Executive Summary
Although there have been some incremental shifts in recent years, the financial advice industry has traditionally (and remains) geared towards attracting individuals who thrive in a career where their earnings have the potential to increase depending on how hard they work. Viewed through the Maximizer/Satisficer lens that Barry Schwartz introduced in his book, “The Paradox of Choice” (where Maximizers are those who continually strive for more, while Satisficers are those who are happy with having ‘just enough’), the advice industry is built to attract, reward, and celebrate those who tend to land on the Maximizer side of the equation. Yet, recent Kitces Research on advisor wellbeing indicates that, while an advisor’s self-perceived wellbeing steadily improves as their take-home pay increases (i.e. money really does buy happiness), the rising revenues only contribute to an advisor’s wellbeing up to a certain point (about $1.5m), and once firm revenue grows beyond that, there’s a direct inverse correlation between advisor wellbeing and revenue. And for financial advisors who want to avoid that sharp decline in wellbeing and have reached a point where their business is doing well enough that they don’t feel the need to press as hard to grow, the question arises, how can they shift their focus away from growth… and towards something else?
In our 67th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can think about optimizing their own practices for something other than revenue, why figuring out how to manage towards something other than money may contribute even more to happiness, and what advisors can do after having gone through the optimization process.
As a starting point, the first shift that an advisor can make to move away from an aggressive growth mindset is to start thinking about ways to increase their take-home pay rather ‘just’ than their revenue. Some strategies include identifying the practice’s most profitable clients, ‘transitioning’ the other (less) profitable clients by referring them out to an advisor that can do a better job of serving them, and then trying to replicate those ideal clients. Meanwhile, advisors who are satisfied with their level of income and how their practice is set up can begin to optimize for whatever it is that aligns with their own interests and goals, such as, number of days off per year, hours spent with their kids, or number of tennis matches played, to name just a few!
From there, advisors can then turn their attention towards what to do once they’ve optimized for whatever (new non-revenue) metric they want to manage to. And it’s at that point that advisors often need the most help. Because, as is often the case with our own clients, few advisors have taken the time to really think about what we would ideally like our lives to look like, and as a result, could also benefit from going through their own life planning process, such as those offered by George Kinder or Money Quotient. For many advisors, setting audacious stretch personal goals for themselves can provide a path towards getting off the growth-for-growth’s-sake cycle and help them focus their incremental time and energy in a completely different (and more positive) direction.
Ultimately, the key point is that there are specific steps advisors can take to improve their own wellbeing once they get to a point where they don’t have to work as hard to grow their business and can start reaping some of the rewards for all the hard work they put in order to get to that place. And while not all advisors have reached that point (yet), the takeaway remains that simply going through the exercise of thinking about what their goals will be, once they’re making enough in their business that they don’t need to keep growing revenue just for growth’s sake, can help ensure that they are building their business with intent and are focusing on the long-term goals that really mean the most!
Authors:
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
- Lifting Advisor Wellbeing By Focusing On Time And Income Over Revenue Alone
- Kitces Report On What Actually Contributes To Financial Advisor Wellbeing
- Only the Paranoid Survive, by Andy Grove
- Financial Advisor Success Requires Just 50 Great Clients
- #FASuccess Ep 7: Matthew Jarvis
- The Society Of Advice
- Kitces & Carl Ep 57: Transitioning “Good” Clients Who Simply Can’t Be Served Profitably
Kitces & Carl Podcast Transcript
Michael: Hello there, Carl.
Carl: Imagine finding you here today, Michael.
Michael: Funny to bump into you in this...
Carl: Crazy.
Michael: ...old room that we prescheduled for ourselves. You can't have chance encounters anymore in this virtual world. It just doesn't work.
Carl: It's a little bit like when I call my mom. For some reason, when I call my mom, she answers the phone, she'll say, "Hello?" And I'll say, "Hello," And she goes, "Oh, Carl." I'm like, "I'm on your caller ID. You already knew it was me." Yeah, no more of those surprises. Nope.
Michael: Yeah, yeah. It's just a strange side effect to the modern world, I guess.
Carl: For sure. What's on your mind today, Michael?
