#FASuccess Ep 094: Crafting Your Optimal Solo Practice By Simply Charging What You’re Worth With James Osborne

What You’ll Learn In This Podcast Episode

• What James’ flat fee structure looks like. [03:55]
• One of the biggest benefits of his approach. [05:55]
• His investment philosophy. [10:05]
• How his marketing strategy has shifted since he first started out. [12:13]
• James’ technology stack [17:41]
• Bason Asset Management’s service structure [21:26]
• Why he doesn’t agree with the traditional AUM model [29:36]
• Why he says a lot of advisors approach scaling the wrong way. [41:58]
• What it really means to reach personal capacity as a financial advisor. [55:05]
• How James settled on his firm structure [1:02:52]
• Why he would rather lose a client than hire a staff member. [1:11:34]
• Why James doesn’t charge more even when his clients would pay much more elsewhere [1:20:58]
• Why so many solo advisory firms actually generate far more value for their founders by staying small.

Resources Featured In This Episode:

• James Osborne
• Bason Asset Management
• Schwab Advisor Services
• Advyzon
• Wealthbox
• The Coming Golden Age Of The (Focused) Solo Financial Advisor

Full Transcript:

Michael: Welcome, everyone. Welcome to the 94th episode of the "Financial Advisor Success" podcast. My guest on today's podcast is James Osborne. James is the founder of Bason Asset Management, a solo advisory firm based in the Denver suburbs that oversees more than $225 million of assets under management. What's unique about James, though, is the unusual way that he structured his advisory business, with a simple flat fee of $4,800 per client regardless of their assets, which has allowed him to build a high-margin solo practice with just 80 clients generating nearly $400,000 of revenue for the firm at the age of just 35 years old.

In this episode, we talk in depth about why James decided to structure his firm using this flat fee approach in lieu of the AUM model. How the design of his business model makes it possible for him to generate a target of his exact income potential as he reaches client capacity, the way he handles situations where his flat fee would be substantially lower than what another advisor's AUM fee might be for prospective clients with a lot of assets and net worth, and the reason that he chose to deliberately build a business model that fits his personal lifestyle and family goals.

We also talk about what it really means to reach personal capacity as a financial advisor. The challenging trade-offs that start to emerge as advisory firms try to grow beyond the individual capacity of the founder, why it is that beyond a certain point, doubling the number of clients and revenue at the practice has almost no impact on the take-home compensation of an advisor, and the reason that so many solo advisory firms will actually generate far more value for their founders by staying small even if the practice is never sold.

And be certain to listen to the end, where James talks about how he's adjusting the way he meets with and takes on prospective clients as he approaches his personal capacity, and what he plans to do to maintain his high-income lifestyle practice once he reaches that threshold.

And so with that introduction, I hope you enjoy this episode of the "Financial Advisor Success" podcast with James Osborne.

Welcome, James Osborne, to the "Financial Advisor Success" podcast.

James: Thanks, Michael. Thanks for having me.

Michael: I'm excited about this episode. We've had a couple of guests lately talking about building solo advisory firms, or the colloquial label out there is lifestyle practices, although I know some people don't like the label. But this idea of just, "I just want to build an advisory firm that works for me and my life in my world and the clients that I want to serve." And you have a particularly I think unique way of doing this and going about it with a fee structure that just says, "Here's what we do. Here's our one fee, $4,800 a year for a client. That's the deal. Don't care about your assets, don't care about the rest of the stuff, $4,800 is what you get for a relationship with the firm." And I'm just fascinated with the model and kind of all the implications that go with that. You want to get to a certain income level? Just divide that by $4,800, and that's how many clients you need. Off you go.

So I guess just to get us started here, can you talk a little bit about the firm that you've built and what this looks like with this flat fee structure?

What James’ Flat Fee Structure Looks Like [03:55]

James: Yeah. I think that you described my approach at least as well as I can. And the firm is very, very simple. It's me sitting in this room, which is my home office at the moment, and my relationship with what I would describe as a relatively small number of clients. Certainly fewer than I had worked with in the past as an employee advisor. And I set out to make the firm do a number of things. One was definitely to fit into my life. And we can talk more about that. But I wanted it to be simple, I wanted things to be straightforward, and I wanted it to be fairly clear who I am, what I'm doing, how people pay for that and what they get for that. And while it might be a bit strong or abrupt to say take it or leave it, that is essentially the model.

And so, I built the firm with the idea of the retainer fee as a very transparent, fairly upfront pricing structure to say, "This is what it costs if you want to have a relationship that involves portfolio management, financial planning, retirement planning, tax planning." All the things that we all do. And you're right. I wasn't concerned about portfolio size, although there are limitations to having a retainer fee, especially as it pertains to smaller clients.

Michael: They do have to have some financial wherewithal to pay the $4,800.

James: Right. And if they can get...if you have a $100,000 portfolio and you can get truly comprehensive financial planning and portfolio management advice for 1%, go do that. I'm not here to, you know, stop you from paying $1,000.

Michael: Find someone who'll do it for that price.

One Of The Biggest Benefits Of James’ Flat Fee [05:55]

James: Yeah, somebody who wants to do it for $1,000. Great. I mean, they can certainly do that. And I think that one...I meanbt, there are so many benefits to this. So many that I'm tripping over myself in the process of talking about it. But one of the huge ones is, I don't have to think a whole lot about billing. I know what billing is going to look like every quarter, and so do my clients. And that piece is pretty straightforward.

Michael: You just bill $4,800 a year, $1,200 a quarter.

James: Yeah. And what the fee was last quarter is what the fee is going to be next quarter. So it's pretty easy. Makes projecting revenue pretty straightforward. All those things. But I think one of the largest benefits of taking this approach and being very transparent about who I am and what I'm trying to do and the services that I offer and my investment philosophy, and having done that through the blog and the old podcast and the website is there's a lot of very valuable self-selection that comes into play when it comes to who I end up working with that, by and large, by the time a prospective client is in the room with me or on the phone with me, they're pretty much in. They know what they're getting and they have predetermined that that's what they want.

And so for 4-plus years now, I started the firm in 2012, so for 4-plus years now, I haven't done a lot of sales in the sense of convincing someone that they should work with me or that what I'm offering is valuable. Most people have come to that conclusion themselves before I've had any interaction with them one-on-one at all. Which as someone who doesn't love that part of the process, that is invaluable for me.

Michael: There is kind of an interesting fact, right? When you're...well, first of all, when you're a straightforward $4,800 a year per client relationship, period, it gets really easy to market and communicate this. I know you've literally got a section on your website that just says, "Our fee structure," and literally the first words at the top of the page is, "$4,800 per year, per client." Like, period, there it is. So anybody who doesn't like that just won't call, and it saves you time.

James: Yeah, hopefully. I don't want them to call. Why would you want that person to call you?

Michael: Yeah. So, the people who aren't a right fit don't call. The people who are a good fit do call. And the caveat to that is, it still means you have to somehow have at least some marketing strategy or means to make people show up on your website so that they will at least read this and either decide, "This isn't a good deal for me," or, "This is a good deal for me."

But it did strike me. I started out in the insurance side of the industry as well. Like, everything is outbound, go find the clients and go try to convince them your value proposition and why you should get paid for what you're doing and why they should buy your product features and benefits and all of that. And you've got to me what isn't just a unique model but a unique way about how you go about the sales and marketing process, which I guess to sort of oversimplify as like, "Here's our fee structure, now let's just send as many people as we can over there. And the people who don't like it will save me the time of not calling, and the people who do like it will call me and work with me."

James: Yeah. I mean, I think it's the fee structure and also the investment philosophy. I mean, if you're looking for someone to give you a "professional" opinion about the direction of Tesla over the next six months, you'd better not call. You might not like what I have to say about such an approach. Or if you're looking for something more tactical or if you think that your advisor should be able to identify the next Magellan fund, you're probably not going to call.

James’ Investment Philosophy [10:05]

Michael: And so, can you talk about that for folks that aren't familiar? What is that investment philosophy for you and how are you doing portfolios with clients?

James: Yeah. I mean, it's really, really simple. It's Vanguard and Dimensional. Focus on low cost, low turnover, tax-efficient. Yeah. So a lot of Vanguard ETFs, globally diversified portfolios, not doing a lot of trading. Some rebalancing based around parameters that are what I would think are pretty industry/academically accepted. And hopefully helping the client arrive at a portfolio that they can own for something like forever without significant changes. And I think that number one, I think the marriage of that plus the fee structure is appealing to a lot of people. I ended up with a lot of clients who were former do-it-yourselfers who were ready to hand the reins over but might have a portfolio at which they would choke on a 1% fee, especially having formerly paid zero. Going from zero to $40,000, $50,000 a year in advisory fees is probably pretty tough to swallow for some people.

