Executive Summary
For any service professional, time is the ultimate constraint. There’s just only so many hours you can work and deliver your services, before you run out of time. For those who own their service business – like many financial planning professionals – that capacity is even further limited by the time it takes to run and manage the business as well, not to mention finding the clients who will pay for your time.
As a result, maximizing your economic value as a professional is all about maximizing the value of your time. In the early years of a practice, there’s more time available than clients to service, so the focus is simply on getting more clients to work with in the first place.
Yet eventually, an advisor hits the capacity wall, and suddenly the growth of the business stalls. At that point, the only way forward is to either get paid more for the time (e.g., by improving your expertise and skillset), or figure out how to free up time through delegation and using technology to make the business more efficient.
Ultimately, though, focusing on the economic value of your time itself can actually be an effective guide in how to maximize its value. By recognizing the value of your time, it becomes easier to judge the value of technology tools for efficiency, what tasks to delegate, and what you need to do to ensure that you spend all of your time focusing on your highest and best (and most valuable) use!
Estimating The True Economic Value Of Your Time?
What’s an hour of your time worth? If you bill your clients on an hourly basis, this is probably an easy question to answer: it’s whatever your hourly billing rate is. For most advisors, though, the answer to this question is more complex; clients may pay you in a wide range of ways, from financial planning fees to annual retainers to AUM fees to commissions for the implementation of various products.
If you really want to understand what an hour of your time is worth, the easiest approach is to simply divide your annual income by 2,000.
2,000 represents the number of hours you work in a year, assuming a 40-hour work week and that you work 50 weeks per year (with 2 weeks of vacation). So if you earn $100,000/year as a financial planner, your time is worth $50/hour. Making $150,000/year instead? You’re at $75/hour. Up to $250,000/year but working 50 hours a week? Well, $250,000 / 2,500 hours = $100/hour.
Of course, even for a planner who bills hourly, the hourly rate derived from this equation will not equal the rate you charge clients for an hour of your service – for the simple reason that in practice, no planner is able to generate a “billable hour” for every hour of work throughout the year. Not all of your “work” is “client work”.
For instance, you might be billing clients $5,000 to craft and deliver a financial plan that “only” takes you 20 hours to prepare, for a healthy $250/hour. But when that rate averages out against all the $0/hour time you spent keeping up on your continuing education, or managing/overseeing staff, or just running the business, or handling administrative tasks like getting scheduled with clients, or doing the “pre-work” before a client meeting... the actual amount of revenue you generate for your overall time is far less.
And of course, there’s the time it takes to market yourself – at $0/hour for your time! – just to get those clients who can pay you in the first place!
Focus Your Time On Your Highest And Best Use
As any advisor who has ever started a practice from scratch knows, in the early days of a business the simple goal is to get any clients who will pay anything at all. The challenge is not maximizing the value of each hour of time, but simply getting paid for all the available hours in the first place. Similarly, when getting started, there’s a tendency to try to do everything yourself. After all, your time is “free”, and you don’t have enough client activities to do to fill up all your available time anyway. You’re turning idle hours into business-productive ones, even if they’re not billable to a client.
As the business and the number of clients grow, though, the situation begins to change. Eventually, every available hour is spoken for – some working with clients and some working elsewhere within or on the business – and the advisor “hits the wall” on growth and capacity for their time.
At that point, it’s crucial to recognize that growth can no longer come from just getting more clients and spending more time with clients, because there isn’t any more time to give to them. Instead, the only path forward is to generate more value with your time, either by making it more valuable and getting paid more for it, or by delegating less valuable tasks so you can maximize the amount of time you spend on your highest and best use.
In other words, in the early years you can grow your income and business by turning idle hours into productive ones, but once you reach capacity you can only grow further by maximizing the number of productive hours, and making them even more valuable.
Delegate And Automate To Free Up Time For More Valuable Tasks
So how do you free up more productive hours? The key distinction to recognize is that as you grow the value of your time by increasing your own professional skills, it may no longer be valuable for you to do tasks that could now be delegated to someone else at a lower price point.
For instance, imagine you’re generating $250,000/year of income, which means the effective value of your time is $125/hour at 2,000 hours/year. In reality, you’re charging over $200/hour for the time you spend with clients, but unfortunately there just isn’t enough time left in the day/week/month/year to take on any more clients. You’re at capacity, and you can’t even reach your ‘full’ potential at over $200/hour because only about 60% of your time is actually spent with clients!
So you decide to hire an assistant at $25/hour. The “bad” news is that because your assistant is new, and doesn’t know the tasks as well as you, it takes that person 3 hours to do something you could have just done in an hour yourself. But the “good” news – and the key point – is that even if it takes that person 3X as long, that’s still only an effective cost of $75 for 3 hours, which is less than the value that you’ve assigned to your time for just 1 hour!
