Scaling Financial Planning: Client Affluence Vs Technology Efficiencies: Kitces & Carl Ep 172

Video

***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 YouTube Music.

Show Notes

• Kitces Report on The Technology That Advisors Actually Use (And Like)
• Kitces Report on How Financial Planners Actually Do Financial Planning
• 10X Is Easier Than 2X by Dan Sullivan
• Graduating Clients The Right Way: A Thoughtful Approach To Sustainably Transition 'Small' Clients To On-Demand, by Tim Goodwin

Kitces & Carl Transcript

Michael: Greetings, Carl.

Carl: Hello, Michael. How are you?

Michael: I'm doing well. I'm doing well.

How Revenue Per Advisor Changes With Client Affluence (Not Technology) [00:17]

Michael: I am swimming in data these days because we...

Carl: Oh, boy.

Michael: We wrapped up. We actually just wrapped up our advisor technology study. So we go out there and look at all the different technology vendors who's using what so we can calculate market share, who likes what so we can calculate satisfaction ratings. And part of what we did with this year's study, in particular, was we linked some of the data back to the productivity study we did last fall. Because technology is supposed to give you all these sorts of cool productivity benefits. And so we wanted to start looking at both the link between technology sophistication, how good are you at really getting the most out of your tech, and productivity, as well as the study we did previously. We looked at a whole bunch of other factors that impact productivity.

And so there were a couple of really interesting findings that we had, the most disturbing of which, and I'll come back to this in a little bit more detail soon, was that...so when we measure productivity, the primary ways that we measure it is we look at how much revenue each advisor manages. So just think, your total revenue divided by how many advisors were responsible for clients, which is sort of, in the purest sense, how good is the firm at converting the limited number of hours that an advisor can work and do advisor things all year long into revenue that they get paid for doing the things that they do?

The secondary metric that we look at is revenue per employee. So just take your revenue divided by your total headcount, and you kind of get to a similar thing, which is on average, how much can you convert all the work that the firm does for clients into actual money that gets earned? And one of the nice things about using revenue per metrics is it's kind of a cool equalizer. Look, I don't care whether you work with 300 massive, fluent clients, 100 clients who have $0.5 million to $1 million, or a couple of dozen clients that are much bigger. Any of those can equalize out to the same amount of revenue. So your choice. You can do big fancy things for a small number of high-dollar clients. You can do "simpler things" for a high volume of smaller-dollar clients. And we equalize out to the same way.

Except what we find in our research is that it does not equal out in the same way. And technology isn't even the biggest driver of what the productivity outcomes are. It turns out, the biggest driver of productivity outcomes is how affluent your clients are. It's, full stop, how much money they have to pay you fees. So mathematically, this is essentially your revenue per client. If you work with people who pay you $3,000 a year or $10,000 a year or $20,000 a year or $50,000 a year, if you're working with really, really high-dollar clients, the more affluent the clients and kind of the bigger the AUM portfolio, since most of us are AUM-based, the more affluent clients, the bigger the portfolios, the higher the revenue productivity for the advisor. And it wasn't even a little bit close. The average advisor whose typical client is $250[k] to $500[k] manages about $300,000 of revenue. The average advisor whose clients are $2 million averages 500 or 600 grand of revenue. The advisor whose average client is 5 million plus averages $1.2 million of revenue.

They all have the same number of hours in the year. It's not like someone's magically got extra hours to take on extra clients to do extra revenue-generating things. Just the raw affluence of the clients. Literally, the advisors who average 5 million-plus clients generate 4 times the revenue of advisors who average $0.5 million clients, 4x the revenue difference.

Carl: That seems rather odd. Explain to me why you're surprised by this.

Michael: I guess, I'm surprised...

Carl: I'm trying to get my head around it, because it seems to me that's...

