Kitces & Carl Ep 117: Sustaining A Profitable Advisory Business That Allows You To Explore New Endeavors

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Show Notes

• Diamond Teams (Angie Herbers)

Kitces & Carl Podcast Transcript

Michael: Well, good afternoon, Carl.

Carl: Michael Ernest Kitces.

Michael: How are you doing today?

Carl: I'm great. I'm super good.

Michael: Super good is pretty super.

Carl: Come on. Have you looked...? Maybe depending on where you are in the country, but it's so beautiful here in Utah right now. It's…how could you be anything but good?

Michael: 'Tis the season, 'tis the beautiful summer season.

Carl: Yes, yes, this is true.

Why Finding The Right Employees Makes A Difference In Firm Sustainability [00:38]

Michael: Fantastic. Well, I'm looking forward to today's conversation because I'm really genuinely curious for your take on this situation from an advisor who came in. So, I'm going to anonymize this situation a little bit, right, just in deference to him. We'll call this person Stewart, not his real name. So, Stewart says, I'm building an Angie Herbers-style Diamond Team, which is the 4-person team, the main advisors on top, 2nd base of the baseball diamond. Then you have servicing advisors at 1st and 3rd and a support person at home plate. And it's kind of this 4-person team that is really lean and efficient in a full unit to service the client base.

And so, Stewart says, look, "I'm building this Angie Herbers-style diamond team where I'm at the top and 2 service advisors and a support person. We've had great growth. We're north of 100 clients, average client's a million dollars. So, they're north of the 100 million. We've just hired the last of our team. I think it's going to take us 2 or 3 more years to round out to about 200 client households. And I think we'll be good, 2 million of revenue, a 4-person team." But Stewart says, "My goal at that point is, I want to whittle down my client relationships and only serve a very small handful of them. 2 good advisors, not much growth going on. So, should be able to handle 80-plus clients each if there's not the burden of ongoing client growth because we're just in good client maintenance mode at that point." Which Stewart says, "Basically, I want to do that because I want to move on to some other endeavors. Our practice is really good." Stewart has a niche.

So, if I say, "Our practice is really good at serving the wealthy people of our niche who already made it in our niche. It's not so great at serving the rest of the niche who's maybe a little bit earlier in their career and stage and has not made it yet. So, we did the thing that's good for the financially successful people on my niche. I want to go create something that serves the rest, which I've seen. I know you've seen from a lot of advisors, like membership programs and other kinds of ideas of, how do you serve a broader base that can't afford your core service." But what I wanted to focus on today for the conversation is not this, how do you bring your business down market and serve other broad bases? We've talked about that a little, and we can maybe come back to that another day. I want to talk about this actual conceptual model where you get to a point and say, "I'm done growing the business. We're just going to hang out here." And to me, it's 1 thing when you do that as a solo, when it's you and just you, when you get to the point, and you say, "I'm making enough money. I've got enough clients. I'm good." You're totally entitled to stop and just hang out there. If you've got enough, you've got enough.

But Stewart's model to me is interesting because there's other people involved. And the challenge point I had for this and part of why I'm really curious for your views on it is, to me, there's sort of this assumption, there's this thing built into Stewart's model that I need to do this so that I can keep growing. I think deep down it's he just doesn't necessarily want to stay attached to clients indefinitely. There's other things he wants to do. His practice is wonderfully profitable. It can basically be the proverbial cash cow that funds the other business endeavor and things that he wants to do, which you get to do when you're the builder of a profitable business and you can take the profits and do what you want to do with them. But this idea, Stewart wants to continue on his growth journey, so all the other advisors that he's going to hire can hang out and service the clients and make that profitable thing keep going.

