Holding Back From Hiring Associate Advisors Out Of Fear They’re Just Going To Move On: Kitces & Carl 179

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***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 How Financial Planners Actually Do Financial Planning
• How 3-Member "Triangle Teams" Maximize Per-Advisor and Per-Employee Revenue (Latest From Kitces Research)
• The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It
• Limitless Advisors Coaching
• Creating A Financial Planning Residency Program To Develop The Next Generation Of Advisors

Kitces & Carl Transcript

Michael: Well, good afternoon, Carl.

Carl: Hi, Michael. How are you?

Michael: I'm doing well. I'm doing well. We are, I guess, into the fall season by the time we're recording this, probably on the cusp of the winter season, by the time everyone hears it, because we record a little ways in advance, but this has been conference season for me. So I'm just bouncing around from one event to another. I think I've had...I think I'm queuing up five consecutive weeks to being out for a conference a day or two every week. So we'll get to see a lot of folks who listen to the show in person. And then they'll hear this episode after we get back.

Carl: Yeah, that has been fun this year. Lots of really great FPA chapters, and XYPN was fun. And yeah, it's been great this year.

The Challenges Of Hiring A 'Forever' Associate Advisor [00:56]

Michael: So in that vein, I actually wanted to talk to you today about a theme I'm finding cropping up as I've been talking to a lot of advisors lately. And this is an extension of some of the productivity research that we put out on the Kitces platform. I guess what would have been end of last year or early this year, we did a bunch of research looking from just a pure perspective of revenue productivity, or how much revenue can a financial advisor be effectively responsible for.

We found that often the most productive teams were quite small and lean. Senior advisor at the top, associate advisor to help you with your clients, and a client service admin. And those teams we found on average were north of $1 million of revenue just with that 3-person unit.

And to be fair, we didn't have the best way to measure in the study. It's probably two and a half because I know a lot of firms that run on models like this, and that client service admin often supports two of those teams at the same time. So it's like one... This is like a triangle, but the base of a triangle has a shared point with another triangle right next to it, with an overlapping admin. I'm trying to draw this with my hands.

Carl: Should I try and sketch that for you? Let's see what...

Michael: That would be great if you could sketch that for me. Two triangles, shared bottom corner point of the service admin. And just like extraordinary productivity, because the team just gets really hyper-focused at that point. If you just imagine from the senior advisor only, there's not a lot of people to manage, just you and one or two others. Everybody is focused on the same client base in a constructive way.

Because what we found conversely, when teams got bigger, they got to four people, five people, and up, the productivity numbers started to come down despite how popular some of those structures are. And what we found is that it seems to be this combination of either A) as the team gets bigger, you do get some time savings and more clients that you can delegate or work that you can delegate, but you have to take back managing more and more people. And so all the time you're getting in client delegation, you're losing in team management.

And we found that... No great surprise. When teams get really large, we often end up sharing the clients, right? I've got this client I do with Brett, this other client I do with Susie, because of when they came in or how they support me on those clients. And so I've got all these clients that I share with various members of the team.

And it's one thing when you get "shared" clients with associate advisors who are meant to leverage you. But when advisory firms start doing this with multiple advisors who are full-fledged lead advisors themselves, but they're still sharing clients with other lead advisors on the team, in essence, your productivity crashes because you're putting two senior advisors in the room, and just nobody charges the client two fees when they put two senior advisors in the room.

And so if you put twice as many people on each client and you've only got one fee, you're basically cutting your productivity in half out of the gate. And it's not to say that it's not valuable to have team leverage, but again, what we found is that productive teams leverage associates and admin staff to make a senior advisor super productive. They don't share clients amongst a really large team with lots of senior lead advisors because then they end up oversharing the clients without charging fees commensurate to the fact that they've got lots of people on, and they end up with a lot of management time.

And so these focused lean teams with essentially a lot of leverage to the team, right, folks that are not as highly compensated as a lead advisor, leveraging up the lead advisor, great for productivity. And so we started taking this research out to the advisor marketplace, as it were. And a lot of the feedback, obviously, pushback, concerns that we've gotten often amounts to, "Okay, but what's my advisor development track? If I do that, what happens to the associate advisor?"

I'm like, "Well, they make their own team. They get promoted, and they make their own triangle." That's the point of where you get the productivity lift. If all of you end out on one giant blob of a team with all these people to manage all these shared clients, your productivity goes down. If you want to keep productive, when they're ready to be in a lead seats, they form their own triangle or they form a dot, and then when they get a couple of clients, it becomes a line. And then when they got more clients, it becomes a triangle. You don't need all the staff on day one when they don't have a client base yet, right? If you're building a firm, you end up with lots of teams. And really, any sizable firm has already grown to be lots of teams, but you just have slightly more teams that are slightly smaller in size, and we see big lifts in productivity.