And I think that the combination of those two things is attractive to a certain subset of people, and most importantly, it's attractive to the right subset of people for me. So my clients tend to be more experienced on average. I would assume, probably...I probably have a higher percentage of clients who read your blog than the average advisor, which...

Michael: God, would anybody else who has clients that read my 3,000 to 5,000-word articles?

James: Well, nobody said they read all 5,000 words….

Michael: Oh, yeah, just give me the executive summary. Okay. Okay.

James: But that works really well for me. I enjoy the high-level, more in-depth conversations than the, "Hey, you should really save more than 6% of your gross income" conversations. And so, it resulted in, again, this self-selection model that has just worked really well.

How James’ Marketing Strategy Has Shifted Since He First Started [12:13]

I do want to go back and comment on one thing, which is that my "marketing" strategy today, which is largely non-existent, is not what it was when I started the firm. I mean, when I started the firm, it was very traditional, old-school, pound the pavement, lots of meetings with CPAs and attorneys, lots of looking for referrals. I was writing on the blog essentially infinitely more than I am now, which is pretty close to zero. And so it's funny because maybe the year leading up to starting the firm, I had this idea that I would hang my shingle, including online. And because this structure was so different than almost anything else out there, with the exception of Evanson, who I spoke with at length on the run-up to starting this firm, I assumed that people would just pour in and I wouldn't really have to do much.

Michael: Well, you just like, "We're doing a $4,800 flat fee. You've got $2 million, your advisor charges 1%. Do the math. Give me a call."

James: "Do the math and call me." Yeah. And while that I think happened eventually, the rate at which it happened was a little different than my poorly-guided expectations at that time. And so, while today I have the luxury of really doing no marketing, in part because I am actively trying not to grow anymore, that was not always the case. It wasn't this magic stream of perfect fit clients. Two referrals a month from the day I opened the door. It didn't work exactly that way.

Michael: So talk to us a little bit more about just investment, I don't know, like, structure and implementation. You said you're making your tax-efficient, globally diversified portfolio, a combination of Vanguard and DFA funds. You said you’re not doing a lot of trading, which to me sort of implies there's still some. Is there a selection process or a factor-tilting process or something else that's in here or are you really just down to, "We rebalance and we add or subtract cash when clients need cash?"

James: I mean, yes, there's factor-tilting and things like that, but they're strategic non-tactical for our audience. Otherwise, it's rebalancing and cash management. I mean, I've never called a client and said, "Hey, I'm really concerned about emerging markets, let's get out," or, "Hey, look how cheap international small-cap is, let's double our investment policy size." So it's really cash management and rebalancing. And I think one thing that might be unusual is, I haven't looked at hard numbers on this for a while, but I'm guessing that I have significantly more net cash additions to client accounts than withdrawals.

Michael: So, your clients are still in net contribution phase because you've still got accumulators?

James: Right. Right. And a lot of my clients are at or very close to peak earnings years. Around a 5 to 10-year window of pre-retirement peak earning years kind of station.

Michael: Okay. So for a lot of advisors, that moment of getting the client is, they've decided to retire and now they've got all this money and they don't know what to do with it. Or they're retiring a little older and they just don't really want to manage the stuff anymore. They'd rather enjoy the retirement and do other things with their time than worrying about their portfolios. Those tend to be trigger events for us. Your clientele is much more of, they're do-it-yourselfers. They've just decided that they want to delegate. And they're not delegating because they're retirement-transitioning, they're delegating because they're hitting peak earnings years and actually making a lot of money and don't have the time to deal with this anymore, so they say, "I look at what I'm making. For $4,800 a year James will deal with this and I don't have to deal with this. That feels good to me. Let's go."

James: Yeah, probably more than the average advisor. But that's not to say that the traditional triggering events aren't still at least a huge minority of who's coming on board.

Michael: So how do you actually do the investment management process? Are you ultimately making custom portfolios of Vanguard and DFA funds for each client or are you also running models as well, so clients choose from some range of models, from conservative to aggressive, and get one of those allocations and then you just manage those models?

James: Yeah. I mean, it's technically custom in that I don't run account-level models, but it's like a custom version of a model. So, essentially all clients own the same 10 or 11 funds, let's say, whatever the number is, but in varying allocations and in varying account locations. And I custody at Schwab. I don't think that matters for our audience. I get that question a lot, and I don't think that's material in any way. I think they do a great job obviously. But young advisors who're like, "Where should I custody?" My response is always, it doesn't matter at all.

Michael: And then are you also using technology tools just to literally manage portfolios or do you solely use the tools that Schwab gives on the platform?

James’ Technology Stack [17:41]

James: No. So I use Advyzon for portfolio accounting and reporting. And so there I get rebalance trigger alerts, cash alerts, asset allocation analysis and things like that to manage the portfolio. So other than trading, I don't rely on Schwab for analytics let's say.

Michael: Okay. Interesting. And I think Advyzon is not one that a lot of advisors are familiar with. I know they're kind of nominally an all-in-one. Not really all-in-one in the financial planning sense, but performance reporting, billing, it's got its own native CRM solution all kind of in one platform for investment practices. Is that how you're using it for all those different pieces?

James: I don't rely on the CRM.

Michael: Okay. What do you use instead? What's the CRM?

James: I went back to Wealthbox earlier this year or last year. Sometime after they added Wealthbox Mail, which is this integrated solution that includes email inside Wealthbox, and just functionality was absolutely worth the price.

Michael: So what were you using...like, were you on Advyzon for a while with...

James: I was using it Advyzon CRM. Yes.

Michael: Okay.

James: And it was functional, but there were some efficiencies to be had at Wealthbox for, I mean, what's essentially a very modest cost, especially for a solo advisor.

Michael: Well, and I know the founder of Advyzon came out of Morningstar. He did, like, I think original Morningstar Advisor Workstation and Office.

James: And basically lifted his team out.

Michael: Yeah. So, he's wired to the portfolio management reporting tools. I get that. But they weren't a CRM firm from the start. Although the appeal of an all-in-one I think is still very appealing for a lot of advisors.

James: Yeah, I think it could be. I'm not sure that I agree, but we could get down philosophical software rabbit hole about pros and cons of integration and API and data sharing versus an all-in-one solution. One of the things that you said I think before we started recording is, you get a roomful of advisors and ask them all what the right way to do something is and you get 100 different answers. And I think that's true of investment philosophy, marketing practices, and software decisions too. So I think it's tough to do the all-in-one thing.

Michael: So talk to us about kind of the sizing of the firm overall. Assets under management, or I guess I don't even know how meaningful that number is kind of given the nature of the fee structure, just number of clients. How many people are you serving under this model?

James: Yeah. Assets under management, this will be reflective in how important this is, I'm not sure. I think it's somewhere between $225 million and $250 million. That was the last number that I think I looked at. But it's about 80 households.

Michael: Okay. And of course, that's the point. You price this around households, not around assets or AUM.

James: Right.

Michael: So it's a big number, though. 80 households at $4,800 a year, that's just shy of $400,000 of gross revenue into the practice just doing this $4,800 per client.

James: Yeah. And there's a handful of clients who were smaller or there are some exceptions to that number essentially, but it's something like that.

Michael: You've got to make the occasional exception when you're getting the business going.

James: Right. Or somebody's kid needs help.

Bason Asset Management’s Service Structure [21:26]

Michael: Right. So in terms of the model of what you're doing for clients, is the whole deal solely on the investment end just, "For $4,800 a year I will tend the assets in your portfolio?" Are you doing other financial planning stuff attached to this as well? What else is part of this model? Or is the core just, "Give us $4,800, we'll worry about your money for you?"

James: No, I mean, it's definitely...I hope that it's definitely not portfolio-centric because there's a limited amount of value-add there, if we're being completely honest. The portfolio as commodity, especially the passive factor-tilted portfolios commodity mean is true in a lot of ways. And while I think there is value in a personal relationship that's tied to portfolio management as opposed to a robo solution or something like that, especially as it comes to asset location and consideration of outside assets and some things that go into that...

I mean, the best example I have of this is, I sat down with a relatively new client yesterday or the day before, and explained to her that, "Look, yes, we're going to do the portfolio management piece and we're going to be smart and sensible and, know what we don't know and things like that most of the value-add that I believe that I can bring is outside of the portfolio. It's tax planning opportunities. It's having conversations about financial goals, about charitable giving or estate transfers or, "What do you want to do with this money? And how does this fit into your lifestyle? And is your lifestyle sustainable based on your net worth?" And things like that. I mean, that's real financial planning work.