In other words, by focusing on the target value of your time, the reality is that your business can be more successful even by delegating tasks to people who are less efficient at it than you are. Your staffing cost for the task might have been $75, but the cost of your time was $125, and the hour you just freed up can now be spent with a client at $200/hour or more! And of course, as your staff support learns the tasks and becomes more efficient as well, and eventually learns to do the task in an hour just as you did, now your business is even more profitable as you’re freeing up time for clients at $200/hour by delegating to a staff member implementing the same task at $25/hour!
In fact, once you do the math to determine the value of your time, you should never be doing any task that could be delegated to someone else at a lower price point. Which also means the higher your income grows and the more valuable your time, the more cost-effective it is to delegate. If you make $50,000/year, delegate anything you can for $25/hour or less; at $100,000/year, delegate anything at $50/hour or less; at $250,000/year, delegate anything at $125/hour or less. And if you’re delegating to an expert who takes less time to do the task than it would take you, there’s even more room for hiring and delegation.
Similarly, tasks that are purely repetitive can not only be delegated to staff, but automated altogether with technology, whether it’s rebalancing software to automate trading or a scheduling app to improve the efficiency of setting up client meetings. From this perspective, the reality is that very small incremental time savings can add up to a significant value, multiplied across the value of your time throughout the year. A software tool that saves you 15 minutes per week is worth over $1,500 of time savings throughout the year when you value your time at $125/hour – which makes the cost of most software productivity tools tiny in comparison!
Increasing The Economic Value Of Your Time
Ultimately, it’s not just about freeing up the availability of your time. It’s also about truly making your time more valuable in the first place. After all, it’s one thing to delegate or automate “lower value” tasks, but freeing up your time is a moot point if no one is going to pay you $100/hour, $150/hour, $200/hour, or more, for your time in the first place!
Accordingly, the second path to continuing to grow your income and business is to make your time more valuable, which means having more/better specialized expertise that creates value for clients, and the skillset to deliver it.
This is where training and professional development begin to matter, starting with going through a CFP certification educational program and then extending to post-CFP educational programs, which might cover technical knowledge or be more oriented towards trust, communication, and relationship-building skills. Simply put, if you want your time to be worth $100/hour, $150/hour, $200/hour, or more, you need to have the training, expertise, and skillset to justify it.
It’s also important to recognize that with professional services, from medicine to law and more, the reality is that specialists get paid more for an hour of their time than generalists, and the natural path of most professionals is towards some form of niche or specialization. It’s a simple matter of supply and demand – when your knowledge and skills are specialized for a unique target clientele, the depth of your capabilities is worth more to those clients because the solution is scarce and the alternatives are limited.
In the context of being a financial advisor, this means either developing an outright specialization in a certain subset of financial planning (ultra-high-net-worth estate planning? Tax planning for executives with extensive deferred compensation, stock options, and restricted stock?), or focusing on a particular niche clientele where you can truly differentiate yourself (a focus on pharmaceutical executives, physicians, government employees, teachers, Gen Y, or something else!).
In the end, our greatest constraint as a human being is time. We’re only given so much of it, and we can only spend a limited portion of it working. Which means ultimately, it becomes necessary to not just keep working harder, but to also work smarter, and find ways to spend as much of your time as possible doing whatever is your own personal highest and best use, maximizing both the value of your time, and the amount of your time that is paid for that value!
If you’re struggling with how to implement this in your own business and professional life, two resources I highly recommend are:
The E-Myth Revisited by Michael Gerber
Conventional wisdom says we need a niche. The logic is easy
enough to follow. But it might be time to rethink. Specialization eliminates
competition, thereby raising cost (to the client). The necessity for a
financial planner to have a niche is overblown. It serves the advisor best, not
the client. Are there separate stock/bond markets for dentist, engineers, etc? We’re
all playing in the same sand box.
Recommending stocks and bonds for dentists or engineers is not a niche. That’s basic (and increasingly commoditized) portfolio management.
Learn how to advise dentists on maximizing the value of their dental business, how to operate their dental practice efficiently, the best way to finance acquisitions to expand the practice, how to optimize cross-tested profit-sharing plans based on the employee census of a typical dental practice, the best way to structure a buy-sell agreement between a retiring dentist and his successor consistent with dental practice valuation models, etc., and you’re starting to talk about a bona fide niche for dentists. Notably, NONE of this has ANYTHING to do with the dentist’s portfolio.
– Michael
Hi Michael,
Do you have any recommended resources (books, blogs, etc) for learning more about these business practice issues?
Thanks!
– Joseph
I agree with both Michael and David, but really more of a middle ground. I’ve got a practice with about half my clients in a niche (young advertising professionals) and the other half fairly diversified. The niche is where most my new clients come from since it is very easy to be referred to others and I have detailed knowledge of their field, unique planning needs, and work place benefits. But, many clients just don’t fit under a neat niche like “dentists” and really don’t have any unique planning needs. In the end, the article is about being the most efficient as possible and maximizing your value as an advisor, so niche’s will allow you do that as Michael described.
Everyone has great points. My question didn’t have much to
do with Michael’s actual post. More general in nature.