But I find a lot of, I don't know, angst that I'm finding around this idea of, wait, you mean I work with the associate advisor for whatever, for like five years, and then they're going to move off onto their own team? So I'd say, "Well, yeah. Did you expect them to be your number two forever?" At some point, they're going to want to move up. It's just a progression of career thing at some point.

And I'm not trying to make light of that or belittle that recognition, but I have been struck how often I'm talking to advisors where there really does seem to be this implicit assumption of my associate advisor number two person, they can just stay my number two forever, right? I'm not sure that's a good assumption to make.

The Productivity Opportunities And Challenges Of A Multi-Advisor Firm [07:37]

Carl: Tell me how...just so I understand. So we do have people that want to step into a paraplanner role, enjoy that role, and stay in that role.

Michael: Yes, that don't necessarily want to...

Carl: How is that different?

Michael: ...build their own client base, right? So someone who's like, "The analytical planning work is more fun or enjoyable than the client work or building a client base." That's fine. But even those folks, they often still have some professional career aspirations. What do I do if I'm on that track? I'm a paraplanner, then I'm a planning specialist. Then maybe I'm a director of financial planning, or I'm the super senior advanced planning expert on the team, and I help out all the advisors who have complex clients in their situation.

Those roles definitely exist. There's even a...it's not the most well-defined in a lot of firms. There's a career track of what that looks like, is you do paraplanner or planning specialist, I don't know, senior specialist. You get some deep knowledge area of tax or estate or equity comp, or whatever it is. And maybe you even end out in a leadership position. You're a director of financial planning. You're a chief advisory officer, chief wealth officer, something to that effect. So there's a track for it. But that person also doesn't necessarily stay your number two on your team indefinitely.

Carl: As the paraplanner.

Michael: As the paraplanner.

Carl: But you're saying this is even more pronounced because when somebody says, "I want to be an associate advisor," they have desires to work directly with clients. They've become good at building relationships. And the next logical step is, hey, I should have my own set of clients. And then you either get into this shared client problem you talked about, or they move, not necessarily leave the firm, but they move to a spot where they have their own set of clients.

Michael: Correct. Ideally, within the firm, right? If I'm an owner, partner, or equity, actually would do that.

Carl: Let me ask you, if that opportunity doesn't exist within the firm, is that where we sometimes get this flight problem?

Michael: Oh, absolutely. I think we've talked about this in other discussions in prior episodes, but for all the folks I know out there that... So look, I hired the young person, right? Young people aren't loyal, right? I hired an associate, they stayed for a couple of years, and then they left, and have to then reflect back to someone, like, "Well, what opportunity was there for them to move up in your firm if they stayed? So, well, they could have gotten their own clients and worked under the firm. Well, if they get their own clients, they can just hang their own shingle. They don't need to work for you at that point.

In fact, that's probably why they left is there was no upward motion with your firm unless they brought all their own revenue. And if they brought all their own revenue, they don't necessarily need your firm. They can hang their own shingle and do their own thing. Which just gets back to the same point of, look, when you hire an associate advisory, this is a professional services career where people, especially younger folks coming in, generally have upward career aspirations and aren't likely to want to stay as your right-hand person indefinitely, right, by income opportunity or career potential or promotion or outright desire to have clients of their own someday. This seems pretty natural.

And ultimately, I'm sure it is why so many teams end up becoming four-person teams, five-person teams, six-person teams. Because I bring someone on, they help me, then eventually, they start taking some clients. Maybe they take some of my smaller clients. Maybe they eventually start getting a little bit of their own. They're moving up further, but I want to hold on to them on my team because I don't like letting people go. So my team gets bigger, but now they can't do the support work for me anymore, so I actually have to hire another associate.

So now it's an associate, me and my prior associate, who's now a service advisor. And if I do that enough years, I end up with these four, five, six, seven-person teams that then we find are actually significantly less productive because, A) you're sharing a lot of clients, B) you don't actually have a lot of people to manage. And sometimes C) you didn't actually solve the original problem, which is, "I had some clients that were smaller and not a great fit for me, and I didn't want to serve with them directly because it wasn't a great fit, so I assigned them to my service advisor. And now my service advisor has a whole bunch of clients that are not profitable for the service advisor as well, and it's dragging down the productivity of the whole team."