And I think the industry is somewhat at fault for this, but it seems often that the focus is on managing investment portfolios. And that's often what people believe that they are looking for and believe that they need most, but that's not what you spend most of the time with most clients discussing, right? I mean, we spend all of our time talking about everything else that touches their financial lives. And it's like, "Oh, yeah, we need to rebalance," or, "Oh, yeah, you made a 401(k) contribution," or, "Oh, yeah, you funded the kids' Roths and we need to get that money invested." I mean, that...not that that's unimportant, but the opportunity to add incremental value there is dwarfed by the opportunity to add value related to everything else in their lives.

Michael: Well, and you just make a good point, from a pure time perspective, we just don't spend our time on the raw portfolio management for the most part anymore. I mean, I know there's a subset of advisors out there who are active managers and they're picking stocks and funds and they're literally hanging out in front of their computer doing the analysis work for that. But aside from that subset of very active, investment-centric advisors, for most of the rest of us the actual portfolio managing part is usually not all that time-consuming. There's some staff that may help, there's some technology that may help, but it's not as though...I think there's still a vision out there sometimes. From the consumer end, like a good financial advisor, I'm going to give them my money and then they're just going to sit in front of their computer and, like, stare at the money and how to trade it and invest it all day long.

James: Right. And then they're surprised when I tell them, "I don't know what the market did today." And I say that in all sincerity related to today. It's an hour after the close, and I could not tell you if the market was up or down today. I genuinely do not know.

Michael: So what does financial planning look like for you tied to this business and this model? Are you producing full comprehensive financial plans using planning software or are you just available for all the planning conversations that may come up around whatever it is that they need help with but you're not necessarily writing "the plan" for every client? Like, what's financial planning in your firm?

James: Well, there's "the plan" for every client. So, most commonly that starts with retirement sustainability, Monte Carlo projection, the things that hopefully we're starting with. College planning, tax planning, insurance review, all the bits and pieces that affect people's financial lives. I mean, that's where relationships start with me in a new client, and that is, generally speaking, the primary focus of a review meeting, whether that's annual or semiannual or quarterly… that's usually driven by client preference.

The planning piece, again, comes first and is comprehensive. And yes, people get a delivered plan. It's not in a leather binder anymore, thankfully. But, yeah, that's the core, especially at the beginning of relationship. And then on an ongoing basis, those conversations, in my experience, are largely driven by what just came up in the client's life. Whether they're moving or their oldest kid is going to college or their youngest kid is out of the house and they're off the payroll, or there's an inheritance or sale of a business or what have you, all the things that come up in people's lives. Those are the things we end up talking about.

Michael: So this planning, kind of deliverable plan that you go through for clients, that's just bundled into the $4,800 fee? There's not a separate planning fee. It doesn't matter whether...I mean, do you have clients that don't do the planning process and say like, "Look, James, just you've got a good deal for the investment management, I like your process, your pricing is reasonable for my portfolio, just manage my money."

James: There's been a few of those. That usually happens after we've established essentially that they have more money than they're ever going to need and we don't need to worry about something like a Monte Carlo projection. And then we just sort of,  have a handshake understanding that… we're not asking questions about whether or not they have a 4% or less withdrawal rate, but recognizing that that piece of things is covered. And often still in those conversations, there's discussions about insurance needs or estate transfer or charitable giving or what have you. But there are a few.

The most important thing to me is that I have a good and enduring relationship with this person or these people because that's what I'm looking for professionally. Whether the onus of the relationship is centered around, "Are we saving enough for retirement?" or, "Have we saved enough for retirement?" or, "Am I spending too much in retirement?" or it's, "Hey, I don't want to think about looking at this portfolio ever again," I want people who want to be here and want to be here for a considerable length of time because I'm young and I need this to work for quite a while, and I also need to enjoy it enough that when the phone rings, I'm happy to answer it. And so it's really about relationship fit more than it is about a specific emphasis on one set of services or another.

Michael: But all of your clients are investment management and planning clients or do you have clients that  just engage you for the planning only and then skip the investment management stuff?

James: No. I think everybody who's a retainer client has assets to manage.

Michael: So it's some combination of the two, and they'll engage as much planning as they engage.

James: Essentially, yes.

Why He Doesn’t Agree With The Traditional AUM Model  [29:36]

Michael: So tell me a little more about just the clientele and how this works. If I just sort of do my envelope math here, $200-plus million, 80 clients, so your average client is $2.5 million or $3 million, give or take a little.

James: Yeah, that sounds right.

Michael: So, I don't know, on the one hand, I get it. If a $3 million client walks into a whole bunch of advisory firms today, they're going to get charged maybe not 1% because usually, some breakpoints have hit in at this point, but you're probably at a blended fee schedule somewhere between, call it, 60 and 80 basis points. So, the other firm is going to charge them $24,000 a year at 80 basis points on $3 million, you're going to charge them $4,800 a year. So it's a pretty stunning price disparity for multimillion-dollar clients. Is that basically what drives it at that point? They just look and say, "Those other guys are just so much more expensive than you, I'm working with you?"

James: I'd like to hope not. The funny thing about this fee and the structure and this part of the conversation is it's very easy for someone outside of this firm/a client of this firm to say, "Well, you're just undercutting on price," which is true for that $3 million client. Okay, let's be honest. Yes, I am considerably cheaper than the guy who's charging $25 grand. In fact, I am 80% cheaper. And that's pretty appealing, I would think. I want to believe the idea that this isn't about necessarily being cheaper but about being more honest and straightforward about what it costs to deliver these services and more transparent about, "This is what you pay and this is what you get."

I have grown and had grown prior to starting this firm pretty uncomfortable with the 1% fee thing over time. And that I'd have a client who had a half a million dollars and a client who had $3 million essentially getting the same services. Everybody wants to talk about retirement. Everybody wants to talk about their kids. They want to talk about insurance. They want to talk about taxes. And they want to hand you the portfolio. And if we're being completely honest, there's effectively no difference. Maybe there's some tiny argument at the margin between managing a half a million dollar account and a $3 million account. It's numbers in software at this point. It's not like I have to call three different brokers to try to find an investment for some client because they have a larger portfolio.

Michael: Right. I'm trying to get a good price on this bond execution, let's call up a couple of brokers and see who's going to cut the best trade execution here.

James: Yeah. I mean, those things just don't happen anymore. And so, this idea that an advisor is entitled to 1% of the portfolio for a large client or that they're somehow earning that through portfolio management just did not sit well with me. I do not like that argument at all. My joke is that the only other industry that charges the way that we do is the IRS, which is a comparison that a lot of people don't really care for. It's illegal in California for an estate planning attorney to charge a percentage of a taxable estate. And the reason for that is it's the same work.

And to think about this is like, "Oh, well, we're adding value to the portfolio through alpha or tax alpha or asset location or what have you," but the end of that sentence is, "Therefore we deserve a cut of it." And I've just never been very comfortable with that. Number one, because I'm very skeptical about how much "advisor" alpha there really is. And that depends a lot on who the client is. But number two, what people are buying when they come to a professional service provider, and I believe this is true whether we're talking about CPAs or an estate planning attorney or a civil attorney or what have you, is they're buying the time and expertise of that person, so let's be honest about the value behind that time and expertise. And I'm not convinced that for a client that I have a formal meeting with twice a year and I email or talk on the phone with once every several weeks, I'm not convinced that that relationship is worth $30,000, $25,000. I'm just not sure that it is.

I think that the industry gets away with charging that because that's what's always been done. And this ability to pay model has been so long in force that there are not very many voices like mine raising their hands to say, "This is a little weird and no one else works this way." I know that that upsets a lot of people whose margins that might threaten. And I guess I'm sorry about that, but I think it's a question worth raising.

And at the same time, Jeff Bezos, via Morgan Housel, "Your margin is my opportunity,"  yes, the fact that the 1% model was common, is common, allowed for there to be tremendous low-hanging fruit for me to build a nice little practice for myself. And I'm not changing the world here. I'm not...this isn't a $5 billion firm. I'm not threatening any single advisor or firm by having 80 clients and $250 million. At best I'm a gnat to someone. And so this really came down for me like, "How should I do this? If I'm going to do this for the rest of my career, how do I want to do it in a way that I feel pretty good about doing it?" And that's really where the retainer came from.

This was a five-minute diatribe in defense of just like, "Well, you're just the cheap guy" thing that I hear on a fairly regular basis that I don't really like. Because somebody could go start my identical firm and charge $4,000 a year and undercut me by 20%, and no one is stopping them from doing that. No one is stopping anyone from literally lifting everything that I have done from a philosophy and a pricing standpoint and going to build the identical firm. And in fact, I hear that that has happened a couple times, which is fine with me. Again, I'm mostly done growing. I'm not trying to build an empire, and I'm not convinced that I'm changing the face of the financial planning and investment management world by being one tiny little firm in Lakewood that has a different fee structure than what's normal. I'm going to stop talking now.

