Executive Summary
Advisory firms often assume that one of the greatest professional risks comes from making a serious mistake with clients’ finances. Yet as firms grow, the larger the client base and the bigger the advisory team, the greater the surface area for potential disputes, misunderstandings, or even opportunistic legal threats. Even when a team is confident that it has acted appropriately, the economics of litigation can still pressure firms to settle claims… simply because defending them would cost more than the dispute itself. As a result, growing firms must confront a difficult question: how can they manage legal and reputational risk without burying advisors and clients under excessive layers of compliance and documentation?
In this 187th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to manage the systematic (and unsystematic) risk in advisory firms. Financial advisors regularly help clients make high-stakes decisions involving large sums of money under uncertain conditions. As firms expand beyond the founder and responsibilities are distributed across multiple advisors and staff members, the owner’s direct oversight naturally declines while legal risk exposure still remains.
A practical goal, therefore, is to reduce the likelihood and severity of problems rather than attempt to eliminate them entirely. In that vein, firms must be careful not to respond to risks with excessive procedural controls, which can ultimately harm the client experience and team productivity. In theory, risk could be reduced close to zero through exhaustive checklists, constant disclosures, and mandatory sign-offs for every client action. In practice, however, such an environment would likely be intolerable for both advisors and clients. Overly burdensome compliance processes can erode trust, create administrative friction, and reduce a firm’s efficiency. At a certain point, the cost – both financial and cultural – of trying to eliminate every possible risk can exceed the expected cost of simply resolving the occasional dispute when it arises!
The challenge then becomes finding the balance between prudent safeguards and operational paralysis. Insurance – particularly adequate errors and omissions (E&O) coverage – exists precisely to manage the possibility of financially catastrophic outcomes. And advisory firms may still require explicit client sign-offs for high-stakes decisions – such as actions that trigger significant tax consequences.
Equally important is attention to human factors within the firm; advisor hiring standards, emotional intelligence, and relationship skills can play a major role in preventing disputes. In many professions, practitioners with the worst communication and bedside manner – not necessarily those who make the most mistakes – face the highest rates of lawsuits. Additionally, firm leaders may want to consider which behaviors their compensation incentivizes – do they structurally permit (or even encourage) advisors to offload problematic clients?
In the end, risk management in advisory firms mirrors the broader financial planning process itself: some risks can be mitigated through processes and safeguards, others can be transferred through insurance, and some must simply be accepted as the unavoidable complexity of doing meaningful work with clients. Recognizing and thoughtfully managing those trade-offs will allow advisory firms to grow sustainably while continuing to deliver high-quality advice and maintain strong client relationships!
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 YouTube Music.
Show Notes
- Risk is What’s Left Over by Carl Richards
- Don’t Scar On The First Cut by Jason Fried
- Kitces AdvisorTech Solutions on Client Meeting Support (AI Notetakers)
- The 7 Dimensions Of Risk For Growing Advisory Firms by Sydney Squires
- The 4 Components Of Senior Advisor Satisfaction: Structuring Compensation, Workload, And More For Long-Term Retention by Sydney Squires
Kitces & Carl Transcript
Michael: Well, good afternoon, Carl.
Carl: Greetings, Michael, how are you?
Michael: I'm doing well. I'm doing well. I'm enjoying...We are getting into the spring season as we record this. It's like the very end of winter, beginning of spring, depending on what part of the country you're in. And I'm very ready for winter to be over and the season to turn.
Carl: Yeah. Yeah. In your world
Michael: In your world, that's very sad because the snow.
Carl: Yeah, I want winter to start. We haven't had much of a winter here. Which has actually been lovely, but it's problematic. So anyway.
Michael: I'm here on the D.C. area. Spring's our good season. We'll get cherry blossoms in a few more weeks.
Carl: Exactly. Well, what in the world are we possibly going to talk about today?
Client Litigation Risks Grow As The Firm Grows [00:52]
Michael: So, had a really interesting conversation with an advisor that I wanted to bring to the conversation here because this is one of those topics where I think there's a little bit of technical stuff we can talk to, but there's really some interesting just mental framework mindset stuff that goes on in what this advisor is dealing with. So I'm going to summarize what this person had sent in to us. We're going to call him Alan because it's easier to have a name. His name is not Alan. I'm honoring his anonymity. So here's what Alan said.