Michael: I'm surprised that I thought... So I guess a few things. One, again, from a pure "convert the hours that I spend doing client things into revenue," I don't know, my idealist self, maybe this is just my idealist self, would say, "Look, I can work with 20 clients who pay me $50 grand apiece or I can work with 300 clients who pay me $3 grand apiece." Both add up to about a million. And so I just get to decide, do I want to go really deep with fewer clients, or do I want to go less deep with many clients? And just choose in the spectrum where I want to be. And what we find in the data, just very dramatically, nothing else we looked at had a 4x impact on productivity. A lot of us, we invest in the tech to make ourselves 5% more efficient, and this is 400% more efficient, it's so off the charts relative to tech. And that was part of our indirect finding, was you can work your backside off trying to get more effective tech, or you can just move upmarket to clients who have slightly more assets and revenue to pay you. And averaging up your clients just obliterates any improvements anybody gets from tech. Because affluence of clients and willingness to pay is just so dominating in the financial outcomes.

Carl: Yeah. For the other one, for your ideal picture you painted to be true, what would have to be true is that dealing with 300 clients...what did you say the average was?

Michael: Carl, $3 grand, $3,300, if you want to get technical.

Carl: Yeah, 300 clients that pay $3 grand a year, it would have to be equal work.

Michael: Well...

Carl: And not only is it not...

Michael: But it is, because, look, both of these advisors have full-time jobs. They work approximately the same hours a year. Some of us work slightly more or less than 40 hours a week. But on the whole, I got 2,000 working hours a year, so I can put 7 hours a year towards 300 clients, or I can put 20 hours a year towards a smaller number of big clients, or I can put 200 hours a year towards 10 multifamily office clients. We all have the same time. Literally, the amount of work is the quantity of work, the time it takes to do the work.

The Challenges Of Scaling Many (Less Affluent) Clients [08:21]

Carl: Yeah. But you don't have...there must not be, because this wouldn't be showing up here. If there was equal numbers of people who had 20 clients as people who had 300 clients, and they were making the numbers you're pointing to, I can't remember the numbers we used exactly, the reality here is that I think... I know I did, we underestimate the work it takes to serve. I always think the situation is simpler, so it won't take me as much time, so I can have more of them.

Michael: Right. Well, yes, which I think is part of why this curve doesn't work in practice.

Carl: That's right.

Michael: So you move upmarket. You work with clients who pay five times as much. They don't take five times the time. They take more time. They take more time.

Carl: Well, there's actually some argument. There's actually some argument that, in some ways, they're actually easier to deal with.

Michael: With some dollar dynamics.

Carl: Yeah. Maybe the situation is more complex.

Michael: We see this in our numbers as well. There's remarkably little difference in how much time advisors spend with $300,000 clients versus $700,000 AUM clients. But there is a pretty material difference in how much time we spend with $700,000 clients and multi-million dollar clients.

Carl: Maybe because the situation is more complicated.

Michael: On average, obviously, individual clients have more orless needs in any particular year. But, look, if only because the higher the dollar the client, the more you're, "Well, I need to meet with them more. I need to do more things for them because they pay me a lot of money, and I don't want them to fire me and say, 'What have you done lately?'” We all seem to have a compulsive drive, if nothing else, to try to spend more time with our bigger clients because we want to justify the fees they're paying. I'm not saying this in a wasteful way. "I really want to do more awesome things for you because you're a very valuable client, and I would like to keep you. What else can I do for you that would be wonderful for you?"

Michael: The thing that shifts, though, and why this sort of equation breaks and doesn't hold in my ideal world of 20 giant clients or 300 little clients is that the sheer math of it comes down to, it turns out, more affluent clients just literally are willing to pay more for advice. They just pay more. If I take the advisor's revenue and I divide it by how many hours they work doing client things, what you quickly get to is the average advisor working with a mass affluent client makes about $250 an hour and the average advisor working with multi multi-high-net-worth millionaires makes $1,000 an hour. Because it turns out people with a lot of money in complex situations are willing to hire $1,000-an-hour professionals, and folks with more limited dollars just, at some point, say, "That's just too expensive. I can't afford it."

Carl: Yeah.

Michael: I think, in the lawyer sense, some people hire the $250-an-hour legal associates, and some people hire the $1,000-an-hour partners. And if you look at who hires the $1,000-an-hour partner and who hires the $250,000, $300,000 associate, there's usually a pretty big correlation to the affluence, net worth, financial capability complexity of the person doing the hiring at the end of the day, or viewed another way, just people with a lot of money are outbidding, are buying up the best advisors by giving them large portfolios and paying them very, very well for their time and then filling up their client capacity to not be able to take any more.