Michael: So I hear you. The only piece of this that I still sort of, I don't know, wonder about or I'm stuck on is, I get the whole, your margin is my opportunity as a startup advisor competing against other advisors in the area. And the dynamic of just, it takes a certain amount of time to service clients and a $3 million client is not 6 times the complexity and time of $500,000 clients by having 6X the portfolio and at least 5X the fee with breakpoints if not 6X. But here's the part where I do struggle with this, which is, it's not like firms working with $3 million clients are walking around with, like, 80% profit margins. Because they could have done it for $4,800 like you, but they chose to charge $24,000, getting 80 basis points on a $3 million client.

James: See, this is a chicken or the egg thing for me. And my first question is, why aren't they walking around with 80% margins? And I'm laughing, but I also say that in all seriousness because I don't understand. I know that... Look, I came out of a fairly large firm, and we were a pretty common environment, average revenue per client was a little over $10k, so AUM of a little over $1 million. And our breakeven was something like $2,500 per client. So we were walking around with 70% gross margins. And I genuinely don't understand why everyone else isn't because I didn't see that we were this, like, lean and mean machine. And so, I don't understand where all the money goes. And maybe somebody can help educate me about this. But I also know, and you've written about this at length, that the average partner at that firm that has let's say $1 billion in AUM, half a billion, $1 billion in AUM and $5 million in revenue isn't making that much more than I am.

And I have infinite questions about this. One is, why not? And the other is, why are you doing this? I mean, I can't understand the drive to build a $1 billion firm for a marginal increase in personal income. And some of this is that I'm just not interested in building something big. I have little kids that I like to spend time with most of the time, not like 24 hours a day. I have hobbies and interests outside of this room. And I don't understand the how or the why of huge firms with an average revenue per client north of $10,000, $15,000 that aren't more profitable. I don't get it. I sincerely don't. Because from where I am sitting, managing 80 households and $250 million, I don't have 70% overhead on my $4,800 fee. It's just not there. I mean, I suppose I could spend a lot more money on the business but I don't.

And to go back to the chicken or the egg thing, I think what ends up happening often is, the advisor starts out and they get their first 20 or 30 clients, and then they've been told that they need to hire an assistant. And so maybe at that point, they have $100,000 or $150,000 in revenue and they're going to take a third of it and pay it to an assistant in hopes that that further allows them to keep growing. And so now they're trying to grow, find new clients, and manage this person. And what are the odds that they have all those skills, right?

And so it seems...I think that a lot of people approach this the wrong way. And obviously, I think that because I've rejected all of that for myself personally. I have no interest in hiring anyone because I think I would be a really, really terrible manager. And so it just seems like the expenses follow the revenue, just like they do for everyone who earns a paycheck and then gets a raise and spends more money, as opposed to saying like, "What do I need to do to manage these relationships and these portfolios? And maybe I'll just keep the rest as income." I don't know.

Why Some Advisors Approach Scaling The Wrong Way [41:58]

Michael: It does raise an interesting question, right? I mean, on the one hand, yeah, there is just, if you're going to grow a larger firm, there's more staff and there's more people, there is some cost that just has to go to, we'll call it pure infrastructure, right? I need some more office space. Although office space is usually a couple percent of someone's P&L. It's not like it gobbles up 30% of your revenue. It gobbles up 2% or 3% or 4% or 5%, depending on your area. You get some admin staff, and then you need some people to manage the people, right? So you've got to get some middle managers as the firm continues to grow. But it is still an interesting phenomenon that when you look broadly at the industry benchmarking studies, overhead for an advisory firm is actually pretty consistent as it continues to scale up.

James: Yeah. So does that indicate that something is broken? Then they're not scaling, right?

Michael: Yeah. Well, I think that's long been observed. Well, so on the one hand, I think it's long and observed that advisory firms don't seem to get much scale. Or at least if you're going to find economies of scale, it comes at a much higher threshold than just the path from zero to $1 billion or a path from $100 million to $1 billion. And there may be some operational economies of scale at the upper end when you get to multibillion-dollar firms. I think that's hard to see right now because in practice, most of the multibillion-dollar firms, by the time you're at that size, you are now really, really focused on growth, you kind of have to be because you've got 50 to 100-plus employees and they want job opportunities and careers. So if you're not growing at 15% a year, you're going to start having turnover of people because they can't advance their own careers.

So although some of those larger firms end out...I think they get fewer economies of scale at multibillion-dollar firms because they end out actually having to reinvest more quickly for growth, so that maybe distorts the numbers a little on the high end, but it is a striking thing that almost no matter where you look up and down the scale from firms with $100 million or firms with $1 billion or firms with $2 billion, which is a crazy wide range that most people spend a literal lifetime building, overhead is, like, 35%, plus or minus a couple percent pretty much across the spectrum.

James: My immediate thought about this is, is it possible that everyone is doing this all wrong? What if the idea of hiring an assistant and then hiring an operations person, and then hiring a junior advisor, and then hiring someone who's a senior advisor but not a lead advisor, and then hiring an office manager, and then hiring a compliance person, like, what if that's all wrong? And what if instead the first thing you should do is bring on a partner and the two of you operate in a silo and I do my paperwork and you do your paperwork and the goal is to maximize gross margin per advisor instead of maximizing revenue?

Michael: I don't even know why you're partners if you just keep your revenue and the other one keeps their revenue. You may as well just stay separate at that point.

James: Yeah. I mean, you could make an argument. So we can get kind of personal here. And I realize we're kind of going down the rabbit hole, but I think it's a fun rabbit hole. But I've had multiple opportunities to bring on another advisor. And in two very serious cases there were people that I knew, that I knew were ethical, trustworthy, competent, would have been a good fit from personality and professionalism standpoint. And at the end, I just said, "Forget it. Go set up your own thing and I'll help you do everything, because there's just not enough here for me to do that." And I think, arguably, there could have been some upside.

Yes, if I had some traditional payout structure with this person and I took a cut for overhead, operations, compliance, software, the brand, if such a thing exists, then yeah, I would have had a marginal increase in personal income, or at least a marginal increase in net revenue and an even smaller marginal increase in personal income. Or, like you said, it's like, let's just stay separate and I'll help you get off the ground because there's just not enough here for me. That made so much more sense to me, and still today it makes more sense to me than having to try to continue to grow because that's what you're supposed to do.

I could very easily in the last year have taken on 20 or more new clients. I think instead I took on three or four. And that was by design. And with those 20 or more new clients, maybe I would have needed some personnel help, even though I think that that's really the wrong way to invest money as a small growing firm. But there was no there there for me. I didn't see the upside from a lifestyle standpoint for me, from a net income standpoint for me that would have made it worthwhile to bring on those 20 or so people. And I don't know, sometimes I think a lot of advisors or firms are chasing growth because that's what you're supposed to do. And for me, there was not additional happiness there, and so I've chosen not to do it.

Michael: Yeah. There's this path, I think, that we go through as advisors, where the first year or few, like, you're just trying to scrap it out and survive.

James: Yeah, you have to eat. Right.

Michael: Yeah. Like, God bless, I got to 20 clients. Like, okay.

James: Oh, man, what a feeling that is, too. I mean, that cannot be underrated.

Michael: Yes.

James: Like, that hurdle of, "Oh, we're paying the mortgage every month." And that's hard to describe.

Michael: So, you do that initial sprint, you get to 20, "Oh, my God, what a relief. There's enough clients that are paying revenue. I think I can actually stick with this." Then you double from 20 to 40 and it starts getting good. The money starts getting better because now you actually can take some money out of your business and actually enjoy it. You're not just covering core expenses and basic house bills. Then you go through another doubling. You get from, like, 40 clients to 80 clients. And now the money usually starts getting really good. As you illustrated, like, you get to 80 clients, you can get $300,000, $400,000 of revenue if you're generating a couple thousand dollars of revenue per client. Which at 80 clients you still probably have the capacity to do on your own. And so, we get, like, the initial sprint to 20. We double to 40, it feels amazing. We double to 80, it feels freakin' incredible. And so we say, "Well, let's go for another doubling to 160," and everything breaks.

James: Yeah, absolutely.

Michael: And I think that's really the distinction and when this kind of hockey stick curve of growth and higher income just suddenly turns and flattens. It's like a upside-down hockey stick or something. Where the rapid growth just flattens because suddenly the path from 80 to 160, you're going to blow through the 100-plus client capacity, which is where most advisors I find cap out. Active relationships really, really hard to get more than 100. You just literally can't remember all the people's names.