And I will admit, there's a part of me that is just very skeptical about whether this is a sustainable model because, to me, it inherently assumes apparently nobody else at this firm wants to grow and cares about growth. Stewart wants to do it because he wants to do the next thing and climb the next proverbial mountain because, and a lot of us do that in the advisor world, we're very growth-oriented and like to do growthy things. Can you build an advisory firm where you've handed off basically all the clients to someone else? And is it really sustainable to believe they're going to hang out indefinitely, servicing the heck out of your clients while you make the profits on that and just hang out that way? And not necessarily, there's no growth for them. They're not moving up. They're not hunters. They don't get clients. Stewart gets clients. That's how he built the practice. But can you really build an advisory business where everybody else just hangs out while you keep growing? So, that's my core question to you. Is it really realistic to build a business where everybody else just hangs out so that you can keep growing?

Carl: Yeah. So, cool. So, I would love and probably we just need to pin this for another episode, but I would love to talk, at some point in the future about why this kind of genre of question keeps coming up. Just, generally, we hear a lot of, and it may be just a selection bias because it's something that I did, but I get a lot of people asking, "How do I stop with client-facing activities?" And that's a separate note. So, let me just share a story. I think there's 2 important things here that are going on in my head. And the story is this. So, I have this friend in New Zealand, and she worked for... And I've had this experience repeatedly. In fact, it happens so often that my wife has told me to stop doing it because she's, "You're really annoying people." So, it's this entrepreneurship problem that I have. I’ve become a zealot. And so, my friend, and we'll just call her Sally. Sally worked for a company that had, it was just 1 person. So, the founder had built this company, and they did professional services. It wasn't a financial advisory firm. They did something around geology, mapping, carbon, credit kind of stuff. Professional services, you had to be really smart. You had to have a lot of background to do it.

And he had built this business. Sally came in to work with him. And Sally was doing most of the work, and he was off doing a bunch of other stuff, still building the business, but doing a bunch of other stuff. And I remember 1 day I asked Sally, I was so flabbergasted. You can't possibly just sit there and do that. I thought, for sure, don't you want to start your own? And she was, "Not at all." She's "I love going to work. And when I'm done, at whatever time I'm done, I go home, and I don't think about it at all. I'm so happy with that trade-off. No problem at all." And that was just number example 172 of me imposing my value set on other people in terms of... My brother-in-law, "Come on, start a window-washing company." And finally, my sister and my wife had to say, "You're killing... Leave him alone. He doesn't want to. He's happy with the thing he's doing." So, example 179 with Sally.

So, that's the story. Here's the problems I see. Number 1. So, things I'd love to talk about is, number 1, those people exist. Those people exist. And it turns out that the stuff that I don't like doing, other people love doing. And there's nothing wrong, or different, or it's not inferior. I'm not better or worse. It's just different. Number 2, the stuff that I don't like doing, other people do. The stuff that I love doing, there are a whole bunch of people in the world that want nothing to do with it, going to find new business. And so, that's the 1st thing. Those people exist. The 2nd thing I'd like to talk about is, we're really bad, really bad at finding them because we like to hire people like us, which is what I think you're pointing at.

Why Outlining A Path For Growth Without The Firm Owner Is Important [09:36]

Michael: Yeah. It's a little bit distinct, though. I kind of parse this out a little bit. From some segments of the business of the industry, there are 2 types of advisors, those who can do business development and those who are failures. And there's nothing in between. You get clients, or you literally don't have a job in this business. And I do think that is...

Carl: Wait. You're saying that's 1 segment of our business?

Michael: Yeah, there's a group of our business that says, "The only type of advisor who exists, gets their own clients. If you can't get your own clients, you may as well leave the industry."

Carl: And that historically was much stronger. It's starting to...

Michael: That was basically the story of the industry for many decades.

Carl: It was only…Yeah. Okay.

Michael: And I do think that is fundamentally changing. You see more and more businesses that are separating business development from client service. And business developers get clients and client service people serve clients. And that you can have that separation, that exists in some very large firms, that have great national brands that actually bring in clients and your job is simply to service them, and then exist in some independent firms that just have founders who are super good at business development. And either, A, get so many clients they could not possibly serve them all, so they have to hand them off, or B, some that are just so stinking good at business development, they would actually personally feel more energy by going and getting the next 10 clients than doing meetings with 10 clients they already got. And they're just so wired of business development, they just need to bring service people around them that can support those clients and serve those clients. And I'm totally on board with that. I agree with that.