What Financial Advisors Can Do After The Don’t Need To Grow Any More [00:47]
Michael: We did this episode a couple of weeks ago around...as I like to think of it, basically the maximizing versus satisficing conversation. How you help all those clients that are just maximize, maximize, maximize, more, more, more and can sometimes get so stuck on that, they can't even enjoy the wealth they've created, where we get stuck in our frugal saver habits that we can't enjoy the money that we've frugally saved and all those challenges that crop up with clients.
We had a couple of questions or comments that came in from advisors that to me, were basically the same thing applied to us as advisors. There's the old saying of business, "If you're not growing, you're dying." Our industry puts growth on a pedestal. Grow, grow, grow, revenue, revenue, revenue. Always has to be moving up and to the right for lots of different reasons. But, the comments that started coming in were a lot of advisors say, "Look, at the end of the day, I've been doing this for a good amount of time. I'm 10 or 20 years in the business," so, I guess they're probably in their 30s and 40s, "I've got a good client base. I make some pretty good money. I've had my clients for awhile, which means I don't even actually work a ton of hours anymore. Basically, I make really good money, I've gotten to a point where I don't have to work that hard. I could really cruise from here and make good money and be able to retire and everything's fine, and I don't know what to do because basically, everything in the industry says you're not allowed to stop. You always have to grow, grow, grow because if you're not growing, you're dying. I don't want to be dying because that sounds bad. But, I don't really feel a need to grow. What do I do?" What do you do when you've actually gotten to a good place with the business, but you're supposed to keep growing, but you don't actually need to keep growing, but you're supposed to keep growing, but you don't actually need to keep growing?
Carl: Look, this is a great subject and timely for me just because I struggled with the same thing. I have thought a lot about it. I have no idea, but I've thought a lot about it. This is another one of those moments where I think I get to declare that I reserve the right to be wrong about everything I'm going to say, and I'm often wrong and never in doubt. And this is one of those subjects. I think, yeah, it's funny. I got a very similar...I got some of the emails around that too and one of them I'm thinking of right now, is somebody who said, and I'm just trying to make sure I anonymize enough, an advisor, a successful advisor who said...and these are the funny emails. I get these, these are the quiet, in the corner of the conference, in the hallway, “is anyone around?” emails. “Hey, I don't know what to do. My business is super successful and the very thing that made it successful has resulted in me really not having much of a life. I forgotten what I was interested in.” This particular email, he had just broken off a long-standing engagement and...
Michael: Meaning significant other engagement not...
Carl: Yeah, yeah, exactly.
Michael: Engagement engagement.
Carl: And was struggling with what to do, sorry...I'm sorry, people. I know I'm going to get emails about that. I forgot to turn the thing off. It was ringing. I had to reach up and turn off the phone. Sorry about that. Long-standing engagement and is essentially saying it was a wakeup call. “I don't need to grow anymore, but yet, here I am still working.” The question was, “What do I do?” To me, it's so obvious from the outside and I can say this with deep empathy because I can't solve it for myself. I can see it in other people. But, it's like, “Get a life,” you know what I mean? Find some other things that we're interested in.
Realize that that myth...it's settled science at this point. The thing we will regret on our death beds is the stuff that we didn't do with the people and the interests that we have. We won't regret...we know, it's cliche at this point. We're not going to regret the fact that we didn't spend more time at the office. We're not going to really regret the money we spent. We're not going to regret the things we tried and they didn't work. We're going to regret the things we didn't do, we didn't try. We know all that, and yet, I think Andy Grove is largely to blame for this, right? "Only the Paranoid Survive," that book of his.
Why Advisor Wellbeing Declines As Revenues Increase Past A Certain Point [06:14]
Michael: I feel like it has gotten magnified in our industry that, look, I get the whole if you're not growing, you're dying philosophy. But, we do have a tendency in this industry, I think in particular, to imply or sometimes outright say, "The best advisors have the biggest AUM and the biggest growth rates." Right? That's literally what we put in the recognition list. Nobody does a list for the highest income solo practices who work the least hours to make a half a million dollars. We only have the lists of the people who got 37% growth rates and managed to get to a billion dollars the fastest. We put that up on a pedestal, and I know why we put that up on a pedestal, we do it because the platforms, the broker/dealers and the custodians will only make money if we grow. We're their market. We haven't added to the net count of advisors for 20 years. It's been stagnant or declining, so they literally only make more money if we grow, so they sponsor contests where they celebrate the growthiest of us, so that we all outcompete each other to be the growthiest. Weird conflicts within our industry.
