Executive Summary
One of the biggest challenges faced by solo financial advisory firm owners as their firms grow and encounter capacity issues is deciding whether (and when) to hire an employee. While hiring staff members can offer a helpful lift in reducing capacity constraints for the firm owner, it also comes with its own burdens such as managing, training, and supervising employees, which many firm owners may have never considered when first launching their firms. Furthermore, determining the right time to hire an employee and which role to hire first can also be challenging decisions for solo firm owners.
In our 111th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how getting clarity on the reasons why hiring someone is necessary for the firm can help advisory firm owners determine what role to fill first, which business metrics to examine to understand when to hire, and which attributes to look for in a candidate.
Before making the commitment to hire a staff member, it’s important for advisory firm owners to understand if doing so is really necessary in the first place. By listing out what the advisor does on a daily basis and sorting the list in order of what the advisor enjoys most, the advisor can decide if the tasks they don’t enjoy can be eliminated to relieve capacity constraints (e.g., getting rid of multi-step tasks, rightsizing clients, or slowing growth by saying "no" to prospects), or if they are tasks that can be delegated. If there are enough delegable tasks to justify hiring an employee, it may be a signal that hiring additional support makes sense.
Once the reasons for hiring a new employee are clear, the next step is determining if doing so is affordable for the firm (for many advisory firms, hiring the first staff member tends to occur between $150,000–$250,000 of revenue and 40–50 clients). If revenue can support a new hire, the firm owner can then refer back to their least enjoyable tasks as a starting point to create a job description. This will help the advisor be more specific in defining the role they need to fill. By seeking candidates with complementary (not necessarily similar) working styles to the advisor, well-rounded teams can be established that are more likely to excel at problem-solving and developing functional processes.
Ultimately, the key point is that hiring, when done thoughtfully, can benefit advisory firms and their future growth. And by understanding the reasons for hiring someone and how they can support the firm before beginning the hiring process, firm owners can create job descriptions that will keep the search for a candidate much more focused on what will actually benefit the firm the most. And finding the right candidate who enjoys their role helping with the tasks that firm owner least enjoys will inevitably create a better work environment for both the employee and the owner – providing a sustainable role for the employee and a more enjoyable task list for the firm owner!
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
Kitces Report: How Actual Financial Planners Do Financial Planning (2022)- First Who - Get The Right People On The Bus (Jim Collins Article)
- Kolbe Index (Assessments)
- What Is Unique Ability? (Dan Sullivan blog)
- Nifty Advisor Support
- The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It by Michael E. Gerber
- The New One Minute Manager by Kenneth Blanchard
Kitces & Carl Podcast Transcript
Michael: Good afternoon, Carl.
Carl: Greetings Michael E. Kitces Jr.
Michael: Not Jr. My father was not a Michael, he was a Maurice. So, like MK initials carry down, but I'm not a junior or a third.
Carl: I was just trying to bestow that on you since you have to call me David Carl Richards the third. It's fine.
Michael: Well, because there were 3 of you. But...
Carl: It's fine.
Michael: I only got 1 of me.
Carl: And thank heavens for that.
Michael: Yeah, that would be really overwhelming if you had to deal with 2 of me at once.
Carl: Weekend reading would become month-long reading.
Michael: There you go. Oh, if I had twice the time to find articles, I could totally send everybody twice as many articles every Friday.
Carl: That would be amazing.
Understanding Why To Hire Additional Employees [01:01]
Michael: Now I'm just dreaming. I'm just dreaming. Although, so ironically, actually truly, honestly coincidentally I prepared for a topic I wanted to talk to you about today, which is the dynamic of when firms start hiring, and that proverbial, I actually do want to clone myself because I got like more work and more clients, and I need to hire people. I just... I often hear the question coming in of just, how do you know when it's time to hire? Is it certain metrics? Is it certain numbers? What are you actually supposed to hire first? Because there's even a lot of industry discussion, what's the right first role to hire? So, thought it would be a good place to start around just hiring and when you start going down the hiring road.
Carl: Yeah. Super curious. And I'm excited to hear your thoughts on...because you've seen a lot more of this and the metrics and all that stuff. Where my head goes first is why, because it's just letting you know unless...