I totally agree with Scott. It’s a middle ground issue; To niche or not to
niche. In all the blogosphere. I’ve yet to see one post saying it’s OK to just
be a good advisor, without a niche. Again not aimed at Michael, his stuff is
priceless. If I want to read about life-cycle investing, I go to Zvi Bodie and
Bob Merton. If I want to read practice management and financial planning, I
read Mr. Kitces. I mention out of respect. My whole point here is to stimulate
healthy debate…
But it seems every post I’ve ever read (again, not talking Michael’s blog here)
said something to the effect of finding or creating a niche, and all your asset
gathering problems will be solved. Sorry, but a niche or specialty is earned
not found. Too much fake it, till you make it.
The labeling of having a niche is form rather than substance. Picking up on
Cliff Asness’s “Top 10 Peeves”. ‘Investors should care far less about what an
investment strategy is called (form) than about how it is designed and
implemented (substance)’. Likewise, claiming to have a niche is far different
than actually having a specialized body of knowledge. As in the items Michael
mentions above when helping a dentist. To Maria’s point. Serving a niche serves
the client, first and foremost. IF and ONLY IF, an advisor actually has a specialized
body of knowledge.
I suppose my frustration comes down to folks paying for a level of service they
may not need. Not every financial problem requires an advisor with a niche.
Maybe it’s time for a standard of service. If an advisor wants to claim they
have a niche, it should be backed up with credentials. Haha, just what we need,
more designations. I do hold the CFA btw. Making me a certified fcking a-hole.
Sometimes a generalist is just fine. Sometimes, paying a cardiologist to check
my blood pressure is overkill when my family doctor can do it at a fraction of
the cost.
No doubt. Having a niche has its purpose.
This is a very interesting discussion. When talking about “niche” and in the current context of people being more and more connected via social media. I see two other benefits in “niche”
– if the niche is a “network of people” who not only share the same context (location, profile) but also know each other. There is a huge efficiency gain for the advisor in selling, and building its network and its trust
– relevance. The level of service or the kind of service may be the same but there is value in being on the top of what a specific “tribe of clients” (I prefer tribe to niche) are concerned about.
Serving a niche serves the client, first and foremost. They get an expert in the field they’re in… who keeps up with trends and products they’re bound to be most interested in their “population”. They get an advisor who is “passionate” about working with their “population” They connect with other clients in the niche at advisor events, and so much more.
And it serves the advisor in a host of ways, too.
As far as the industry as a whole, there are many niches. The bank I bank with specializes in construction. There is another bank with a reputation as being small business friendly, and another who is developing a niche in health care. The advisors in my area, niche in various ways, too. And then again, some don’t.
Plus there are many exchanges… (niched again)
Just this week I read something (about the SEC or a member of the SEC) talking about separating banks from investment firms again.
As a Business Coach to advisors I haven’t worked with one advisor who prefers to work in the same sandbox as everyone else. They prefer to stand out from the crowd and attract business to them. Advisors who niche are more easily recommended because they specialize. The person or company type they specialize in connects with them first because they are the exact person the advisor helps. It’s just easier to turn strangers into prospects when the stranger IS the person you’re passionate about helping.
Plus through the niche (actually through the 2nd step in the niching process, creating an ideal client profile) the advisor can connect more deeply (the know, like and trust part). Because they REALLY get the client.
I myself have recommended people and business owners to advisors based on who the person was that was asking for financial guidance.
Often at advisory firms, different people will specialize in different but similar niches. OR they might be institutional, retail or family office advisors.
I’ll recommend a few other great books on the topic of growing firms using systems. (They’re part of the mandatory reading list I provide my clients.)
Emyth or Emyth Revisited (as Michael mentioned). (Warning, it’s VERY wordy, often boring, but in the long run very much worth the read).
Millionaire Consultant – Weiss
And these niched books:
— E-myth Financial Advisors (and the Manager addition for their Office Manger and team members)
— Tested In the Trenches – Carson
— And of course, the One Page Business Plan(r) for Financial Service Professionals or Busy Executives. – Horan
Even within the Emyth Revisted (5-6 books now, focusing on different specialties, ) and the One Page Business Plan, there are editions that connect with different segments of business owners and executives and make their customer feel special and cared for.
And I think of the marketing books my clients have read, and a majority of them have Financial Professional or Advisor in the titles. While they can read “most” marketing books.
I’m really glad that millenniums are starting their businesses by “working smarter”. Most ‘ve spoken to are serving a niche or thinking about it.
Banks…… and brokerage firm grew… by starting with a niche, too. Some old ways really are great new ways, too.
At what point does becoming a niche financial advisor cross over into being a personal business consultant?
Shaun,
I don’t think that’s a universal path for a financial advisor (or even necessarily a ‘niche’ financial advisor).
HOWEVER, IF your niche IS with a (particular type of) business owner, being capable of providing personal business consulting seems almost inevitable in the refinement of that niche service?
– Michael
If you are looking for financial marketing plan, Check out at –
https://www.billgoodmarketing.com/top-financial-advisor/