Frankly, I think that's the future of the industry and it's a better future because there's a lot of people out there who I think are wonderful financial advisors. They may be terrible at bringing in their own clients, that is not the gift that they were given in this world, but they're brilliant, they have great service, they can communicate and engage very well with existing clients. And they have jobs in the kinds of models that Stewart is talking about here. But the asterisk I would give to that is, they don't just have service advisor jobs at firms like that, they have careers at firms like that because the business developer-y people or the national marketing thing, or whatever it is, keeps bringing in clients, so their teams grow and their client bases grow and they get bigger clients with more complexity over time. That generates more revenue and allows them to earn more money and advance their careers. And as the team grows, maybe it turns out they like training, and developing, and managing people, which they get to do because their team is growing, so they get to give back and do more.

And to me, there's this sort of premise in Stewart's framing here that if I'm not a business development person, I'm not going to be interested in any version of career growth, income growth, or advancement for the rest of my life once I just get to my 100 clients that pay me a really sweet income. And I am skeptical. That's the part that I have a challenge with, not the idea that you can find advisors whose dream job is just, "Give me some clients of service and be awesome for and I don't want to have to do any business with them." They exist, they're out there, they're great. And if you do good business development for them, you can create great opportunities for them where everybody wins and there's lots of loyalty and there's lots of positivity. And again, I'm very upbeat on that model.

Carl: I'm having a hard time understanding the distinction.

Michael: But if you get that person to where they are, the idea that 5 years from now, they're going to make the same thing and still be happy, and 10 years from now, they're going to make the same thing and still be happy, and 15 years from now, they're still going to make the same thing and be happy because there's no more clients coming in. There is no growth, nothing’s moving up and getting better.

Carl: Yeah, I think you're right.

Michael: Stewart's moving up and getting... He's off doing whatever his next great adventure in life and business is. But these other folks are supposed to just hang out back there and never get a raise, and never get a promotion, and never get new responsibilities, and never get just new challenges in life that stretch them and make them interesting and engaged as professionals in a professional services business. That's the part I struggle with is, are they really going to hang out and be content that there's never a new professional growth opportunity? Because the reality is, if Stewart's moved on, the next thing, there is no growth coming.

Sustaining Business Development Without The Firm Owner [14:34]

Carl: Wait, wait, wait. Pause right there. Pause right there because I didn't hear that in the question. Because I'm assuming that once you've got 200 clients, those clients are going to be adding money. So, I think there's a couple…The market...Adding money…

Michael: Maybe until they retire and then they’re subtracting…

Carl: Stewart's going to have to give up an increasing share. I didn't read... Yeah, if you're going to get no raise for the next 5 years, just forget it, right? And the idea that there's going to be new...

Michael: If you're not growing the business, and eventually clients retire, and they start taking their money out...

Carl: New referrals are going to come in.

Michael: ...your best-case scenario is your profits go down every single year because you can keep giving more raises to your advisors. And the revenue isn't necessarily growing because you're not adding clients.

Carl: Yeah. Michael, I totally...

Michael: Pretty profitably business. Might last for a while that way, but that's literally a declining income-based, declining asset of the business because you've made a decision to stop growing it. But the people you've left behind who are servicing it, that doesn't mean they're necessarily going to hang out there forever, not having any version of personal growth for themselves.

Carl: Yeah. As you've painted it, I think that I would be skeptical, too. That's not how I would paint it. But as you painted that, I would be...

Michael: So, how would you paint it differently? Because, I mean, I see these out there.

Carl: I would just say...