Carl: You know what's so interesting to me about this? We have been holding these retreats at the house. They're small groups, 10 to 12 people. We've done 12 of them now. And there's a lot of people coming with this generalized challenge of feeling overwhelmed, right? They're generalized challenges, like too many clients, the firm's gotten too big, the team, the management. And so I have this deep appreciation for people who do this successfully because, man, I can feel my head hurting. Now I understand why I never had any staff, right, despite maybe wanting to.

And I think this is an important point. Lean into the problems that you... Be aware and honest about the problems that you're solving, because there are... And I've met so many advisors, right, that run small, midsize, and large firms that are really good at this, really good at sorting out. But just don't underestimate the agency problem, right, the management. You're trading the opportunities for growth and/or impact. You want more growth, more impact. It doesn't come for free. And the hard work is often a different set of skills than maybe what it took you to get there, like the classic e-myth challenge, right? You're really good at baking pies, open a shop. Suddenly, you got to get good at management.

And so what is that? How do you...? I guess it's just being really honest and aware with that reality, like, "Okay, this person's going to be here, three to five years, in this seat, if I'm lucky. And the very quality and traits that I love in them in that seat is indeed going to lead to this eventual desire to have their own clients."

Michael: Or go some other planning specialist career track, if it turns out they are of the permanent paraplanner or proclivity, but either way, they tend not to stay where they are.

Carl: Yeah, so who does this? The people who do this right, what do they do? Is this a defined...they've thought very carefully about this defined...? I hear you use the word, sometimes, career track. Is that what we're talking about here?

Michael: I think there's a part of this that is defined career track at the firm level. The part, I think, that hits me in thinking about it at the advisor level... So look, I get it, right? I've had team members over the years that were key right-hand leverage-me people and have lived how disruptive it is when one of them leaves. The first person I ever hired to leverage myself, I delegated a ton of stuff to them. I completely shifted all the things I was doing over the span of two years, and then they gave notice.

Carl: Oh, man, that's so hard.

Michael: And so then I have all the new things I've been doing for the past two years and everything I used to do that boomerang back to me in the face. And it's bleeping awful. In the moment when you find out that they're leaving with a few weeks' notice, which is not possibly enough to figure out how to actually handle this, aside from having an oh-blank moment of what's coming back to you.

And the comment that I had from my coach at the time, I was working with Steph Bogan then, she'd said, "So what has to happen for you to look back on this moment in the future and say, 'That was the best thing that could have happened to me in the business?'" When I'm saying right there, and the, "Oh, my goodness" low points, right? "Everything's changing. My world's blowing up. What do I do?" What has to happen for you to look back and say that this was the turning point, where everything got better after a brief valley of pain? Because can't solve that in the moment.

And the answer I came to very quickly was twofold. I'm going to learn to hire better so at least I get more than two years. Hire and manage better. I did neither terribly well, although in retrospect, I... the hiring was actually pretty good. He was a great person. Still is. Stayed in touch. I was terrible manager. So learning to manage a little bit more, so at least I can make that last longer.

I guess there were actually three conclusions I had. Learning to manage—sorry, this is a reflective, cathartic moment.

Carl: This is great. I love this.

Michael: Learning to manage, saying, "If this is how it works, then apparently, I just need to get better at hiring and training them faster." And then it won't be such a big deal if they leave, which was my first version expression of, "Oh, this is why all the system and process crap that I can't stand, ones that everybody says is really important." I was like, "I don't need all that stuff. I'm getting things done, and it's going great." It's like, "Oh."

Carl: Throw people at it.

Michael: Because if it were systematized, it would be a lot easier to train. I can't make the manual of how to do the thing when I do the thing differently for every single instance, every single client, every single scenario, it's really easy to train it when there's a more systematized flow because they just read the workflow and they know what to do.

So how do I make it to the training process isn't so painful? Which was my moment of realization of, "Oh, this is why the system process stuff matters," from all the people who used to tell me that. And I blew it off for years and years and years. And at least for me, it also then gave me a little bit more of a hunger to say, well, if I can grow this a bit bigger, so there's more than one person in the company who does that, then at least when we get to the moment where someone is transitioning and moving on, it doesn't have to boomerang back to me. I just have to have enough people on the team to distribute the workload amongst everybody and make it manageable."

And so if I can make my team bigger that I've got some redundancy, then at least I am not the first and last and only resort when inevitably someone decides to make a transition out of the personally supporting me role.