But, I do feel like we have gotten, maybe overly fixated on growth, overly fixated on the revenue. We even saw this, we did a recent study on wellbeing. We did a study last year on wellbeing. We're doing another one this year. The study we did last year on wellbeing, one of the most striking results that we had out of the research is, if you just look at advisor, self-reported wellbeing, our satisfaction with life, how often we have positive feelings, how often we have negative feelings, there is a very clear and direct relationship that the more profitable our practice is, the more take-home income we have, the better we feel about our practice. There is a money buys happiness thing. But, it's only a relationship between take-home income and wellbeing. There is not really no relationship between revenue and wellbeing. If your firm actually gets large enough, it is a very clearly negative relationship. For every $100 million you add after the first $100 million, we see a direct linear relationship that you're less happy.
Carl: Down.
Michael: Down. Negative. Down and to the right. When the revenue goes up and to the right, the happiness goes down and to the right. And I think entirely driven by most of us, at the end of the day, get into this to work with clients and help people, and when you start growing a business of a certain size, your job is not to serve clients and help people, your job is to manage people and grow a team and do a whole bunch of management-y, business-y stuff, which for most of us, is not really why we got into this in the first place. I mean, if you keep growing and you add clients, you will eventually get to this crossover point, but it's not why most of us did it in the first place.
To me, the starting point, the most basic level is, if you just start thinking about how do I grow my income and not my revenue, and you start optimizing for that instead, which means you may get more focused on fewer clients that are a better fit and how to serve them well, because if you just add clients and then add staff to serve them, you may not even take home anymore money because you got to hire more staff to serve more clients. If you just start changing up the metric a little. Maybe it's not about grow, grow, grow the revenue and the number of clients. Maybe it's just about better clients you can serve better in a more premium fashion and possibly fewer of them and get a little bit of your time back as well. What we see literally in the data is, that's what produces advisors who actually, empirically say they're happier and have better wellbeing, not just the grow, grow, grow, more, more, more.
Carl: Yes, and to me, that's an interesting first step is, okay, let's...and I remember somebody telling me that 22 years ago. And they would point out, in fact, I remember, I was on a chair lift, not far from the office. I can look out the window and see it. And there was a, I'll spare the name of the firm, but everybody would know the name of this firm, advisor, I didn't know them. I was skiing by myself. I got in the singles line that I happened to get on a chair lift with an advisor. They said to me, and this was when I had a firm that had, let's just not even use numbers because everybody gets fixated on the numbers, but some number that was, "Cute, lifestyle business." I said, "What do you do?" And the person was like, "Yeah, I work here." It was two initials and giant private wealth management, investment bank maybe. And they said, they asked the question, "How much do you manage? What's your assets under management?" And I said the number and he literally said, "Oh, so you run a cute, lifestyle business?"
Normally, I let that go, but this time I was like, I took a long pause and I said, "Hey, let me just be clear about something," because I had already found out where he lived and it was not here. I was like, "Let me just be clear about something. You're on vacation. This is just Tuesday for me." And I normally, I just let it go but I couldn't. And somebody after that, I was telling somebody that experience and they were like, "Yeah, optimizing for income, who cares how much you manage." That's step one. But, I think even better would be, next step would be, optimize for enough. What is that?
Michael: It reminds me...
Carl: Let me just put a pin in something before you jump in. One thing, let's not forget. Okay, let's pretend like you get there and you say, "I've got space." What do you then do, because that's where I think we're really pointing out in this conversation.