Michael: I'm going to build it up and hand my clients off me. Frankly, I've seen a lot of... Well, the flip side, I've seen a lot of advisory firms that have done this with, I'll say less intentionality than what Stewart's doing. At least he's very clear this is his vision. I've seen other firms that do this less intentionally, and it really does blow up for them often because they found a young up-and-coming advisor who came into the practice and took over the clients and created this great lift for the founding advisor who was drowning in their business because they had too many clients and doing too much work. They finally got a good associate advisor who's helping them and they're handing things off, "This is great, I can breathe again, I can take a vacation. I'm making good money because the profit margin is high on the revenue relative to the clients." But they stop. They're not growing. The associate advisor they brought in isn't growing because they came for the clients, not for the growth thing. And then 3, 5, 7 years later, the whole thing blows up because, eventually, that associate advisor is, "I've been here 5 to 7 years and I'm not moving up in my career. I appreciate what I've made, I appreciate the opportunities I've gotten. And I've gotten some good experiences, but I'm kind of bored. Not much is changing, not much is growing." And I've watched those fall apart.

Granted, again, built with less intentionality than what Stewart is trying to do, but ending out at a similar point, which is just this presumption that you can leave your service advisors hanging out, serving clients, and that they're not going to be expecting new challenges that we tend to engage with as professionals to advance and sharpen our skills, promotions, raises, just like, things that people want?

Carl: Can I take a stab at just an alternate story?

Michael: Sure, please.

Carl: Yeah, because the way I heard, this is for the listener, we don't talk about these much before. So, when Michael told me this story, he literally didn't tell me anything about sort of where he was headed or, and he was curious about where I was headed. And when I heard this story at the beginning, I didn't hear any of that. Granted, that's 1 possible story that we've actually both seen play out. It's a true story. It exists in the world. But here's an alternate story. The alternate story is, first of all, you get the right people, so you get people like Sally. First of all, we both agree with that. 1 of the reasons some of those things blow up is because the person we hire is like us.

Michael: Yes, we hire mini-me, I hired this advisor, reminds me of me 25 years ago.

Carl: Okay. So, 1st...

Michael: It's like, "Cool, you're an independent who doesn't work for anybody else." That might be a hint about the longevity of your hire that's just like you.

Carl: So, that's a recipe for failure. So, 1st, we hire somebody like Sally, somebody who'd be that way. 2nd, in my head, what I was seeing was, and this is the story that I've told myself about what Stewart was asking. Stewart, in my mind, is saying, "I'm going to work really hard to get this to the place where there's 200 clients. I'm going to build a really great team with people like Sally that want to serve clients. They're really, really great and they can self-manage, meaning they're autonomous, they can run this business, and I'm going to put them in charge of the business." And we all know, and I remember in year 2 of the business, I remember I went around to all the veterans and asked them for advice, and 1 of them told me, "Once you get to $100 million," this is all in AUM businesses, right? "Once you get to 100 million, you can't stop the thing." So, if you're at the point with 200 clients, 150 to 250 million. It's an AUM business. That thing's going to keep compounding from organic growth, but also from referrals from happy people. So, you're not doing hard in the trenches, business development work. You're just keeping people happy. In my mind, that's what I saw. I was…Stewart is saying, "Hey, I want to build this business, I want to get it to 200, I want to get an awesome team, I want to get the right team in place. And now it's going to go from 200 to 250 to 300 to 350 without any really hard non-organic growth." That's my story.

Michael: Yeah, but I don’t think that…Again, some of this is specific to folks.

Carl: Well, wait, wait. Before...

Michael: I don't think that's the idea here for Stewart because he's even trying to get rid of his 200. He wants to get down almost to nothing because he wants to do other things.

Carl: Yeah, that's what I'm saying. He's going to help build it to 200 and then he's gone. He's not servicing any of them. Before we debate that, just acknowledge that that's also a story that we could see being true. I've seen that. I've seen people build businesses that then continue to grow. And the founding builder is no longer really there. May come in every once in a while, read the Wall Street Journal, shake some hands and leave. Takes a share of the profit. Basically, the preponderance of the profit growth is split among the existing, the remaining team. People are happy. It's great. It's got a shot at working. Can you at least give me that?

Michael: I don't see a lot of those. Just, again, that'll maybe be a little bit of my own, anecdotal experience. Good number of advisors I've seen over the years. I don't see those working very well. Unless at the least you have to start splitting the pie, which means you have to start making them partners because, at some point, otherwise, they're, "I can literally just hang my shingle across the street.