Carl: So interesting, right? This reminds me of a friend who has a knowledge product business, writes books and does coaching and retreats, and he gives away 97, the number he uses, he gives away 97% of his content. So he has no $20 product, no $200 product, no $500 product. All of that's free. And he charges thousands of dollars for his products – $5,000 or something. And he just ran the math. And I think this is a very similar thing. When you actually sit down and count the cost, and his claim is people paying $5,000 for a coaching session or something ask different questions, they have different expectations than somebody who pays $20. And he said, the math, to get to the same revenue number, especially when you include conversion rates and close rates and lifetime value of a client and how long are they going to stay around, it's just orders of magnitude. And then I think you get...that's where you quickly get to Dan Sullivan's book, "10x Is Easier Than 2x." I think there's probably some marketing hyperbole in that title, but it's pointing this directionally to something very interesting.

Michael: Yes, right? In that sense, it's easier to 10x your business by moving upmarket to higher dollar clients than it is to 2x your business by eking out incremental technology benefits by implementing better tech with better integrations and better workflows and all of that. Again, I say this as a tech enthusiast that published an app and founded a tech company. I really like tech. But just the magnitude of productivity lift that comes from moving upmarket is just so, so more dramatic. Trying to get incrementally more efficient doing $250-an-hour work by leveraging tech just still gets obliterated when you work with $1,000-an-hour clients.

Moving Upwards In Revenue By Taking On Fewer, Higher-Paying Clients [15:08]

Carl: Okay. So let me ask you a practical question, because, reduced to its absurd conclusion, you could say, "Okay, great. Well, the advice is just decide to have only super high net worth clients."

Michael: Yes, and/or... That's usually a hard magic wand to wave.

Carl: That's why I call it the absurd conclusion.

Michael: But, look, it does give you some really striking implications when you look at how to scale an advisory business, which most of us mean expand margin, expand productivity, expand margins, drive more revenue per team member so that we've got more profit that drops the bottom line. Because what it implied, the way most advisory firms today that I see try to "scale up" their margins is we need to invest more and more into better tech so that we can drive more efficiency for the firm so that we can expand our client capacity. Because if I can serve 120 clients instead of 100, that all drops the bottom line, or if I can serve 250 instead of 200 or 80 instead of 60, whatever it is in your practice, if we can get tech to expand the advisor capacity and help them handle more clients will be more profitable.

Carl: Right.

Michael: And what we see in our data is, if you look at the firms that actually successfully expand their productivity and scale, they go the exact opposite direction, which is they start shedding clients and average up in the process. I'm not doing anything to expand my client capacity. I'm just only going to add clients above my average. And every time I add one, I'm going to subtract one below my average. A partial book sale, I hand them off to another advisor in the firm or turn my house account, we all have different options, depending on what kind of platform we're with. But they either average up, one on, one off. So my revenue keeps going up, and my client load doesn't increase. And when we look at the highest productivity advisors, they all unequivocally have below-average client loads. Very high dollars. So the math adds up very well. They go from 250 mass affluent to 100 millionaires. And then they go from 100 millionaires to 50 multi multi-millionaires. And in the process of going from 300 to 200 to 100 to 50, their average revenue, they cut their client load by 80%.

But if you started with mass affluent clients, frankly, it doesn't take that much to 5x your average clients. If you go from $3,000 clients to $6,000 to $9,000, $12,000, $15,000, you have now 5x-ed your average revenue per client. And granted, that's still not an easy switch to flip overnight. But if I look out there at advisory firms that have been doing this for 10, 15, 20 years, most of us just already drift upmarket over time. We get more established in our community, and we get more known. And some of our clients that started out small get big, and then they tell their big friends. And we start getting referrals from the person we went to college with. And now, it's been 20 years, and they have money, and they've seen us on LinkedIn for the past two decades. Just opportunities start to come. It's always the frustration of an experienced advisor. You're like, "Where were these clients 10, 20 years ago when I really needed them? Not today when I'm already doing well."