Michael: Never mind when to hire. Why would you do that to yourself?
Carl: No, just being clear. Just to be clear about the why because there's so much mimetic just like, well, you hire because everybody hires, that's a bad reason. So, just getting clear about are you sure you want to? What is it you're solving for? Are there other ways? Have you deleted everything you could? Should you delegate? And then the other piece, I'll just toss your way and then we can see where you want to go is, is this natural? Because I've tried a couple of times, I had business partners who were all amazing, right, hired people who were all amazing, and 1 mistake that I made often was, because it's easy for me to get along and talk with people like me, I made the mistake multiple times of partnering or hiring, or working with people like me. That's a terrible idea, you know what I mean? That's the last thing I should be looking at is hiring people more like me because that just creates chaos. Nothing ever gets done, you know what I mean? So, those were the 2 thoughts I had was one, why, let's get clear about what we're solving for. And number two, let's not make the mistake of trying to find a best friend that you're going to work with because then all of a sudden you've got chaos. Where do you want to go?
Michael: I actually think it's good to start on the why end. I do want to come... Like we can nerd out about metrics and hiring sequence and such. But, I actually think you frame it well that I get the question of when should you hire. And often there's not really a lot of thought and consideration of why would you do that to yourself. Why would you make other people's families and payroll your responsibility? Why would you do that to yourself? I mean there are very good reasons. I'm not trying to knock on managers or people that scale up and build businesses and go that route. That's a weighty thing that to your point, I'm not sure a lot of advisors actually spend time thinking about because the standard industry answer is just forever and always, well, "Of course when you reach your capacity, you're supposed to hire more advisors to take on more clients to increase your capacity because you're at capacity." And no one really ever pauses for the question, "Or you could just stop taking on clients because you've got enough at capacity and you're making good dollars." For which I hear from some advisors like, "Well, but I want to still grow." It's like, well, cool. Then from now on you're only allowed to take clients above average and every time you take a new client above average, you have to let go of one below average. And you will grow every year that you do that and you will never have to hire anyone.
Hiring someone is a... And expanding capacity is a choice. You don't have to expand capacity to grow. You can just get clients that value your expertise more and are willing to pay you more in order to grow. Expanding capacity and adding people is a particular choice and path about how to grow. That granted some people do and love to do and are very happy and love to follow that journey but I look broadly a lot of advisors and I see a lot of advisors, they didn't get into this business to manage people. They got in this business because they like to help clients and sit across clients and serve clients. And the only problem is they so like sitting across clients and serving clients that they don't know how to say no to a prospect. And so, the only solution is saying when you can't say no to a prospect is, "Well, I guess I'm going to have to start hiring people because I'm out of capacity and I don't know how to say no." And I will admit, I've talked to a few like that over the years. I'm like, "You don't need hiring advice. You need how to say no to prospects advice."
Carl: Right, right. And suddenly you've just created a new problem. And that was the other piece that time I try, I was always just like, "Oh, I feel some pain. Throw a person at it." And it never seemed to work strangely unless I got really clear about what was the pain. Exactly what are the systems? How do I want it solved? That's a whole different skill set than what you thought you were getting into.
How Hiring Additional Staff Changes Firm Productivity Dynamics [06:33]
Michael: No, it's really true. So we put out one of our advisor productivity studies a couple of weeks ago. We update it every other year and we just put out the latest one a few weeks ago. And one of the charts and the things that we documented in it is, how many hours per week does the typical advisor work? And how big is their team, specifically senior advisor? How many hours does the person at the top work and how big is the team that supports them, right? Because most of us think of it like, well the bigger your team, the more that they can take off your workload and your hours should go down because you can delegate all this stuff. And what we found across the whole study was just absolute unequivocal crystal clear line every time the team size goes up, the number of hours worked goes up. It never went down. And the bigger the team, the worse it gets. It just...hours worked just keep going up the bigger the team.
Carl: Wow. That's actually...
Michael: Because managing people take time like, great news, you delegated 5 hours of work, and you picked up 6 hours of management duties.
Carl: Is that true?
Michael: Every single staff increase resulted in higher hours worked. Now...
Carl: Wow.
Michael: ...it also resulted on average in higher profitability, better economic... You do start scaling. You do make more money on your time by doing higher-level tasks and delegating lower-level tasks. The...