How To Optimize For Something Other Than Money [12:50]
Michael: I was going to say, it reminds me of, one of the early podcast episodes we had for "Financial Advisor Success," Episode 7 was Matthew Jarvis. Matthew still has this wonderful "lifestyle practice." Million dollars of revenue, 50+% profit margin. He had enough, and so, Matthew was optimizing the number of days off that he took, the number of workdays that he didn't work. Literally, that was his KPI dashboard metric. He was like, "I want to make the same amount of income, but try to make my vacation days go up and to the right every year." That was his growth metric. All of his focus on the business was not about how do we get more, more, more of clients, or even more, more, more of revenue, or even more, more of income. It was, how do I get more vacation days within the framework that I've got, and that's the thing that he was business solving for. I think at the time, he was at something like 80 business days a year that he was taking off, and now he's over 100 because he's continued to optimize for that in the years since. To me, it's this interesting framework that, as the saying goes, "What gets measured, gets managed,"
Carl: Yeah, I like that.
Michael: Which is when you think about a different metric, a completely different metric, days off, I actually knew an advisor that did this, basically his metric was the number of volunteer hours at his kid's school in the PTA system. And that was his thing and everything was built around how could he free up more hours of PTA service. He was doing hundreds of hours in his kid's school because that's what he wanted to do. But, it wasn't just a, "Hey, it would be neat to do this," because at least some of us, we're kind of math nerds about how we do this. He measured it, he quantified it, he had a tracking statistic for it and he optimized for it because that's what we do. We plan and execute, plan and execute. Set the goal, achieve the goal. Set a goal and achieve the goal. But, to me, the interesting story is they found different metrics.
Carl: Right. I love the idea of just playing a different game, competing at a different thing, which is awesome, right? Now, let's pretend because the comment that I get that I'm more interested in, concerned isn't the right word, but more interested in, and I think you got some of this too, is let's pretend like you managed to do that. You essentially say, "Yeah," I've had two of these lately, "I have set everything up in the business so I can take Fridays off, but I'm not taking Fridays off because I don't know what to do." Right? What do you do then? Because that's... I'm in a similar situation right now, where I've set the business up, the team is amazing, and I'm finding these big chunks of space, which was the plan, because I wanted it for creative time. I'm finding instead of even some rest or creative time, I'm filling it with unnecessary stuff. I'm having the conversation lately of, why am I doing that? I think what's interesting is if you set it up so that you can take Friday off, or you're like Matthew, I'm going to take a week a month or I'm going to take a week a quarter, I know people who have done that, all the systems get set up, you win and then you find yourself like...and you come...I love the idea of you come face-to-face with yourself. What do you do then? How do you solve that problem?
How To Determine What To Do After Optimizing Your Practice [16:43]
Michael: It reminds me of the conversation...just even with clients. “Mr. Richards, you come in, I'm so excited to work with you on your plan for retirement. Tell me about your retirement goals.” I go do my goals-based planning thing. I ask you, "Tell me about your retirement goals," which for anybody who's tried that, usually goes very badly in a client conversation. People are like, "I have no idea."
Carl: Let's keep asking them, and especially let's do it...
Michael: “I don't know. I guess we would have a beach house.” “Cool. Is there a reason you want a beach house?” “Yeah,” basically it usually comes down to, "I saw it in a movie, a commercial," or "at some point in my early childhood, someone I admired had a beach house, and seemed really cool, so I've always thought it would be cool if I had one as well, but no actual idea if that's meaningful, valuable, if I'll enjoy it. It just seems like a nice idea." Most clients don't even know what their goals are. They can't articulate their goals. At best, they're plucking goals out of thin air or they're just projecting their current life, ever so slightly modified. We don't know what we don't know. We've never lived a life we haven't lived.
I've long griped about that in the client context and frankly, I think to me, this just reinforces, we literally have the same problem ourselves. Tell me about your goals when you make enough income that you don't need to work so hard in your practice. And most of us have no answer to that question. Tell me about your goals when you're making enough income in your practice that you don't need to keep growing it anymore.
Carl: And it only gets harder and more pronounced the longer you go. Because look, and again, nobody is going to admit this, these are these quiet conversations that we have when nobody's looking. My inbox, "The Society of Advice" inbox is full of these stories because apparently, people feel like I care, and I do.
Michael: I was going to say, you do, right?