The narrative out there these days is the path to expanded productivity is we use tech to increase our client load, and what we see in the data is it goes so much further when you actually reduce client load to go deeper with your highest value clients and then incrementally try to get more of them over time. Again, it doesn't have to be a wholesale cut everything. That could be one on, one off. That could be one on, two off. For a lot of us that have been doing this 10 or 20 years, if I had a client that's above average, you could probably subtract 3 or 4 of your smallest clients and still net ahead. And so you average up on the average client while you bring down the client load. And part of their question is, "Well, how do you get more affluent clients?" The first answer is, well, you clear more capacity to be able to go deeper with the good ones that you got so that you can drive referrals and create other activity. Because most of us don't realize how time-constrained we are until you really have fewer clients and realize how much deeper you can go with them.

Carl: Yeah. I love always thinking incremental. And my brain is always, "Take big, rash, aggressive choices," you know what I mean?

Michael: Or you could do a partial book sale and sell 80% of your bottom clients because the top 20% probably generates 80% of your profits anyway. So you could take a sledgehammer to it if you want, Carl.

Carl: I know. It's just so fascinating to me how, when you get into the math...again, assuming this is an important part of your goal of running a business, and it doesn't have to be, there are other reasons to run a business, it's fine, but we're holding that assumption, when you start running the math on these things, you're just, "No, it's pretty simple." It's pretty simple, right? Twenty percent of your clients probably do. I've done this so many times it's ridiculous. I remember that crazy story. I knew the guy. His name is George. He had 500 clients, did this exact experience. He was, "I'm burned out." He's the first person I heard the term getting pecked enough by ducks. I feel like I'm getting pecked to death by ducks. He ran a whole...

Michael: That's a very brutally blunt way to go.

Carl: I agree.

Michael: Those beaks are not sharp.

Carl: I agree. It was 500 clients. He ran them all through a spreadsheet of who you really want qualitative and quantitative. And of course, part of the quantitative piece was revenue, profitability of client. And there were 16 of the 500 that fell out of the bottom of that spreadsheet. And then he was, "Oh, I can't do that." He went and looked. Those 16 represented something. It was above 70% of his revenue. And he actually just made the decision. He got rid of 484 clients.

Michael: Wow.

Carl: And then built from there. Basically, he was the first one I heard say, "I bought a 747. I tore out all the seats, and I put in 100 first-class seats. And 16 were full." Yeah. And it's funny, how much this applies in so many places. So, anyway, I think that's... Again, assuming you get to decide what value you place on profitability and revenue and personal income and who you serve and the kind of work you're doing and all of those things. But if you're running this as just a pure business, it's a pretty simple thing to think about. Now, simple is not easy.

Michael: Well, yes. And there's all sorts of other secondary effects that come from following this. Again, it means you're not trying to expand capacity. You're trying to average up while you reduce client count, which takes you to one on/one off, one on/two off, one on/three off, one on/four off systems. And then you have to figure out how you're going to gracefully transition clients that don't fit the future of what you're trying to build towards, which gets awkward for some.

Carl: Right.

Michael: It also indirectly means, to the extent you get tech, you start focusing on different tech. And this is one of the other findings that we had from the tech study. Ironically, advisors who view the primary benefit of tech as time and cost savings, the advisors who view tech as an efficiency solution, are drastically less productive than the average advisor. Advisors who focus on tech for time and cost savings are drastically less productive than the average advisor. The ones who are more productive are the ones who view tech as a pathway to deeper client experience, deeper advice and better client experience.

Carl: Wow. Very cool.

Michael: Because, again, if you use it for client experience and advice quality, you tend to go upmarket. And what we found is the advisors that are most focused on using tech for efficiency tend to have a disproportionately high volume of small clients in the first place. So, basically, I have a lot of unprofitable clients, and instead of adjusting fees to cover the cost, I'm looking for tech to bail me out.

Carl: Right.

Michael: Apologies for anyone, that was a hard-medicine statement. But that shows up pretty clearly in our data, why we get advisors that try to eke out efficiency from tech are actually not growing and scaling nearly as well as the ones that are investing into bigger client opportunities, or oversimplified, you drive more outcome by going to get Holistiplan and starting to do tax planning for your top clients than you do by picking the next new CRM and trying to get a little bit more workflow efficient.