Carl: I agree with that.

Michael: I don't want to do business development. I'm just going to hang the shingle across the street. And all the people I've been servicing for 10 years...

Carl: I agree with that.

Michael: ...that you have not seen for 10 years...

Carl: I agree.

Michael: ...are going to follow me across the street. So, at best, your pie starts getting smaller. You're either paying more, or you're giving them equity. You might keep some, but your pie is getting smaller.

Carl: Wait, wait, wait. The pie is growing, and you are sharing an increasing share of the growth. So, if I miscommunicated, yes, profit share would be an important part of this formula. But you're going from a business that you got this amazing business and I'm proposing to you that at 200 million AUM business with 200 clients, that it would be hard to stop the growth as long as you were happy without even any business development. We all know that story, right? As long as you're keeping people happy...

Michael: Yes, but that story tends to still play out because the founder who's good at business development keeps it going. Because when you look at the other end, look at how many advisory firms out there have gotten to a very big size, right? You look at the firms that are multibillion-dollar firms. Most of them are struggling with growth right now. Very low single-digit growth rates. In theory, they should have referrals coming out of their ears because they got 1,000 clients that they've been serving for 10 or 20 or 30 years. Referrals should be flowing at them left, right, center, and sideways. But what happens instead is they have built a firm that has mostly people who are not business-development oriented, who don't hunger after the referral, who get to the point of, "Yeah, I don't really like doing sales and business development. That's why I took this job." And they don't pursue the referrals the same way, and they don't chase down the referrals the same way. And just in practice, why a lot of firms that have hired great service-minded advisors, they have wonderful retention rates.

And the refrain I hear over and over again is, "We can't figure out why we're not growing more. We have 98% retention rates, and we can't get 2% of our clients to send us referrals every year, even though clearly we're doing great work because we have a 98% retention rate." And the answer is, "Well, hire a lot of advisors that are really not wired for pursuing, and following up, and tackling those referrals the way that you did when you were the founder that was leading it and growing it." Because there is still some work that it takes to actually turn soft referrals into business opportunity. I find a lot of founders who are good at it just do it naturally. You don't realize that it actually is a skill set until you hand that off to service advisors that may not be well-incentivized, that may not be well-trained, and that just may not be wired for doing that. That's why they took the job they took where clients are handed to them because they don't want to go and have to hunt for that stuff. So, I would asterisk that, yes, I've seen lots of advisory firms that get to a certain point where the darn thing just keeps growing because referrals keep coming. They're serving their clients well, and referrals keep coming in and the growth keeps going, even though the founder is not really doing much outbound marketing. But I do still usually find the founder or whoever was driving the business development is still driving the business development. When they step away from that, it's a lot harder for the growth to just sort of magically automatically continue its momentum.

How Incentivizing Employees Can Help Sustain Firm Growth And Profitability [24:58]

Carl: Yeah, I've heard other stories. It sounds like you've got a story you're really convinced of. I've heard other stories where those businesses do grow. And I think it's a slightly pessimistic view of the kind of advisors you could hire that would be happy running a business, not creating a new one, not running across the street and hanging up a shingle, but happy to be running a business and are good at understanding. Not doing outbound marketing, but understanding what it means to receive a referral and bring them in. And with a team of 4, Angie Herbers Diamond Team where we started, it's not we have this massive pressure on growth. We've got to grow enough to keep you the pie, continuing to grow so that the profit sharing is valuable to you, valuable enough that you won't overcome...

Michael: Well, if it continues to keep growing, at some point, you're going to break the diamond. There's too many people. There is a point where then what are you? Are you going to start firing clients that have been here 15 years because they're smaller than the new ones that came in? Or are you going to start saying, "No."

Carl: It sounds like Stewart's screwed. There's no way this is going to work.

Michael: To me, it is the challenge to these, this idea that...

Carl: Undoubtedly a challenge. Undoubtedly a challenge.