Carl: I do deeply, actually. I care about this more than anything else we could talk about, is our own interpersonal struggle. There's these emails...I know half of you listening are...it's probably true actually. Half of you listening are like, "I don't know what you're going on about." That's amazing. That means you don't...but if you have wondered yourself, look, I worked so hard while the kids were young. They're all teenagers, got purple hair and nose rings. They don't want to talk to me." Nothing wrong with purple hair and nose rings. Or "I don't have any hobbies," or "to be honest, at work," I was just having this conversation with an advisor the other day and he was like, "Carl, at work, I get validation. At home, I don't. I don't even know how to be at home." If you think you're alone, that's every single hard-working man or woman in history has had to sort out if you...But, what you do there is you either go do something crazy, we have a word for it, a mid-life crisis.
Michael: I was going to say.
Carl: You go do something crazy. It's so common, we have a cliche, right? Or you say, "Darn it. I'm going to rebuild this situation." Then, what do you do? You do it the same way you do it with a client. Let's place a small bet. Hey, what if you just took one of those kids to lunch every Friday? And didn't make a thing. Just, "Hey, let's go grab a taco." What if you just decided that you...remember that interest you had in off-road Jeeping? I don't know. Pickleball? Ping-pong? What if you just place a small bet? And then, it comes down to what you and I talk about all the time. Well, you just practice, one little step at a time. Or you give up and have an affair and buy a Ferrari. It doesn't have to be that dramatic, but just trying to be cliche about it, like in the movies, right?
How Advisors Can Turn Their Focus Towards A New Big Goal [21:33]
Michael: I hear you where they just be incremental and try something. I do feel like there's an added challenge for a lot of us in the advice business that just, advisors tend to be very goal-oriented. We've actually literally seen that in some of the research that we've done. If you measure, there's some psychological traits around goal-orientation to focus to future. If you measure that, the average advisor just scores off the charts of that relative to the average human being. From a human psychology end, financial advisors are basically goal-setting, goal-achieving machines who like to teach other people how to do the same goal-setting, goal-achieving thing that we love doing for ourselves, which is why we love goals-based planning and setting goals and I'm going to help optimize you on your path to your goal. It's just how a lot of us are wired, and I think that's great...
Carl: We're in the wrong business.
Michael: It's a great, awesome thing, but it means we don't do incremental experiments well. Albeit, for one, advisors I've seen, the way they unhook themselves from this challenge is a big, new goal in another direction. Like, "Hey, I'm working too many hours. My health is not great. I know I'm making enough money. I really need to get on a better track. I used to work out a lot, but I hardly do anymore. Next year, I'm going to run a marathon," and just throw a giant, old thing out there. I need a really hard-to-achieve, distant, challenging, I'm going to strive for it goal. And for some of us, that breaks them out into a new path, a new path, that gets them out of the rut, out of the stuck, out of the, “if I'm not growing, I'm dying,” because you are growing. It's just, you're not growing your practice anymore, you're growing your marathon thing, you're growing your martial arts belt, whatever else it is. For a lot of people I've seen, it gets very physical.
We set the big, new goal so that we have a goal to work towards, because you got to have a goal to be striving for. It's not a goal that has to do with more revenue or even more income or even anything in the advisory business. And part of the realization is saying, "You know your business is at a point where you can set a goal that's a whole other thing in another direction, and have that be what occupies your incremental time and energy. Now, you're not going to walk away from your practice and not serve your clients. It takes a certain amount of energy to do that. It takes a certain amount of additional energy to do the next thing, and the next thing doesn't have to be the more clients direction. It can be the next thing."
Carl: I struggle with that because I'm that way too. I'm all in or not. The exact number of cookies that I can't eat is one. I can eat 0 or I can eat 5,000. But, I had this conversation, we had James Clear on as a guest at "The Society of Advice" thing and I used it as a personal therapy session. And we talked specifically about incremental versus big, all-in goals, and it's really interesting how often we have flare out and burnout when we do these big things. What really, and I'm finding this to be true, is setting up..."Atomic Habits" is a magic book. I was like, "Really? Seriously? Another habits book?" And it's actually, yeah. And one of the things I think is amazing is just setting up the world, the people you hang out with, your systems, everything around you to optimize for the thing that you're trying to do now.