"So as I go into 2026, I've been thinking more about risk reduction as a firm. We've been getting bigger we're half a billion under management now, 500-plus clients. And so we do a lot of AUM and we have a lot of managed portfolios and trading. We do a little bit of insurance and annuities. We do tax returns for our clients. So we have CPAs on staff. And we've only ever had one E&O claim for a very small amount in the past, made a small trading mistake, team member happened, but we've had a few more that were close calls including a client last year that claimed they didn't approve a stock sale and wanted us to pay $30,000 of taxes that they'd incurred even though we had them literally sign off on a clear cut capital gains analysis pre-sale. And then they still tried to twist it around to say that there weren't enough details in the sign-off and that we didn't make it clear enough to them what was going to happen. And then basically threatened lawsuit, lawsuit, negative review, da, da, da."
And as Alan said, "What I realized is no matter how strongly we believed we were in the right and that the client was wrong, if they had pursued this legally, we probably would have ended up settling it with them because it would have been more expensive to fight it than to just pay them the tax amount." There's some threshold where it is too big and you've got to fight it with the lawyers and there's some amount that's small enough for, if I really have to lawyer up, it's more straightforward to write the check. And fortunately, there's a very small percentage of people who kind of know this about the legal system and take advantage of it, but they're out there. And if you keep growing to 500 clients, as Alan is now, 1000 clients in a few years, 2000 clients someday, it basically feels a mathematical inevitability that I'm going to have an unpleasant lawsuit.
And so Alan's question, in essence, was how do I put processes and safeguards in place to prevent this as we grow bigger? Do we need to do more sign-offs? He was kind of asking what other firms do what for sign-offs. And then, do we end up with more and more sign-offs on everything big and small? Do we end up in some weird world eventually where it's overkill for most clients, but we're doing it because there's still a percentage of clients who may sue us and someday we need it? So I thought this was a really interesting question and issue to frame up. I feel there's a very real switch that happens for most of us if you ever grow an advisory firm beyond yourself. It's one thing when it's like, it's my firm and my clients. I know I serve them well, my team reports to me directly, I can look and make sure that the things that they're doing are right, and I'm pretty confident we're going to serve people well.
And at some point when the firm is bigger than you and there's clients that get served by an advisor where you're not in the room, whose portfolios get traded by people where you're not in the room, who are all handling and handing off processes with your firm that you are not involved with at all for the client. But if you're the owner, you absolutely bear the liability at the end of the day if something goes wrong, that gets scary. And as Alan notes...And the bigger the firm, the more mathematically inevitable that the scary thing is going to happen by sheer rule of numbers.
Carl: Yeah, look...
Michael: How do you think about this?
Carl: I think there's a couple of things that are interesting is even when it is just you...I was just thinking back to the number of times at the retreats we hold here at my house, the number of advisors who've come, and it's not a lot, but once or twice at least. And I can think of specific names right now of some of the best financial planners we know who've had those instances where something went sideways and they'll tell that story. Often it ends dramatically and that's a risk. And then I think there's also, it's really interesting just to think about the surface area, right? The risk surface area, which is what you're pointing to, right, like at 500, 1000, 2000, and then the mathematical inevitability of just somebody being kind of a nutcase...
Michael: If your surface area compounds enough, it feels like this is a matter of time. And that's not the good version of ticking matter of time. Let's just see how many clients it takes before I get my first big lawsuit.
Carl: Yeah, I think that it's interesting just to think about how much...whether it's an honest error that somebody on your team makes, or you just have sort of a nutcase looking for an opportunity, either one of those are no fun. It's interesting just to think about, I often feel a big piece of the job of a really good financial planner is to help clients make what I like to think of as mission-critical decisions in the face of irreducible uncertainty. And here we're just flipping that on ourselves. It turns out there's...and I would to...it'd be interesting to spend a few minutes talking about what we could do to reduce the uncertainty, what reasonable measures, which is what I think Alan's pointing at. But I do think it's important to call out that at the end of the day, after all you can do, there's a pile of irreducible uncertainty left, it's just inherent in the business.
Michael: I agree. We can talk a little bit more in a moment about, what do you do? How do you think through some of the risks? What are things you can do? Because I do think there are just some practical steps and system and process that you can put in place. But I do very much think in that same way, Carl, that...I'm like, look, when you run a professional services business where we're touching people's money in a lot of high-stakes situations, and some percentage of the population is litigious, and unfortunately, sometimes we just honestly and genuinely make a mistake, something happens and goes wrong, I really think about that in context, that's part of the gig we've signed up for. That's a cost...
Carl: You take risks for a living. This is a version of risk.