Carl: But you don't have more time.
Michael: ...economic outcome works. The time outcome doesn't.
Carl: Fascinating. That's really...because that feels intuitively correct, but the fact that you've got something other than a cute little story that Carl tells to back it up is really, really cool. If you're... Maybe you made more money but you don't have more time.
Michael: Yeah, just going from 1 team member up to 3 team members, the average advisor’s hours worked every week was up 15% to 20%. If they got to 5 team members, their hours worked were up more than 30%.
Carl: That is amazing.
Michael: So...
Carl: And so...
Michael: More profitable. I don't want to be totally negative around the business of expanding team. It does allow you to expand economically. The scale starts happening but not time-saving. So, when I hear like I'd love to hire for work-life balance, I'm like, big red flag. If I hear, I'd love to hire because I really want to scale my business and grow larger, okay, cool, but then just to check do you really actually want to scale and grow larger or are you just saying that because you don't actually want to deal with saying no to prospects. So, the easiest way is to say yes and then to hire people and you rationalize it by saying, "I'm scaling up," but the truth is I didn't want to work more hours managing more people to scale this thing up.
Carl: Right. Or do you somehow believe you're different than the average? Meaning you could figure out... You're a skilled manager or you've got processes or systems in place. That's the question I'd ask you. The rare people who actually did result in increased freedom or time. Let's pretend like that was somebody's goal. Do you have any sense of what they did differently?
Michael: There is a little bit. So, one of the other things that we looked at in the study is just some of the business economic metrics around productivity so you can measure things like revenue per advisor, revenue per service team, revenue per team size to try to find the optimal points. So, what we did find is, so even when you look at it from the economic perspective, almost all of the staff leverage that you get comes when you go from a 1-person team to a 3-person team. There's almost no increase in productivity from a 4-person team. And then it starts to go down when you get 5 plus. I'm talking actual service team of how many different people interact with you and your clients. The 3-person service team seems to be pretty robust. Your hours do go up a bit, but your income goes up a lot and that team structure's pretty simple and straightforward at the end of the day. It is you, it's an associate advisor. So, there's someone second chair that can capture notes and do client follow-up and field the first round of client questions and cover the office and the client questions so you can take a darn vacation. You get a lot of leverage from that associate advisor and then there's 1 client service administrator who just does all the paperwork admin work that goes along with it because there's some of that work that needs to be done.
It should be delegated somewhere. And candidly just, it's a lot less expensive to hire an administrative person than it is to hire a second advisor after the first. And some of the work should get delegated down if you're going to make the team more effective. If they go to a fourth hire, the fourth hire is one more advisor. So you now get something that looks like Angie Herbers Diamond Teams kind of structures. You're at the top, there's another service advisor that can lead client relationships along with you. There's an associate advisor who's doing the paraplanner support work notes, initial follow-up plan analysis, that kind of work. And there's an admin at the bottom of the diamond. If you visualize a baseball diamond, you're at second base support advisors are at first and third, your admin sits on home plate. And that 4-person team we find is about as efficient as the 3-person team. And just you handle more clients and more revenue and you can generate more profits, but you're still not saving any time. Your hours aren't getting better, they're just getting incrementally worse as you build up team because if that's your whole team structure, you're not big enough to hire a dedicated operations manager who can do all your HR issues. You got to manage them, you got to do their employee reviews, you got to build the career track, you got to develop the compensation system for them because if you don't do that well they leave.
And if they leave then you got to do all the extra work of, well I expanded clients because I wanted to build a team around me and I did, but then my advisor left, so now I got to handle all the clients until I replace the advisor. And then I have to hire the advisor and then train the advisor while I'm doing all the clients that I took from the one who left. And you can get into a spiral. Now, if you do a great job of managing your team and keeping them on board, and giving them some opportunities so they feel like they're moving up, they may stay a long, long time. And I do know a lot of advisors that have had great stable, 3-person, 4-person teams that have run for a long time. But at the best you still have to be prepared to actually hire, train, develop people, and manage them to give them that path because otherwise if you hire them up and expand your capacity and take on more clients and you're not able to retain them, life gets even less happy than it was when you were just at capacity as a solo.