Carl: Right, right.

Michael: And if you do that well and you get better clients, you hire another administrative team member, and you don't even go into your CRM anymore because you just delegate that to a team member that you can afford by having higher-dollar clients and by doing deeper tax planning by buying Holistiplan. That's how the cycle plays out.

Carl: That makes sense. It's super good, though, to have the numbers behind it.

The Future Of The Advisor Profession: Affluence Vs Service [25:25]

Michael: Now, the one caveat...I am curious for your thoughts here before we wrap up. The darker side of this, to me, dark is maybe a harsh word, the troubling implication for this is it basically means the advice to any professional who wants to grow and scale your career is you're going to spend the next 30 years going after incrementally richer people until you're done.

Carl: Yeah.

Michael: And from the perspective of helping in the service profession, I don't really love that that's how the math is showing up. It's very clear in the data. But I don't know. I start to have trouble with that when I think about, are we a broad-reaching profession that helps everyone, or are we really mostly a niche thing for affluent folks, where you just get more financially successful by working with people who are more affluent?

Carl: Look, I don't know. It bugs me, too. And I was just having this conversation with my daughter in med school. She's trying to choose her specialty, and she said it just makes all of them kind of sick that pediatrics...oh the one she was telling me about was infectious disease is one of the lowest-paying specialties you can get. Think about that.

Michael: Preventing the diseases that can actually kill, literally, all of mankind.

Carl: Yes. And elective dermatology is one of the highest-paying.

Michael: Because people with money like to change how they look.

Carl: I remember telling her the exact thing. I was, "Man, this sounds so familiar." I remember the story of getting into the business of financial planning because I wanted to help people, and then waking up one day calculating how to best deduct the private jet and just being, "How did I get here." So I think there are people who want to be elective dermatologists, and there are people who want to do pediatrics or infectious disease. And I think we just got to be okay with that's how markets work. And if we're in this system and we're not going to change this system, then we just decide, what is it for you? Because this research you did did not show that it's a bad career or a bad business.

Michael: Correct. And I'll highlight, the advisors working in the mass affluent, they generate several hundred thousand dollars of revenue as an advisor.

Carl: Doing fine.

Michael: It was enough to make a six-figure income, which is better than the average American. It's a good, financially successful career. It works not all the way up and down the wealth spectrum yet. It works increasingly far down the wealth spectrum. But I actually like how you framed it. Yes. And medicine helps all sorts of people across a wide range. And we can also recognize, at the end of the day, elective dermatology does pay a lot more than pediatrics.

Carl: Yeah. And we can rail and be bummed about it, and that's okay. And we can hold two things true at the same time. That's the reality, and it's sad. And it's a bum. I remember thinking this all the time. I had such a problem with this early on, such a problem with this, because I just remember thinking, "Wait, the schoolteacher," because if you get out of the business and start thinking about the school teacher or the paramedic. I'm getting paid. I don't even know how you do the number, if you're per hour. And I remember having this conversation with a coach. I remember having this conversation with a therapist. And the only way I could get there was, "Well I get to decide where I focus." I could focus on those really high-end profitable businesses and then use some of that money in other ways. There's lots of ways to deal with this. But the fact is that's the way the market works right now. You now get to sort out what choices you want to make.

Michael: Fair enough.

Carl: You know what I mean? And let's keep thinking about the profession. Let's keep thinking about it.

Michael: Yes.

Carl: We can hold all of those truths in our heads at the same time with tension.

Michael: With tension. I think that's a good way to frame it. Again, this was not the result I was looking for. Ironically, we started the research trying to figure out, what are the firms who are scaling up really well working with more clients and more limited means who really need help? That was sort of the underlying research question that I went in looking with. And then the answer we came out with was, "Oh, no, the most financially successful ones just move upmarket and then hire staff to deal with all their tech problems and then just keep serving high-dollar clients," and the numbers are drastically irrefutable, unfortunately.

Carl: Yeah. Well, super fun conversation. This is not something we'll... We've now solved all the world's problems, Michael.

Michael: Fantastic. Thank you, Carl.

Carl: Yes. Okay, cheers.