James: Yeah. No. When you're calling you'd be like, "I don't remember who this person is."

Michael: Yeah. So then you've got to start hiring staff and people to help you out, and people to help them, and then probably an advisor to help with all the people, and then another advisor because if you keep growing you just can't even manage the relationships for the junior advisors, so you've got to add more. And I think the shift then that happens is,  the path to 80 or 100 clients is basically you getting paid for your time and filling up your capacity. The next 100 clients is you building an advisory business, right? You're not getting paid for your time and the work with your clients, you're getting paid by creating a business that does advising that works with and services clients, that has to have a whole other set of staff to do all that work for which you as the business owner get your profit margin.

James: In theory at least.

Michael: At least ideally. But in the process, we go from personal practices paid for our time, where it's really common to see highly efficient solo advisory firms where the owners take home 70% to 85% of gross revenue as net profits, to all of a sudden where even if you're running a good business, you're maybe taking home a 20% profit margin as a competitive business, and you have to spend most of that free cash to reinvest into the business to deal with the next growth hurdle.

James: Right. Because you're in the loop and there's no getting out.

Michael: Yep. And that's why you see this in the benchmarking studies all over the place, the highest income solos have the same take-home pay as the average $1 billion advisory firm partner, and you make less money on the entire journey between high-income solo and getting to a $1 billion before you finally pop out the other end with higher total income because now the profits are adding up to a material number and you can actually take them out and enjoy them. But it's this just painfully long grind that I think a lot of advisors don't mean to get onto or don't realize that it's like a different treadmill that they're jumping onto from, "I've got 20 clients. It's great. Let's double again. It's 40. It's better. Let's double again. It's 80. It's amazing. Let's double again. Oh, crap, everything just broke."

James: Yeah. Which, I mean, begs so many questions, right? And one is, why? Why are you doing this? Why are you trying to get from 80 to 160 to 200 to 250 and putting yourself through this valley of declining personal income? Number one. That doesn't seem very appealing to me.

Michael: Well, because I think, when you just went from 20 to 40 and income got good and you went from 40 to 80 and income got better, why would you not keep going?

James: Yeah. And I guess my answer is, you should have thought about that.

Michael: It feels like you just get more clients and you make more money.

James: Right. Except it doesn't work that way.

Michael: Right. As human beings, we're really good at responding to incentives. I mean, I think we just get stuck maybe on these traps sometimes of, if a few more clients is good and a bunch more clients is better, then a whole bunch more beyond that must just be even better and more income and more take-home and the rest. And not realizing that relationship between adding more clients and getting more income just completely starts to break down north of 100 clients because all the marginal dollars have to go into marginal staff.

James: Right. And I wish that people were thinking about this I guess for their own happiness before they got there. But I am struck that one of the things... I get a lot of phone calls and emails from young advisors, because I have some profile online. A couple of RIABiz articles and the blog and now this. And I'm sure that it will result in a flurry of things. So I'm going to try to answer all of the questions that I get all the time on the podcast so that I don't get asked again. But one of the things, is like, you've got to decide what you're trying to do before you go out to do it, which is such a banal thing to say, right? Begin with the end in mind. But if you don't know if you're trying to build a business or a lifestyle practice at the beginning, you're probably going to end up being pretty disappointed in the path that you end up down, and you're probably not going to do one of them very well.

And the other thing that I think gets missed is that the skill set required to go from zero clients to 20 to 40 to 80 and manage that business, if you want to call it that, successfully is so wildly different than the skill set required for the next part, and you're lost. And you're suddenly owned by a business that you created that has outgrown you. And the joke that everyone rises to the level of their own incompetence if you can think about that ahead then either build an advisory business and don't have any personal advisory clients.

What It Really Means To Reach Personal Capacity As A Financial Advisor [55:05]

I could have gone into this and said, "I'm going to start with a partner or a staff person and they're going to be that person's clients." And ideally, I would start with five and some seed capital so that I could pay them while the business grew. But, you know, that's the route to building the advisory business. Or, my take on this is, look, the thing that I'm good at, I think, is sitting in the room with the client. I know it's the thing that I like doing, being on the phone with the client, emailing the client, being in the room with the client, and so I'm going to build the business as much as I can around that idea. And when I reach that limitation then I'm done. And I came to terms with that a very long time ago, but I recognize that I don't have the skill set for the next jump thing. And I think it would actually literally ruin my life if I tried to do that.

Michael: So how did you come to this realization and come to terms with it? To me, what you're essentially saying is, "I came into this business full well knowing there's a limit where I'm going to get to a certain amount of income and then I'm just going to stop."

James: Yeah. Well, I mean, we could start out with the conversation like, is the person making $350,000 a year happier than the person making $250,000 a year? I'd be pretty shocked to see that data, right? And there was a point a few years ago where my wife and I had the conversation. I just said to her, I was like, "Look, if we're not happy here, we're never going to be. The incremental net after-tax income that would come from, you know, growing X can't possibly make us happier if we're not happier today." And I'm pretty comfortable saying the goal of this business is to make me happy and to make my life good. Maybe that's a very selfish way to approach entrepreneurship, if you want to call what I've done that, as a loose interpretation of that word, but I'm okay with that.

I was in a very unhappy professional environment and I wanted that to change, and I wanted to do this in a way that I would be happier. And that was the end goal. The end goal wasn't to make $1 million a year, which I will literally never do. And so it was okay to say like, "Yeah, I'm going to top out somewhere." And if you think that you need to make more money next year to be happier than you are this year, something deep inside of you is broken, because that is just not how it works. And everyone knows that. And if you love the game, if you love pursuing the new client, and if you love growing and building something for the sake of the process, good for you. That's great. And I'm all for that. And I know people who have that mindset. It's just personally, that's just not who I am.

And so I don't know that I had some brilliantly deep personal revelation at any given point where I said like, "Yes, I will be comfortable if one day I stopped making more money." But in my head I'm like, "Everyone should think that," because that's the honest truth. You can't need to make 10% more money to be happier next year. You cannot need that. Because number one, there will be a time that that doesn't happen. And number two, you're lying to yourself if you think that it is making you happier. It's not. Once you get to the point where life is comfortable and you are not stressed out if the car breaks down I think that's it. Yes, there are niceties beyond that, okay? And there are luxuries that make life very pleasant. And no, I have never flown first class and I probably won't because I am afraid that I will reset my expectations to that experience. But in terms of general life happiness, it doesn't come with 10% more income. It just doesn't. I don't know. And maybe I was just lucky to come to that conclusion early on.

Michael: Well, and you do make a very good point there at the end about just, and be careful what luxuries you introduce into your life and not resetting your expectations, right? It's the human reality. It's much, much easier to just not add some luxury service, feature product experience, whatever thing, into your life than it is to introduce it and then decide you have to give it up later, which is...

James: That's just the worst. That's the worst. Who wants to do that?

Michael: Yeah. Well, and from a real-world perspective, the only thing that's worse than that is needing to tell your spouse or children like, "You can't do that," which is even more punishing for people who are in breadwinner situations. I guess some of this just gets back to the old, like, there's probably a lot of...a lot of us as financial advisors probably need to actually have our own financial advisors. And as we tell our clients, it's not about the money stuff and how to manage the portfolio and the rest, it's literally, just start having some of these money conversations about,seriously, how much is actually enough? And when you hit that enough point, what are you doing still growing your business and why? And not to say that growing your business is bad, but you better know what the reason is. And frankly, particularly once you get to the point of personal capacity, it better not be just because I'm hoping to add 20% more clients to make 20% more income. Because once you get to that capacity point, that's not how it comes through.

James: Right. Yeah. That curve bends down, as we talked about, very, very quickly. And if the answer to how much is enough is just a little bit more, then you've got to hit the brakes hard on a lot of things until you've got it figured it out.

So I ride bikes, like, bicycles with pedals, okay? And I can tell you that there is no end to what we refer to as upgraditis. There's always something nicer and lighter and faster and more aerodynamic or stiffer or what...choose your quality that you're looking for. And there isn't an amount of money, or there is but it's an absurd amount of money that most of us will never experience, where you're like, "I have literally reached the peak of acquiring the nicest things I could ever reach," okay?

Michael: What was it, the recently announced Japanese billionaire who will actually become the first moon tourist with Elon Musk. So yeah, there's some point where $1 billion flies you a few special experiences you really can't get anywhere else.

James: Right. But at the same time, if you need those experiences to be happy then something else is not working. So anyhow, there we're deep down the philosophy rabbit hole of money. But I think at some point that started because you asked me if I knew I was going to stop growing at some point.