Finding The Right Candidates By Focusing On Complementary Attributes [13:34]
Carl: Let's do this. Let's pretend you've answered the why question. I'm an advisor. I've taken this to heart. I've gone on lots of long walks in the woods and I'm pretty clear I want to do this. What do you do to set yourself up for success? What is it that... Because I'm assuming that most advisors don't naturally have the inclination and the skill set to be the manager person. So what is it that you found that you could do to set yourself up successfully?
Michael: I find the first piece by far is actually... So wait, I'm going back to more walks in the woods. It's the introspection personally of, what are you really good at? What do you do well in the business? And what do you want to let go of so that you make sure you hire the person who is so naturally complementary to you that it gets easier. And then there's 2 reasons for this. The first is just if you find the things that you really need to let go of and don't do well, you will get the biggest lift in time. You have to manage them, but at least you're shedding a lot of time in exchange for managing them. Because the worst case scenario is you give the things that don't save you much time and then you still have to manage them then you end up spending a lot more time.
So, what are the things that are most impactful for you to get rid of just so you can free up some of the time and space to start learning how am I going to be a manager and what can I do to train myself to manage people? The second thing that goes along with it is, when you get really clear about the tasks that you really don't want to do and that you're going to let go of, you can get really clear on hiring a person who would actually love to do those and take them on. And if you hire someone into a role that they are in their natural happy place, they tend to stay longer. A lot of the challenges I see that crop up around advisors struggling with turnover, it's not even managing the people management problem. It's a, I didn't actually get clear on what role I was trying to hire and what the job description was, and what I was trying to delegate in the first place. And so, then I started changing things up once they were on board and then they weren't happy with that because it's not what they thought it was going to be. And then they turn over and bounce. Even great managers will struggle to keep people on board if they're just not the right person in the right seat to use the Jim Collin's, "right people in the right seats on the bus" analogy. So, the first driver to me is really getting clear about that. I think of that even the context of my journey as I started hiring in business, the first time I made a full-time hire in the business and I did a version of one of those exercises.
I know some practice management consultants advocate just make a list of all the things you do in the business, right? Pull out a Word doc or an Excel document or a whiteboard, whatever you want. Make a list of all the things that you do in the business, all the different stuff you got to deal with, and then just start sorting them. Which ones do you like and look forward to doing, right? I love my client conversations. Which ones do you not look forward to doing? I hate entering the notes into the CRM, or I hate wrapping up the paperwork or I can't stand doing the follow-up calls on the transfers to figure out what's going on with them. And the list of all the things that are below the line at the bottom of the list that becomes your job description.
Carl: Right.
Michael: Just literally that for which I will own. At least for me, I actually had a lot of trouble with that early on because, from my mentality, my mental script around this was, what kind of terrible person, insert your appropriate word here, what kind of terrible person comes up with the things they hate the most and make someone else do it?
Carl: Right, right.
Michael: What a terrible human being am I to take all the things that I think are sucky miserable things and make it someone else's problem because that's supposed to make my life better. And just the piece I fundamentally missed is just early in my career, human beings are wonderfully varied and for everything that I can't stand doing there's someone out there, it's like, you mean I just get to do that all day every day? Like that's my...
Carl: That's amazing.
Michael: That's my... They're like, "Wait, I just have to do all these task things and make sure all the boxes are checked and my winning day is you're going to give me 17 things on a to-do list and I have to check all 17. You know what my perfect day is? 17 things on checklist. I check all 17 like go home feeling so good about myself because I checked off all 17." I look at 17 things on a task list I'm like, "Oh, I can't believe I have so much stuff I need to deal with." But different people are wired in different ways. And so, when you get really clear on what the things are that you want to let go of and you write those into a job description and you find a person who really actually truly genuinely wants to do those and is excited to do those, I find the first round of management gets a lot easier because they're doing the thing that they like. And that goes a remarkably long way to making this more manageable as you're over time going to learn and exercise some of your management skills. I wish I could say, "Oh, just read this book and you'll be a super awesome manager because you'll have it all figured out once you read this book." I don't know and have never seen and found anybody who can find the book to do that. The only people I know who have become great managers, it only happens 2 ways. You happen to be naturally gifted and you're just wired that way in the first place, in which case you get the cheat script in your DNA or you learn it from the school of hard knocks.