Growth Paths For Associate Advisors [19:48]

Carl: Yeah. So what does it look...? I am one advisor. I start a firm. It's solo. I hire service help, whatever that looks like, and then I decide, man, the next thing I want to hire is an associate advisor because that seems like... And then let's just play this out. That works, and leverage happens. And we're now at 225 clients, and we're feeling just totally, completely stressed. We started feeling the stress at 150, and we just keep feeling it.

Michael: Well, I think... so the first thing I would note here, because this is a distinction of where we see what works well in the higher productivity teams versus the lower productivity teams. Teams definitely, on average, handle more clients than solos. Just you do get... many hands make light work. You do get more distributed workload. It does increase client capacity. But we still don't see most of them necessarily go to 200-plus clients.

Carl: So let's... Sorry, don't worry too much about the number. Let's just say you get to the point, though, where you have to make a decision.

Michael: Well, I understand. But the underlying point to it is a lot of the leverage from associate advisors comes from going deeper with your current clients, not adding more clients. And if you go deeper with your current clients, and then they appreciate the depth of the relationship, and they consolidate assets with you, or they move to a higher tier of your planning fees, or they give you more referrals, and now you have more growth coming in without necessarily a need to spend more time on marketing, those are the dividends that we see that start to show up with team leverage, not just add more clients, add more clients, add more clients. Which also makes it a little bit more manageable because if someone transitions, you're not like, "Oh, my Lord, how do I now handle my 225 clients on my own?"

Carl: Okay, so forget about... Let's just... What's the precipitating event? The junior, the associate advisor either needs their own team at your firm, or they're going to leave. What normally is that event? Is that the advisor feeling overwhelmed, or is that the associate advisor saying, "I want more opportunity?"

Michael: That's the associate advisor saying, "I want more opportunity."

Carl: Okay, so the associate advisor...

Michael: If you overwhelm yourself, then stop taking so many clients and focus in your client base. Obviously...

Carl: Let's walk through...

Michael: The triggering event is the associate.

Carl: Okay, so the triggering event happens, up to this...

Michael: "I'm ready to be called up from the majors. Stop keeping me in the minors."

Carl: Okay, up until this point, you've thought of this as just this tight little firm. You weren't sure you wanted much more complexity. How do you decide what to do at that moment when you're the senior advisor, firm owner, the whole thing?

Michael: The crux of it, especially if you're down to it, it's you as the firm owner. Either you're building a multi-advisor firm or not.

Carl: Yeah. And so this is where I think we get back to get really clear about what you're solving for.

Michael: Yeah, so...

Carl: So let's say you are going to build... Take us down both paths real quick.

Michael: So if I'm going to build a multi-advisor firm, then I'm going to start spinning this person to their own team. I'm going to quickly get the question of how do I retain them when I'm no longer involved with their clients? Because that's the whole point of splitting to a second team. So either I've got a path to some really strong compensation. I've got a business development model that says I'm going to give them clients that maybe they couldn't get on their own.

Because the reality is, if they're really good at getting their own clients, they really don't need to stay with you. If they get clients from you, at least then they have a reason to stick around, and you can reasonably have some employment contracts that make it a little bit harder for them to leave and take clients.

Or if they're growing it with you and they're bringing on clients, those people are called partners. And you're trying to find a path to equity because I want my associate advisor to run their own team, bring in all the revenue, but not own the equity. Just does not tend to be a formula for success.

At some point, they're going to figure out that if they can bring in their own clients and build equity, it is more effective for them to build their own equity than to build your equity if they do not participate in said equity. So from the...

Creating A Productive Path As A Solo Advisor [24:23]

Carl: Take us down the other path, too.

Michael: Yeah. So from the firm, and when I'm hitting that crossroads, either the firm truly brings enough to the table that they would continue to be employees earning salary and bonus in whatever structure it is. And to be fair, there are some firms like that. There are some very large firms like that in the industry. They provide enough clients and resources to keep people on board, or you need to share the equity in them, particularly if they're driving most of the growth themselves, because your equity needs to at least be as appealing as the equity they would have across the street in their own shop.

Or you decide, you know what? I really don't want to go through those hassles, that complexity, all the stuff that it takes to be multi-advisor and manage more people and figure out the HR and the payroll and the benefits and make all these career tracks and have people constantly flow through them, in which case, you say, "Cool." Then maybe the gig is you're an associate advisor with me for five years, and then you move on. And I'm just going to plan that you're going to move on.

In fact, my standard gig is when you hit your fourth year, I ask you to start writing a bunch of system and process of your own role to teach your successor, because I'm assuming you're going to leave soon, and I would just like you to leave it better than it was when you found it. So please build some system and process to at least make the handoff to your successor smoother than what you went through when I had to train you, when I didn't have any time to do so.