So, let's just return to, “I want to rebuild my family,” because it seems to be coming up in the emails that I'm getting. “I want to have better relationships at home. I want to have enough, my health, any of those things.” The dilemma with that is the world doesn't care. There's no list. There's no billboard. There's no 40 under 40. Nobody cares. Lance Armstrong said that in his book after the divorce. He was like, "Look, at work, everybody cared." Lance has got a whole bunch of other problems, whatever. But, the example still holds. Somehow, we have to get down to this thing that we talked about earlier. What does it mean to have enough? What really brings happiness? If you can figure out a way to measure that and make it a big thing, I'm going to take these number of days off, or I'm going to...that volunteer hour thing is awesome. Could you do that? I don't think it works really well with teenagers if they know, but they don't have to know, right?
Michael: Number of hours I spend with my teenager without my teenager realizing I'm trying to maximize the number of hours I'm spending with him or her?
Carl: Yeah, that I'm tracking it. I have reminders to check in with my kids, especially when they're living away. I have a reminder. That seems, like really, you have to reminder? Yeah, I care that much that I built a system. But, that's the way I would do it. But yeah, where are you going to set that goal, marathon, Jujutsu, whatever. Maybe that is, okay, go do a small experiment before you go all-in. Once you figure out where it is, you're experimenting, you're being less wrong, less wrong, once you figure out where it is, then, okay, great, my advisor friend, goal-based advisor. Dive in. But, my point really is A, don't feel like you're alone, B, you can do it. I think, and C, if we could just get a little more quiet and understand what's the point in the first place? We know for sure that none of this stuff is going to bring the happiness that we thought. It's so cliche at this point, but I literally yesterday had another conversation with a friend. She is now, when we first started talking, she was making something like $500,000 a year, it's $500,000 in revenue. It's not an advisor, close, but not an advisor, $500,000 revenue and she was telling me about all the stress and the problems and the things and the arguments and the trouble with $500,000 revenue. She's now making $8 million in revenue and it was three years. We literally had the exact verbatim conversation.
Michael: About all of her stresses and unhappiness?
Carl: All the things. And this time, it was the private airport staff, like whatever. But I was like, nothing's changed. Not one thing has changed. I think if growth, if you're having those kind of problems, I think it's clear at this point. If you're having those kinds of problems, growth and more money and more revenue will not solve those problems.
Michael: I think the piece I'd leave out there, just as we wrap up, whether you're at this wall or even including those who maybe aren't there yet and are hearing this and like, "First world problems, I wish I made so much money, I didn't know what to do with more money." I think it's relevant for anyone out there to sit down, sit down and think about the question. What are your goals when you make enough in your practice that you don't need it to grow anymore? And just spend some time with that question. What are your goals when you make enough in your practice that you don't need it to grow anymore?
To each, their own. Take those Fridays off that you've been trying to figure out what to do to take off and spend some time with that question, or take a weekend off or take a week off and go lock yourself away in a cabin somewhere. I know some people like to get empty space and distance to try to find the vision of what's next. But, even if you're not there, and I think frankly, especially if you're not there, it's powerful to think about this question because if you don't think about the question, what are your goals once you make enough in your practice you don't need to grow anymore, you're just going to hit that point and keep growing because you haven't set any other goal. And frankly, I think that's why we see the advisors with the biggest revenue tend to have the lowest wellbeing because they blew past the goal, didn't realize they blew past the goal and grew right to the point of unhappiness instead of growing to another direction that would have brought them more happiness.
Carl: Yeah. What did Covey say? You don't want to spend your entire career climbing a ladder only to realize it's leaning against the wrong wall. This has been going on a long time and the only real solution is quiet introspection and realizing it's cute that we think we'll be any different than anybody else. In fact, we're probably more, as your research shows, we're probably more prone to the exact same problem that other people. But, even if we were just equally as prone, it takes an active engagement, an active effort to prevent this… if left to our own devices, humans will create this problem for themselves. If left to our own devices, advisors will create this problem for themselves squared, right? You actively have to prevent it. It's not just something that's going to show up. I agree, I think the first step is take some time, think about what is it really all for? What is the goal if you didn't have to grow anymore? And get that written down and send Michael copies of it on Twittagram or Snaptalk.
Michael: Okay. One of those social platforms.
Carl: Exactly.
Michael: Awesome. Thank you, Carl.
Carl: Super fun, Michael. Thank you.
Michael: Appreciate the conversation.