Carl: Yeah. But I do think there's some...That's a really important point about finding, because I pointed at it earlier like, don't hire more people just like you.
Michael: You don't hire mini-me. You hire alter me, opposite me. Negative me.
Carl: Totally. In that mindset, I remember the first time... I have 2 quick examples of that. One was I had a classic assistant office manager person. And one day I had clients coming in and I asked if she would be willing to get lunch for us. And the clients filled out menus before like circled menus and sent them. So we ordered the lunch, she brought it in and when she came back she had no drinks. And I remember saying, "Hey, there's no drinks." And she said, "You didn't ask for drinks." And I remember being like, how could you not think about that? And then I realized she was in the Kolbe index parlance, she was classic blue. No red, no fact find, no additional ideas. It was, "You gave me a checklist. I followed the checklist." Because I started out mad and then I was like, "Wait, this is amazing."
And so, it changed my relationship with how I used that person because I was like, wait, this is great. I don't have to get somebody who'd ask me like, "Hey, there's a better way to do it or do you want..." All I have to do is give a checklist and this person loves it. And I was shocked by that. And then the second one was, this happened recently. I have an amazing…somebody who works with me now. Just totally amazing. This was a revelation to me. I literally remember just being like, what. One day they told me, "Hey Carl, I really don't like brainstorming sessions. If you could just tell me what you want done..." I was literally like, I didn't know that was possible for a human because it's all I want to do. Is ideate and create and start.
Michael: For some other people like ideation, brainstorming, stressful is all, heck like, "Oh my gosh, can you please just tell me the thing because it is really stressful to figure out the thing."
Carl: Literally the last thing they want to do and so I love that idea. One helpful tip for me has really been the Kolbe index. Having somebody take the Kolbe test, figuring out the strengths, which is really sort of, it's as close as you can get to trademark Dan Sullivan, "Unique Ability." Understanding somebody's unique tendency. Kolbe will point you in the right direction because I'm a one, two, nine and that's quick start, and then a zero, I'm psychotic. The worst thing to do is put me with another quick-start person that likes to start things and nothing ever gets done.
Michael: You'll just spit everything up and make everybody nuts.
How Business Economics Can Highlight When To Hire [22:19]
Carl: Yeah. So, having people that are those opposite things, at least their natural tendency, their strengths ball there has been a saving grace for me. So, that's super helpful. Is there anything else as we wrap up that you think is important to understand? Just like I've decided I'm going to grow because not only is it the mimetic thing to do, I've walked in the woods, it feels like I want to do this. How to be successful, anything else you would point out there?
Michael: Well, I think the other thing to note is just, well ironically, finally coming back to the original question of just metrics for when you actually hire and the order that you hire them. So, I feel like I do want to reflect back to that. So, I'll answer this in 2 ways. The first is, so if you look just from a business economics end, most advisors end up hiring their first staff members somewhere between $150,000 and $250,000 of revenue. So, not just a little bit of how comfortable you are to make the reinvestments in order to do it but varies a little bit depending on who your clients are and the typical ones that you're bringing on. But most advisors finally start hitting the wall around just like things are getting busy and there's a lot of paperwork things to be getting done somewhere around 40-ish clients or so. May come a little earlier or later depending on how deeply involved you are.
And if you're getting clients that pay you a couple of thousand dollars per client, you're probably coming up somewhere on the $150,000 to $250,000 of revenue depending on what your charging business model looks like and quite how affluent a few of your clients are. So, it's usually cropping up there. If you're hitting 40, 50 clients and you're materially below $150,000 in revenue, either you can start looking at virtual assistance and people that do this part-time. So, you have services like Nifty Advisor that do this on a part-time outsource basis or you may need to take a hard look at, am I taking too many clients already that are just not big enough to pay what I need to be able to build the business to the point that I can do a hire.
