talking about being a struggling artist. It is so intertwined.

Michael: And they lose all the relatability because you're like, "You're not struggling. I struggle wirh...”

Carl: So, I think sometimes there's just this identity piece of...and the place to hide where maybe there's some bigger questions here to ask about, like, what am I worth? Man, what? That's a big question. How do I show up and charge what I'm...how do I show up and be convinced and committed to my own value? That’s a tough question.

Michael: If I'm an advisor who helps people, how do I turn them away? If I'm an advisor who helps people, am I a bad person if I price some people out who I know darn well need advice? We all know they need the help.

Carl: Those are legit. And man, how beautiful is it that we have so many people in this industry that ask those kind of questions, and struggle with that conflict, and try to sort it out? And we've talked in the past about unique ways of solving that problem and trying to separate maybe like maybe the business from the pro bono work or... We've talked a lot about that, but I just think here to me, this question of, I'll go hide behind the search for better tech reminds me of my...how many time management books do I need to read before I just decide that every morning I need to write the 3 things down on a 3x5 card? Well, it turns out that's kind of hard. It's not complicated at all. It's turns out it's hard. So, there must be a complicated...

So, I think that's the beauty to me, is how beautiful is it that we just keep coming back to this challenge of, how do we help the people that need help? How do we show up in a way that we're valued the way we want to? How do we build the kind of business? All of that's tension and there's no resolving it. You're just going to have to live in that tension and do the best we can. And the answer for you is different from the answer to the person sitting next to you.

The Psychological Obstacles To Fee Increases, And Embracing The Identity Of Success [22:07]

Michael: Well, so I got to ask for – I don't know, for your help then: your help on behalf of our collective audience of listeners. How do we make a dent in this issue? What do we need to think about? What question should we be asking ourselves if we're really ready to deal with this? Because just the math of the business is pretty straightforward at the end of the day. Fixing your fees will obliterate any technology solution you possibly can find. You know who they are that are getting undercharged. It's at least your early clients. For some of us, it's still all of the clients. The answer isn't really, raise your fees. I mean, it is, but the hard thing is not raising your fees. The hard thing is something that happens deep down inside of us when we think about that and what's going to happen if we do that, and it's all...it's some combination of us and other people and what we think other people are going to think of us and what we're going to be able to do or help or not help other people. It's a people thing. It's not actually a business thing. So, how do we start doing the work on that?

Carl: That's such a beautiful question. I don't... The thing that comes to mind to me is you practice, and what I would practice, and I like trying to be better at this myself. What I would practice is getting clear about noticing the stories that come up. I'll give you an example. There's some projects I'm working on that scare the crap out of me because of who I'm working with and why, and I was noticing...

Michael: So, you're still imposter syndroming?

Carl: Oh, it doesn't seem to get... The only thing that's made it better is my Justin Castelli, Mr. Burns who hangs out right by my desk now, is just to recognize, "Oh, there's that feeling." That feeling actually means I'm about to do something cool. We've talked about that. But I think noticing that...remembering that what you do is so valuable and reminding yourself that you're not a, "Oh, please, please, please pick me, pick me." At least I still feel like that sometimes, like, "Oh, why would so and so..." and we can get into more details in the next couple of episodes, but, "Why would so and so do this project with me?" Well, so, I think the answer to me is to unravel those stories. Man, I wish I could find the... I think it's a Nietzsche quote about circumstances. Maybe you can do your little cool thing you do. Circumstances, they'll run and we'll call it fate or we'll call it our lives, but run subconsciously.

So, the idea of... Man, we'll put that quote in the show notes if Michael doesn't do his wizardry. But the idea that there are narratives and stories playing in the background about your value. And it's not any easier in our industry because...so I've always thought this. So many people don't understand what you actually do and the press is often talking about something different and using the same word, "financial advisor." So, you have to unwind all that. And one way I did that was I kept a stoke file. I would keep the nice notes. I just got a card from somebody, it's a handwritten card, and I'd keep the nice notes and I would remind myself.