Michael: ...like real estate, you can have a passive business. If you want to, well, heck, if you want to get into stocks and collect the dividends, you can have a passive business. But professional services businesses in most industries have a very long history that partners and owners are active participants in the business because they tend to start creating fracture lines if you don't. Either people want to grow and they don't have growth opportunities, or the relationships end out all shifting to someone that isn't an owner, and at some point, they realize they can hang up their own shingle across the street and basically everyone's coming with them because they already have the relationships now for 10 years and just that those models are very challenging to sustain. It would be different if Stewart said, "Hey, I want to make the same money because I'm just going to have 20 amazing clients that pay me really big dollars for a really high-quality service that I've cultivated over years. And I can service 20 clients in not all that much time, and I'm going to take all the rest of my time and do other stuff." And you might even make similar money because if they're very high-value clients.

I've seen advisors that have hundreds and hundreds of thousands of dollars of revenue with 80%, 85%, 90% of revenue drops the bottom line because it's them and a small book of high-value clients, and there's not much overhead at all. And to me, that totally works because it's just you. Once you put other people in the picture, particularly once you put other advisors in a professional services capacity into the picture, that to me is where it gets hard. This presumption that I totally want to keep growing and they'll be happy not growing. It's the part I have trouble with.

Carl: Well, Michael, nobody's saying that it wouldn't be hard. I'm just simply saying there's an alternate story where there are people who want to work in professional services firms because I've met them, I've seen them, I've seen this work and they are okay. They do not want to start their own thing.

Michael: Oh, I agree.

Carl: They understand what it means to bring in referrals. And at 200 clients, Stewart could get rid of almost everything he was doing except maybe stopping in every once in a while, right? Managing the business. We both know people who are managing the business and aren't doing hardly any client-facing activities. And so, I'm just simply saying there's an alternate story out there.

Michael: Yes, but then we… We also have 1,000 of them that joined XY Planning network because, eventually, they got tired of the fact that they weren't growing. People would agree with you...

Carl: I hang out with a lot of lifestyle owners that have and lifestyle, maybe we have different definitions of it, but 2 or 3 employees do very little work because they've got really, really good employees and they're willing to pay them really, really well. And as the firm grows, the people who work there participate. The firm is optimized for the happiness of the people who work there, the owner and the people who work there. And that person has plenty of time to go do the other things. And so, I'm just simply saying, I think you're right. Challenging? Yes. Hard? Yes. Rare? Yes. What Stewart's painting is rare. Well, it's rare for a reason. It's hard. But I'm just simply saying, it's not impossible and it's not a fact-based thing that will not work. I think you were reading 1 version of the story. I was seeing 1 other version of the story, and they are both equally true. I give you, granted, you are absolutely right. That version of the story is true. Most of the time true. And there's an alternative story, and I think they both exist.

Michael: I'll be curious if we get some folks to write in, send us messages. I guess if you've lived either version of this, it doesn't have to be like Carl verse. Send us a message if you're on Team Carl on this one, send us a message if you’re…

Carl: Yeah, we have a poll. Yeah.

Michael: Team Blue on this. I'm curious to hear more of these stories from both ends because I have trouble finding ones like this that have sustained more than 5 to 10 years. I've seen a bunch that they got going, and it was working great for a couple of years. It was working great until all of a sudden, 1 day they woke up and it wasn't working anymore because someone peeled out of there and now their business is in flux and the lifestyle thing isn't fun anymore, and they've got to do bunch of retooling stuff. It works until it doesn't.

Carl: That's true because of that.

Michael: I'm curious how many have built something like this and sustained for 10 years?

Carl: That's probably true of every model we've seen in our industry for the last 10 years because we're so new at figuring out the business models, right? Eat what you kill.

Michael: We're just growth-y. We like changing things and breaking them.

Carl: Yeah, I don't know that there's very... The only person I know that's been the same thing for over 10 years is James Osborne, right? It's not because it's bad or broken. It's because we get a new idea, we try something different. It's all just progress. But, yeah, I would be super curious in hearing those stories.

Michael: Awesome. Well, thank you, Carl.

Carl: Okay, Michael. Thanks.