How James Settled On His Firm Structure [1:02:52]

Michael: So from a somewhat more practical perspective, how did you set some of this structure of, so I guess A, do you have a number in your mind of what client capacity is? How many people you really can get to before you're just going to cap out and literally say, "I am done. Until someone dies or leaves, I'm not taking any more." And B, where did $4,800 come from as a number? And $4 grand or $5 grand or $6 grand or $3 grand or $7 grand but, like, $4,800.

James: So, I'm going to start with the first question that you asked. No, let's start with the $4,800 question. So in 2012, it was $4,500. And I did a cost-of-living adjustment at the beginning of last year, this year or last year. Don't remember. The number was a result of a couple things. One was doing the math on, "How much do you work, how many clients you can serve, and what's a reasonable level of income with some margin assumption built in there?" And we've been throwing around this 100 clients number for a very long time, an hour and 6 minutes now. So if we assumed that's...if you can serve 100 clients and if you assume you work 2,000 hours a year, then that's 20 hours a year per client.

And then you get to, "What's a reasonable hourly rate for a professional service provider?" And in most places, I think Denver is a pretty average town. 200, 250 bucks an hour is what you're going to pay your attorney. And that lined up with, if I'm being completely honest, making sure that the fee was low enough that it made available a broad enough market share. So I could have set the fee at $10,000, but then I would have been unable to work with clients with a half a million dollars essentially. And we know what the distribution tail looks like. There's a big chunk of the population between that $500k and $1 million of investable assets. And so it's a combination of all those things and, like, what's reasonable.

Michael: So sort of nominally, if I'm at $4,800, if a half a million client comes in, I'm lower than 1%. So if they want to do the AUM comparison, I'm lower than 1%. And if they add on more assets from there, bully for them, it doesn't take me materially more time, I'm going to provide the same service, but I know I can at least serve the lower end of who I want to serve. And if people go up from there then I'll just be a better deal and win the business.

James: Right. And that's...interestingly, that is actually mostly what happened. So my average AUM per client has changed a lot in the last three or four years. Some of that is due to some skew that has happened due to a handful of significantly large relationships. But it's been largely true across the board. So if you looked at the first 20 clients I brought on, my guess is the average AUM was close to $1 million, whereas if you looked at the next 20, it was probably closer to $2 million. And you looked at the 20 after that, it was probably close to $2.5million. And you look at the last 20 and it's probably close to $5 million.

And so, that number has grown significantly. I'm not sure I can exactly answer why. Some of that was due to referrals and some of that was due to, in the first year or two, clients came from traditional sources, CPAs and attorneys, and so they were more traditional clientele, whereas latter growth came from cold off the internet. And so there was more self-selection that came with that. And so it would make sense that those people would be more incentivized financially to work with me versus the advisor down the street because they're kind of paying me a fraction if they have a $5 million portfolio.

The capacity question is hard, and I am not done answering it yet. I'm at about 80 right now. I am only taking referrals from existing clients today. So when I get the cold email from the internet, they get referred elsewhere. I am working off of a waiting list that right now is out to the spring of 2021. When I say that out loud, it sounds completely absurd. And I've had a couple of referrals tell me that it's completely absurd.

Michael: Yeah. Like, they're probably going to find someone else before that date comes.

James: I kind of hope so. I mean, I'm great, but I don't know if I'm that great, okay? Some things are worth waiting for. I'm not sure I'm one of them. The reason in part that the waiting list is long is that I've stretched out how many new clients I'll bring on as I try to figure out what this upper limit of capacity is that doesn't affect my lifestyle and my household. And part of the reason this is hard for me to figure out is that I did nothing but grow very, very quickly for three to four years, where I was sometimes bringing on five or six new clients at once as a solo. And as you know and listeners know, the beginning of a relationship is a ton of work. And then once you get out of the beginning of a relationship and you get into kind of maintenance mode and ongoing financial planning and investment management is less work than the first eight weeks of the relationship. And so I didn't know what my ongoing workload was because all I had ever done was manage a reasonably small with existing clients and a large number of new clients.

And so the waiting list did two things. One was it allowed me to slow down the flow significantly at the beginning. And so instead of bringing on six clients at a time, it was two clients at a time, and now it's one client at a time. The other thing it does, quite frankly, is today, because of how long it is, it does disincentivize people. And the way I look at it is I could do basically three things. I could keep the waiting list, and if people want to hang around for two and a half years, yeah, they can.

Michael: I feel like if they actually wait around for the two and a half years, you're kind of obligated at that point.

James: Oh, yeah. Oh, no. I've never said no to anyone who's been on the waiting list. And honestly, the people that I've taken off, like, most recently did wait over a year. So yes, the waiting list creates some disincentive, which at this point for me isn't necessarily a bad thing. I could also disincentivize people by raising fees, either for new clients or for everyone. I don't like the idea of raising fees just for new clients because now I have two fee structures. And simplicity is a big thing for me. So I don't like that idea. And I'm just not going to raise fees for my existing clients. That's not what they signed up for.

Michael: Beyond reasonable cost of living adjustments.

James: Yeah, beyond the cost of living stuff. Right. Like, it's not like tomorrow I'm going to wake up and be like, "Starting January 1st, the retainer is $8,000." I think that if I did that, my net revenue would probably increase. My revenue per client would go through the roof because I would definitely lose some people.

Michael: And at worst, a few of them would leave, which now means you make more money and have fewer clients to wait for.

James: Right. Exactly. Exactly. But I'm just not interested in doing that. So the third option is the hard close, right? To just say, "Sorry, not a single one more." And despite all my chest puffed-out talk about having enough and knowing that there are limits to growth, that's scary, man.

Michael: Well, it's part of why I asked, right? This is why so many of us hit that capacity wall and then grow past it and then keep adding because it's scary to stop. But if you keep going, you're going to have to add a staff member, and now you have left your current rollercoaster and you've gotten on to a new one. And the new rollercoaster is a lot uglier than the old one was.

Why James Would Rather Lose A Client Than Hire A Staff Member [1:11:34]

James: Right. I mean, I can tell you with 100% certainty that I would fire clients before I hired a staff person. Because that's just really not what I'm interested in doing. So what I've tried to do, because this is a new experience for me, is really bend the curve down so that the growth is very slow, so that I can get a feel for what workload is like with 80 ongoing relationships and essentially zero to 1 new clients at a time.

The other piece of this that we haven't talked about yet in relationship to capacity is that my timing as far as markets go has been pretty spectacular in starting a firm. We had one little dip somewhere in there in the last six years, but there's been no global panic, no financial crisis, no bear market. And those things result in harder work for people sitting in this chair. And so while I am now getting a feel for what it's like to have 80 ongoing relationships in very hilariously calm markets, I don't know what it's like to have 80 ongoing relationships in terrifying markets. And I would like to not get over my skis before that happens. So if anybody has the answers for this, I'm all ears, as long as it doesn't involve hiring you.

Michael: Yeah, I don't know. I mean, even if you, as you're saying, ease into that capacity curve, right? Slow the growth rate, get used to what the servicing obligation is really like, I mean, it is a very powerful reality and I think one that some firms miss, that client capacity when you're just flat-out not growing is materially higher than when you are, because that new client process just consumes a lot of time. I mean, prospecting consumes a lot of time. That goes away when you're not growing anymore.

And just the time-intensiveness of building that new client relationship is way more burdensome in the first months and even the first year or two before you get a couple of years in and clients really get comfortable. And then you start getting to the like, "Hey, I'm checking in to schedule your, third meeting to come into the office this year." And the client goes, "Yeah, I'm pretty comfortable with where we are right now. I'll just call you if there's a problem and you call me." You kind of get off the meeting agenda a little or schedule. So I get it on that end. Again, I think the magic question will still linger of like, at some point you've just got to hit a hard cap or hire someone.

James: Or pray for technology improvement.

Michael: Or, slow the growth enough that you just actually get to the point where,  acts of God reduce your client base as quickly as you're adding them. Level off due to natural attrition.

James: I've had people ask that. If that's what the waiting list is for. It's like, "Am I waiting for someone to die before you bring me on?" It's like, "No. Not yet."

Michael: Another year or two of growth, that might be what it is. Which would be a fascinating practice to actually have a death waiting list.

James: That's pretty wild. I can't really imagine that. But, it seems reasonable to think that I have some efficiencies to be gained from a tech stack standpoint, service calendar standpoint, something in there that would allow a very modest level of growth to continue for a pretty long time. But you're right, I mean, there is an absolute number. And while I think I'm fairly close to it, and that's something that makes me a little uncomfortable, I don't think I'm there yet, at least in these markets.

Michael: So in this world of, you know, it's a good number of clients, the money is good, the revenue is good, the take-home is really good, what's scary about it? Relative to I think most advisors, you're already there, wherever there is. Wherever there is on the journey.