So, then when you go to say, "Okay, at least this next client, I'm going to start today. I'm going to move my fee to where I want it to be before I go talk to all those people back here because that's really scary." Then I can kind of gin up the courage, maybe look through the stoke file, remember value, and then you pay attention to the story that shows up. And listen, I'm going to be really blunt. The story may be what your mom said to you. You know what I mean? The story may be what your dad... The story may be your 4th-grade elementary school teacher who said you're not going to... It could be your tennis coach who said, "If you don't try harder, you're not going to amount to anything." We all hear those stories. And so that stuff, don't underestimate that stuff still playing in the background and you not realizing how valuable you are. And whatever that great quote was, too, "Our greatest fear..." I think it was a Marianne Williamson quote, "Our greatest fear is not that we'll be terrible, our greatest fear is we're powerful."

And so I think so much of that we dismiss as woo-woo talk, but it's really actually having an impact. And you see it with your clients. You see it with your clients, "Oh, now I understand why you're not saving money, or now I understand why you're spending so much, because that thing that happened when you were 7." You see it with your clients, but sometimes we don't translate it. So, I would just start paying attention. I think of this as a beautiful spiritual practice to just start examining and unraveling, and it's like layers of an onion that get in the way of why can't I show up the way I want to show up in my...? If that's what you want. So, sorry, we got to wrap up.

Step 1, try to get clear about what you want. And of course, like it is with your clients, that's goal discovery over time. It's cute you think you know what that is, but you're going to learn over time, just keep unraveling, keep unraveling. Number 2, start examining the stories that get in the way of you showing up for that thing, and then just practice, repeat over and over and over. My wife and I are like, "It's just so interesting how many layers there are to that onion." Just when you think you've done the work, suddenly something new shows up and you're like, "Oh, shoot, I forgot about that." Sorry for the long-winded answer, but that's what I think of when we talk about value and our work in the world.

Michael: It resonates with me just having gone through a lot of price increases over the past 10 or 15 years that I like sort of the framing of just start examining, just start reflecting on stories that get in the way.

Carl: Pay attention.

Michael: Because I found... Just, I reflect back. There were a lot of different ones that cropped up. First it was, "If I raise my fees, all my growth will stop. No one will want to hire me anymore. I'll kill my business." So, at least for me, because I have to solve everything with spreadsheets. I made a giant spreadsheet of tracking and looking at all of the growth we were having, all the lead flow that we were having, all the business that was coming in to mathematically prove to myself there's enough momentum to the business that even if it slows down a little bit, it's going to be okay. We have plenty of growth. In fact, if we take fewer people to much higher fee, it's actually just more profitable. But I had to math it to...

Carl: Of course you did.

Michael: ...get out of that, "I might just kill the growth if I don't do it". Then when I got there, I was like, "Oh, but I still can't do it because they were with me. They took a risk on me early on." All of that. How can you raise fees on the people that you started working with at the very beginning?

Carl: So much there.

Michael: Someone had said to me, and now I say this as often as I can to pay it forward, "Michael, you're pretty good at what you're doing. Look at how little you've been charging them. They got a below-market rate for years. The debt's repaid. Yes, they took a risk on you by being an early client and they got services for a half to a quarter of the market rate for years."

Carl: We're not talking about retroactively billing them.

Michael: We're not going back to say, "Billing error. We've been undercharging you for the past 6 years. Here's a collective invoice of everything you should have been paying us all along." All we're doing is fixing it going forward. They've been getting a deal for years. You both did well on this. It's okay to reset. And I was like, cool, but then I still can't help as many people. So, then you have to go through all of the, at least for me, the dynamics of, "But I really want to help everybody," but you just literally can't. There's not...

Carl: More stories.

Michael: ...hours in the day, week, month, and year. There are more people who will want your help than you can help. That's just the reality of being in a helping profession. So, at some point you have to draw lines or you just burn yourself out.

Carl: Man, this one could go on for a long time, Michael, but we better just say amen.

Michael: We can say amen, and hopefully give some people some stuff to think about of whatever your story is that's getting in the way of just charging what you're really worth in the marketplace because it does amazing things for the business.

Carl: Everyone involved, actually. Cheers, my friend.

Michael: Awesome. Thank you, Carl.