Carl: And to be clear, move on means leave the firm in this alternate...in path B.

Michael: Yeah.

Carl: Yep. How early on would you be...? If let's say you've already set that as a constraint because we certainly know plenty of those firms where they're like, "The constraint is I will never hire, I'll never go beyond this team," how early do you talk about that?

Michael: I would set that from day one. Look, I think in many ways, that's an asset that is underappreciated from the firms in that end, which is, look, if you went out there to some of the young folks out there and said, "Here's the deal. I'm going to teach you. I'm going to train you."

Carl: Everything you need to know.

Michael: "Everything you need to know. I'm going to give you opportunities to sit in client meetings for years. You're going to learn all this stuff, and it's going to last, whatever, five years, three years."

Carl: Three to five years, yeah.

Michael: "And then you're going to move on. And I will happily help you launch off into the world, out of the nest, to build your own firm. There won't be any bad separations. There won't be any messiness. It will be a constructive relationship of helping you move on. All I ask, all I ask, is that you actually give me the five years or three years, whatever it is." As a firm owner, I'd want five. As a young person who's upwardly mobile, it might end up being more like three or four because they get excited to move up.

"Look, all I ask is you actually give me the five years and that you spend a lot of the fifth year building, training for your successor, so that this is positive for the firm and you pay it forward for whoever comes next. And in exchange, I'll pay you a market rate. I need you to genuinely do good work for the firm and bring everything that you got, but I'm going to graduate you at the end in the most positive of ways."

This is a version of what Carolyn McClanahan and John Gietzen, and Yeske Buie have talked about as residency programs. This is how it works in a lot of other professions, notably medicine, right? You come in, you...I don't know the medical world that well. I believe you come in for three years often. You go through your residency cycle. You learn your profession in an environment where you get to experience this with patients in need. And then you move on to what your actual medical career is going to be for the rest of your time moving forward.

And every now and then, someone stays at the hospital where they did their residency in and often they move on. And that's okay. That's part of the system because if you know that going in, you simply build the work and the tasks to be meaningful and valuable for the person who's there for that time period.

Carl: Yeah. I remember having this conversation years ago with the idea of even thinking about that intentionally as an incubator, that maybe there's even an opportunity to help invest in the firm they're starting. Do you know what I mean?

Michael: Yeah, if you want to get creative. And if you're doing well, I'll give you $50,000 or $100,000 of startup capital in exchange for 5% or 10% of your firm.

Carl: Yeah, I think it's such an interesting model of...especially if you start that early, because you could end up having two or three different firms that you've really been helpful. And I'm seeing a lot of older senior advisors really wanting to be involved in that, wanting to see other people succeed. I think it's a cool model. But at the very least, being very open about it, right?

Michael: Look, well, if I came in and said, "Hey, look, here's the deal. In the first six months of the fifth year, I need you to start building some training materials for your successor. In the second half of the final year, you can go out, and I'm going to hire your replacement. I want you half-time to cross-train them, and the other half of the time, you can take my part-time salary and use that as your base while you go start getting your first clients."

Carl: This would be very cool.

Michael: So I'll even give you a financial runway transition because you're making it easier for me to do the transition to the next associate advisor. And now this isn't a negative of people transitioning. This is a flow of people who come in to help me with my great clients until they're ready to move on, and then I find the next person that helps me with my great clients.

And then I don't have to manage multi-advisor teams and deal with the turnover and all the other challenges I find come to a lot of firms that didn't really want to actually build in this direction. And if you do in your firm, because some firms are doing this at very large size, you're spinning up new teams. Almost all firms I find get to some point where they spin up new teams anyways, because it just gets unmanageably large. So in essence, all our research shows is spin off the new teams faster.

Carl: Yeah. Love that.

Michael: Spin off the new teams faster.

Carl: Yeah, that's really helpful.

Michael: As long as there's an associate, there's someone to backstop the advisor.

Carl: Love that.

Michael: And you've got a coherent team.

Carl: Yeah. I find it's always interesting to me in all these discussions that there is no... Right. It's okay to build what you want to build. Just be aware and both eyes open about what problems you're solving and what you're going to end up doing. And it's okay to say, "I don't like any of this. I'm never hiring anyone." Fine. "I want to build a big firm." Fine. Those are all okay. Just remember that all of these firms are lifestyle firms. It's just what lifestyle are you designing? Right? And so be clear about that. To me, I think that's an important part of this.

Michael: I love it.

Carl: Okay. Cheers, Michael.

Michael: Thank you, Carl.

Carl: Yeah.