James: Both way less scary than the first 18 months was. Let's get that out of the way. When I talk about scary it's, there's an aspect of it that's foreign, right, because all I've ever done is grow. And I imagine that that's true for every advisor who's ever built a firm ever, that you've never been in a mode where you're not looking for a prospective new client. I mean, that just sounds crazy to even say that out loud. Imagine going to an FPA meeting and standing up in the middle of the room and be like, "Can everybody who's not taking new clients for the foreseeable future come stand over here in the corner with me?"

Michael: That’s a very lonely corner.

James: That doesn't exist, right? Yeah. So, I mean, there's newness of it that's scary. But I think the other part of it is like, "What if I stop taking clients and then people 20 fire me?" Which is like, number one, that's the stupidest sentence I've ever said. That's not going to happen. And I don't say that from a place of enormous ego, which I often come from, it's just a reality. That doesn't happen.

Michael: No. Just like, you, just look at the client like, we have a, whatever, 90-X% retention rate, we're probably not going to lose a quarter of our clients in one day.

James: Right. That would be...there'd be some end of day stuff happening there. But the other thing is, and I've had this conversation with my wife, and I'm like, "This is my big fear," right? And she's like, "Well, couldn't you just start taking new clients again?" And the answer to that is also, "Yeah, probably."

Michael: You can tell them it's because some death spots cleared up, even though you just got fired.

James: Yeah, even though I just got canned by a quarter of my client base. So yeah, I'm not 100% sure how to answer that. I know that personally, from an income standpoint, there's really no reason for me to be taking on more clients. The business is healthy, the cash flows are healthy. I sincerely do like...everyone likes saying yes, right? So when a client emails me and says, "Can you talk to Joe?"

Michael: We're helper types. That's why we take the gig.

James: Yeah, exactly. So, yes, it's nice to say yes. And, you want to...especially for existing… your client's brother, yeah, I want to say yes. Yeah. And so it's hard to think about saying no every time. I've gotten pretty good at saying no to the stranger from the internet, that's pretty easy. I'm not as comfortable with the idea of saying no to my client's childhood best friend or mother-in-law.

Michael: So is that part of what, like, the waiting list makes it easier? "I'm not saying no, you just have to wait."

James: But if you want to leave, if you want to say no, it's way easier than me saying no.

Michael: Well, and, I mean, I think there is an aspect to that, right? Same phenomenon. It sucks to tell small clients no that you want to work with but they just can't meet your asset minimums or generate enough revenue to be cost-effective for you to service. So it's a lot easier just to write on your website like, "We charge $4,800 per year, per client," and the people who can't fit that number, you don't have to say no to them. They self-select themselves out by just making it clear what you charge and who you serve.

James: Yeah. It's actually exactly the same because the additional client at this point can't move the needle enough to change my life in the same way that that small client didn't provide enough revenue at the beginning. The additional average client today can also not provide enough marginal revenue to justify it from a purely financial standpoint.

Michael: So I do have to ask, though, you said you've had this progression in the clients where the first 20 really were kind of that mass affluent, half a million, $1 million clients. I get $4,800. You were a little bit less than 1% and it was neat that it was a flat fee and you could explain your value proposition. But then you got a bunch of $2 million and $3 million, and now a whole bunch of them are coming out at $5 million. And if they went to pretty much any other AUM advisor out there, they would probably be paying $30,000 to $40,000 maybe, 60 to 80 basis points, depending on where the breakpoints are with all the blended fees.

James: I think you're being kind to that other advisor, but sure.

Michael: So, it's one thing when you're charging $4,800 and everyone else was charging 1% on half a million to $1 million. Do you think at all about changing the fee structure on the high end when you're charging $4,800 to clients who are literally paying $30 grand or more to other firms? Even if you want to say the firm is not that much better, they're willing to pay $30 grand for the service. You could charge them $28,000 and still be a deal.

Why James Doesn’t Charge More Even When His Clients Would Pay Much More Elsewhere [1:20:58]

James: So my question in return is, with what justification? Because, again, and I hope that this reflects what I said earlier about, like, I didn't go about this to be the cheapest guy in town. That wasn't the end goal. The end goal was to say, "What do I actually do and what is that actually worth? And this is the price." And yes, I am sure that if I had more money in the bank than I did when I started this firm 6 years ago, I could reset the whole thing and charge $10,000 and it would work. It would build slower but there'd be more revenue per client. The average AUM would be higher than it was six years ago. And I'm sure that all that would work.

And to the same extent, like I mentioned earlier, I probably could significantly increase fees and increase the business revenue and certainly increase revenue per client because some people would leave, because I would have lied to them about what I'm doing here and they would justifiably leave. But I can't personally justify the idea that just because the other advisor is charging X, I should charge no less than 50% of X, or whatever the number is. I mean, what if...if the industry standard were 2%, I still wouldn't be comfortable charging 1% even though it was so much less than everyone else was charging. In part, because 1% of $250 million is $2.5 million of revenue for a guy who is currently sitting in his basement, okay? That's insane. And it would still be insane if the other firm with $250 million in AUM was collecting $5 million in revenue. The idea that my pricing structure should be relatively competitive on the high end is very strange.

So I had a conversation with a friend of mine years ago who had a prospect that would have been his largest client by far. I think they had, like, $4 million or $5 million. And we were talking, and he said he had a fairly traditional fee structure in the 0.5% to 1% range with some breakpoints, but his average client size was under $1 million. And so his average revenue per client was pretty close to what mine was. And he's with this prospect that they're interviewing 3 other firms and him, and the other firms' pricing range is like $30k to $50k a year. And he's concerned that if he comes in and says, "I can't justifiably charge you more than $10,000," does that affect the client's perception of his value. And it absolutely does, right? I mean, imagine that you're getting quotes for a tree trimmer and everybody said it was $800 on one guy came in and said he would do it for 150 bucks. You'd be like, "I don't know what that guy is doing, but he's not touching my trees."

Michael: Yeah.

James: But instead, we're in this world where the average tree trimmer charges $3 grand and the guy who comes to say, "No, it's, like, $500 or $600. It's me and one other guy and we're done in four hours." That's the equivalent here. And so it's like, from where I'm sitting, the typical pricing structure is so broken that it is unfair for me to anchor on it while discussing my pricing structure for the high-net-worth client.

Michael: Except the two parts that just I still struggle with on that is one, the firm charging that $30 grand to the $5 million client doesn't seem to be running around with 80% profit margins. So...

James: They should be.

Michael: ...the money is going somewhere somehow. And B, I'm a firm believer in just, we can talk about what stuff costs and the cost of service and deliver and such, but at the end of the day, if the consumer doesn't perceive value in the price they're being charged, they just don't buy, right? If at the end of the day there was no value in the $5 million firm that charges $30k, they just wouldn't have any clients at that price point. Five millionaires would just find something else to do. So there's some implication there that a $5 million client does, at least to them relative to their frame of reference, think that service for $30 grand is worth it.

James: So I think I would bring out two points. One is there is no alternative view. Which is, if you're a five millionaire in, let's say you're in Denver and you live in Greenwood Village or Cherry Creek and you go to interview five advisors at every brand-name firm that you can find the big local firm: Morgan, Goldman, Merrill, and somebody, RJ or LPL, you're going to get zero pricing range disparity distribution. Everybody is going to charge you $35 grand, okay? Maybe one of them charges you $32,000 and one of them charges $37,000, but quite frankly, you can't tell the difference. That is not a factor in the decision that you're making. And so they just...it's like, "This is just what it costs." I mean, it's like going to get an MRI. This is what you pay for an MRI.

Michael: So, collective market collusion. We didn't do it on purpose, but we just have,  the secret sacred pact that says, "No one ruins the gravy train by charging way less than everybody else do."

James: Well, and there's...I mean, if you go back to my conversation with my buddy about underpricing, there's probably a lot of fear in reducing fees because no one wants to be perceived as the Dollar General of financial advice. And then my second point is, I would agree with you about perceived value, except that there's a tremendous amount of information asymmetry in our business between the client and the advisor in most cases. So while I'll say I have a lot of clients here, former DIYers who read Michael Kitces blog and Ben Carlson's blog and Morgan Housel, and that's just who my clients are, that's not who the average advisor's clients are. And if you're in a situation where there's really no competition in price for the service or product that you're buying and you don't know anything relatively speaking about the service or product that you're buying, you're not really an informed consumer who has the power that a consumer should have.