The second hire I find usually comes somewhere around 70 to 80 client households. That's like, I've leveraged myself up a little, I got some support, I delegated some tasks, but there's just so many clients and there's so many review meetings, and they email and they call and they want stuff. And I need someone who doesn't just do tasky things I hand off. I need someone who can actually take on…handle and field round one of client questions, actually do the deeper financial planning work. Analyze and look this up and come back to me with an answer or crunch the plan and then let's just look at the results. And that's a layer above admin staff so that often comes somewhere in the 70 to 80-ish clients I find for advisors. Sometimes they get a little bit further, but usually, if they're a 100 plus it means there's a whole bunch of clients that they basically hardly ever talk to because you can just only handle so many active relationships.
And again, depending on what your average revenue per client is economically, you might start hitting that wall as low as $300,000 if you're only doing $4,000 or $5,000 or revenue per client. You get a little further if you are higher. If you're a lot lower than that, just you're going to find staff costs start squeezing you because that's the fundamental challenge of advisory firms. If we don't get a certain revenue per client when we can only handle so many people, the economics start getting squeezy. And for most firms I find that hiring path, your first hire is a client service administrator, that sort of CSA admin hand off paperwork and scheduling and those types of tasks. The second one is the associate advisor who can help with the planning work and sit second chair. And the only asterisk to that is for some advisors who just happen to be really like their brains are wired for systems, you know who you are.
Naturally, make workflows in your systems and you already made your custom Zapier connections to move things from here to there. Just you've done a good job of systematizing already. Often those folks manage to skip the first hire and they go straight to the associate advisor because they've just...they don't need to hand off as many tasky things because they were actually just good at streamlining and automating them in the first place. And just that's again, know yourself. If you're really wired to do that stuff, great, you can move a little bit further. If you're not so wired for that which frankly, I find most advisors are not. That's not why we got in the business to build systems and create integrations between CRM systems and planning software. If that's us, then you probably need someone to delegate some of the tasky work that just is not your gift to streamline and automate. So, you need someone to just take it off your plate for you.
So that's the sequencing I tend to find. Although I will...I guess coming back to sort of the original discussion. For people who are thinking about this or at this crossroads, I'd said earlier, there's a lot of stuff you just got to learn by life, or you can read it, but you still have to experience it before you're really going to internalize it. I will say 2 books I would probably recommend in this direction if you're at this crossroads and just thinking about it and not sure on the why. Highly recommend Michael Gerber's "E-Myth", if you haven't read it. It does a good job of crystallizing that difference between there are people who just love doing a thing and they're great at a thing and there are people who actually want to build a business around the thing, right? It's like that transition from being an advisor to being an advisory firm business owner. And I think Gerber just does a good job of helping people think through that if they've never really thought about that crossroads. And the second I would probably recommend, if you do want to start with something in the direction of management, I'm actually a fan of "One Minute Manager" by Kenneth Blanchard. It's one of the famous management leadership eBooks that's out there, but it's not a bad place to start if you're just trying to get a little bit of a handle on, how am I supposed to start managing people if I really haven't done much of this before.
Carl: Totally. That's so good. So good. The only thing I'd just add is that idea of workflows is really interesting to me that you... I don't think you can... It's rare that you... You can hire a consultant to help you do this, but largely I think we have to define just saying, the mistake I always made with everything and still make is, "Oh no, there's too much. Throw a person at it." This idea of defining what the job is, recording the screen shares, scoping it out, and then handing it off to the type of person who likes that type of work is the one thing that I think that we had, that you've pointed to, and we've talked about it before actually, but delegating, you're really delegating something here and...
Michael: Yeah, I might...
Carl: ...for somebody to do it, they need to know how to do it unless you're expecting them to be a mind reader, right?
Michael: Yeah. I had no skill in training or managing people. When I hired my first team member, I just started turning on screen shares, I was like, I do it this way and then I saved it as a video, and I sent it to her. I was like, "Here's how I do it."
Carl: Totally.
Michael: That was my training. But...
Carl: Yeah, we did the same thing.
Michael: ...she liked doing that and she was good at it, so she grabbed it, figured it out, then figured out a better way to do it usually because I didn't always have the most efficient process, documented it because she likes writing things down. And now all of a sudden, we started having written systems and procedures about how we do things that got more efficient because she was good at it and I wasn't. And I hired someone who was good at what I wasn't.
Carl: Totally. So good Michael.
Michael: Awesome.
Carl: Amen. Thanks for the chat.
Michael: My pleasure. Thank you, Carl.
Carl: See you.
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