I mean, I'm trying to think of, like imagine that you're interviewing heart surgeons, like, you don't know anything about heart surgery. I don't know if it's better if the guy went to CU med school or did University of Oklahoma-Tulsa for med school. I don't even know if the University of Oklahoma-Tulsa has a med school. I have no frame of reference whatsoever. And my insurance company is going to pay both these guys the exact same thing. So, which one do I pick? I don't know. My buddy had heart surgery with guy A and he's still alive, so I think I'm going to go with him. Well, that is an absolutely terrible way to make a decision as a consumer, but that is how most people find financial advisors. I think that'll change, by the way, but not quickly.

Michael: So at a personal level for you with this practice that you built around yourself, I'm curious, there's at least a popular term for this, which is lifestyle practice. I'm just wondering, do you think that's a fair description? Is that a good label? I know some people are not a fan of that label and want to use a different one. Is that how you view yourself and what you've built?

James: Sure, why not. I mean, I don't think my ego is so big that I'm abraded by label. It is a lifestyle practice. It is a business that is a practice, I'm a practicing financial planner, that is designed to be a functioning part of my lifestyle. And that's the most important thing here. When we're done, I'm going to walk upstairs and say hi to my kids, who just got home from school, and we're going to hang out for a little while before their mother or I take them to soccer practice. And I'm not going to think about work until tomorrow morning. And that's ridiculously valuable to me. And so I don't care. I don't care what you call it. It's not important to me. Actually, and I know we've been going on for a while on this, could lead down another pretty deep rabbit hole, I don't care if this practice has any terminal value beyond me. That's also not very important to me.

Michael: Because you just literally don't care about sales or terminal value or just from practical perspective, like, "I'm doing almost $400,000 of revenue with most of the dollars coming out as profits to me with very little overhead. So, I'm going to check all the boxes on my financial goals anyways even if this thing doesn't sail."

James: Yeah, more the latter. I don't have any expectation. I mean, I know that there is...I know that someone would buy it. Again, I'm 35 years old, I'm not selling. And even at 2X, this would provide a very nice life for someone, assuming that they could retain the client relationships. But yeah, it's not a linchpin of the financial planning process for me. And again, those are all decisions that I made in advance, that this was going to be a lifestyle practice, if that's the nomenclature.

Michael: Well, and I think there is an interesting phenomenon that the industry keeps pounding the table. There's supposed to be this giant wave of advisors who retire and sell, there's supposed to be this giant wave of advisors who retire and sell. And then, every year goes by and hardly anyone leaves. We were supposed to be crashing the number of financial advisors, and instead, it's basically dead flat for the past six years, despite retirements and robo-advisors and all the other things that are supposed to be unseating us.

James: They're not going to sell.

Michael: Yeah, the reason is like, particularly if you get to the point where you've been in it for years or decades and you're close to retirement, you're not really in growth mode anymore, you're probably mostly servicing existing clients. It gets relatively easy to service them, especially when you work with them for a whole long time. You can get 70% or 80%-plus of your revenue as take-home pay. So you literally get to the point where even if someone bought it from you for two times revenue, which frankly would be generous for just the whole lifestyle practice anyways, but even if someone is going to buy it from you for two times revenue, you can literally just stick around for three more years, take home more money and still own the machine.

James: Right. And then theoretically sell it then.

Michael: Right, and theoretically sell it then. Right. Except then you get three years out and you say like, "Well, why would I sell it? I can stay three more years." And you basically keep going until health changes or acts of God just change the trajectory of your life and you literally can't do it, which is usually not something you do because you're at retirement age at 62, that's something that happens in your, God willing, 70s or 80s or something. There's still plenty of law firms out there with long-standing senior partners that are in their 80s and still come to the law firm 3 days a week to work with their clients.

James: Right. Yeah, I mean...well, I'm biased because I've been party to multiple failed succession plans, some of which were by the same advisor. And the math just doesn't make sense. They're not going to sell. Number one, their whole life and identity is wrapped up in this thing because it's all they've done for 40 years. And they hired you when you were a scrub out of college, and they're like, "Well, I'm going to hand my business to this kid? I remember when he didn't know what an option was," or whatever. That mentality is very hard to break. But financially, it's like, "Okay, if I lose 5% of my client base every year because they're worried I'm going to die on my desk, then I can die at my desk 10 years from now and still collect 75% of the rest of my time.

Michael: And still collect revenue.

James: And that's five times more than I would get for selling it. And if I sold it, what would I go do? They're not going to sell. So, everybody listen. If you're under 40 and you're a party to an alleged long-term succession plan, get out. This is not going to happen.

Michael: Unless they have some real motivator, that means they'll actually leave, right? I mean, there are...to be fair, I have seen a few where the person is not retiring from the practice, they're retiring towards something, some vision of their retirement that they want to live and have said, "I've got enough money, I'm going to go do this." So, like, those work, but those tend to be much more concrete. Like, "I'm retiring to do this hobby, and I'm going here. And it's a three-year time horizon." Or one or two, or whatever it is. It's concrete. We're executing a plan. Those tend to go through. But the rest...

James: This internal five to seven-year partnership track succession thing. No way.

Michael: Yeah. Because you don't want to leave when you get there. In fact, for a few I've seen, they I think truly meant to leave five to seven years out, so they hire the associate advisor and develop them to take over the practice, and then in doing so had to start delegating clients, delegating tasks, and instituting better technology for the first time, and finally made the practice of their dreams and now they don't want to leave.

James: Well, yeah, because now they don't have to do any work. Why would they leave now?

Michael: Yeah.

James: Yep.

Michael: So as we wrap up here, you know, this is a podcast about success, and one of the things we always observe is just the word success and this whole thing of what we're working towards in our practices is very different to different people. So as someone who's I think objectively built what anyone would call a successful business with hundreds of thousands of dollars of revenue and you're 35 and have a giant time horizon ahead, how do you define success for yourself at this point?

James: I think it looks like this. I don't feel that I'm lacking or wanting for anything professionally or as it fits into my lifestyle or anything like that. It's a phenomenal question and loaded with all kinds of value clarifications, right? But if I'm being 100% honest based on my definition of that word, it looks like this. I enjoy the overwhelming majority of my clients. Literally nearly every single one of them. I like being in the room with the client. I like my pace of work right now. I like how this fits into my life. We're comfortable. We don't want so much. I can't imagine there being some other definition of success that I've yet to attain for me personally.

And hearing that out loud sounds absurdly egotistical and like, "Look at me, I've arrived." And that's not my intent at all. I think I'm just trying to be honest that I'm a very happy guy professionally, and this firm has become what I truly hoped it would when I started six years ago. And it became that very quickly, which is awesome. And I don't think I want it to look like anything else. So maybe that's the definition of success. When you can't imagine that it would look like something else than what it does currently, like, maybe that's a pretty good marker for what success should be for you. I don't know. I think that's what it is for me.

Michael: Well, and as you said, I think it's a striking thing that you crafted this with deliberate intent. I think it's not something most of us do when we start our firms, if only because we're in such a panic phase that we've just hung our shingle and have no revenue. We're just trying to find clients and do what we can. But I think it's a fascinating testament to, the fact that if you just recognize the value of your time and what you're worth as an advisor, charge a healthy revenue per client, you can get your base of 80 to 100 clients, serve them and make a pretty darn amazing income by just serving the clients you want to well and staying focused there and not getting caught up in all the rest.

James: Yeah. And not just a pretty darn amazing income but a pretty great life too. I mean, we're very fortunate. I have two good friends that I'll force to listen to this all the way through so that they hear themselves referenced here at the end. But last week I had just a really great client meeting. It's just one of those times where you feel like you were helpful and productive and added value and the client recognized that and you got to, talk with them about life and their grandkids or whatever it was.

And I shot my buddies a text, and I was just like, "I just want you guys to know, we spend a lot of time kvetching about the industry and software and clients and compliance and the whole thing. It's like, not today. Today I think I'm capable of recognizing that this is pretty great." And the thing that I get to do, the core of what I get to do, there's a lot of ancillary stuff that's not fun, but the core of what I get to do really is pretty fun and pretty great. And the fact that you get to earn a good living and do that at the same time is something that most people are quite frankly not lucky enough to experience. And we should probably recognize that.

Michael: Well, amen. Thank you for sharing your version of it and how you built it. I think a good inspiration for other advisors who're maybe trying to figure out how to get to a similar point or just how to structure it to make it...make their practices work for their lifestyle the way that you have.

James: Well, thanks for having me, Michael. It was a lot of fun. Like I told you beforehand, who doesn't want to talk about themselves for two hours? So I successfully accomplished that today.

Michael: You did. I appreciate your willingness to talk about yourself for the better part of two hours.

James: Thanks again.

Michael: Thank you for joining us, James, on the "Financial Advisor Success" podcast.

James: Thanks for having me.