Michael: Yeah, that's a cost of doing business in our profession. Now, out of the gate then, you put some guardrails around. It's like, this is why we have E&O insurance, right? Insurance and all the things, you self-insure the things you can manage and you get insurance for the things that would be financially catastrophic. On the one hand, this is why we all have or really, really should have coverage of a sizable amount. And also why most policies have a decent-sized deductible because there's a portion that we can take, it hurts and it's not pleasant, but we can handle it. It's the deductible. And there's a size of claim that would be destructive or disastrous and that's why we have insurance. And at the end of the day, I own insurance to avoid the disasters. I try to minimize how often I use my deductible, but I don't necessarily get it down to zero because stuff happens.
The Operational Downsides Of Mitigating 'Too Much' RIA Risk [09:26]
Carl: Yeah. Yeah, I just think it's super interesting to...what Alan is doing is just making a risk that has always been there below the surface much more... bringing it to awareness that we're going to talk about it. This has always been the case, whether I have ten clients or a hundred, and you're just saying the risk increases proportionately to the size of the client base, of course, right? And so how do you deal with normal...? I think, to me, that's the interesting piece is just accepting that after all I can do...risk is what's left over after you think you've thought of everything. So yes, let's think we thought of everything and then let's also accept the fact that this is why I get paid.
Michael: Well, I would even take it one step further than that. And Alan alluded to it a little bit in his message. I don't know, maybe I'll out myself in a problematic way here, but I wouldn't want to work at a firm that took this risk to zero, truly took it to zero. Because you know what that firm looks like? There is so much darn paperwork. You can't breathe and sneeze in front of a client without a sign-off to make sure that they have expressed that there's no liability in any germs that were caught from the sneeze that occurred in the presence of them in the conference room. If you're going to go all the way down this road, there's a thing to sign for everything. There's going to be a piece of paper to sign for everything.
There's going to be a 19-step checklist process that has to be perfectly documented in the CRM. Oh, and if you don't document...Then there'll be a process to make sure that everybody's doing the documented process because otherwise you can go rogue and you're still going to get the firm in trouble. So I'm going to have a 19-step checklist, and then someone else is going to have a checklist to make sure I'm doing my checklist. Because if you really want to take the risk to zero, that's what you have to do. And to me, you very quickly get to a couple of really problematic outcomes there. I don't think a lot of advisors want to work in that environment. We all get that we need to be compliant, but there's a level of compliance and administrative burden that becomes overbearing. I'm not even sure how many clients want to be in that environment because...
Carl: That's right. That's the part I was thinking about.
Michael: I value your advice, but by the 17th time I have to sign a disclosure, I'm now like, you guys give me so much disclosures, but when things go wrong, I'm just assuming you suck and must screw things up all the time. Because otherwise why would you give me 17 sign-off disclosures in a year every time we do something? At some point it can undermine trust for the client. I don't think it creates a very pleasant work environment. And just sheerly mathematically, the toll on productivity, the firm that does that, I would venture to say will spend significantly more money on system and process and risk controls than they ever would have paid to settle the one in 2000 clients that comes in who's hyper-legitious, finds an excuse to sue you, and you have to settle with them because it's not worth fighting the fight. So at some point, it's not even the cheaper route anymore.
And again, I feel I want to say all this from a place of we're trying to be good for clients. We're trying to do the right thing for clients. I'm not talking about this in the context of, well, let's just wind up and do crappy things for clients and fight off the lawsuits. Alan's comment, if we're trying to do the right thing, and we're trying to build a good team, and we're trying to do all the right stuff, and we're trying to put reasonable system and process in place to avoid the bad things, and then you have to get to some threshold to say, do I accept the risk or do I keep doubling, tripling, quadrupling down on the process and the checklist and the sign-offs and all the things? I just I feel compelled to say, I really do think there is not even just a point of diminishing returns, there's a point of negative returns.
Carl: Right, right. If we were graphing it, there's a point in which it rolls over and every new additional...And I love the point you're making about, yes, of course, the point of being an advisor working there, but I think it's even more important from the 99% of clients who aren't going to have that experience. They have to live through some crazy stuff...
Michael: Right. Let's make sure we're not making it worse for the 99% to solve for the 1%. I'm not even sure it's 99% to 1%. But 99.9% and 0.1%...now, if you've got 1000 clients, that means one of them is coming at you at 0.1%, because that's one in 1000. So the firm gets big enough, a small percentage still means something is going to crop up, but how many other normal clients being served by normal advisors doing normal good things with reasonable checks and balances is enough?
Carl: Yeah, the other thing that comes to mind here, and I heard Jason Fried say this at base camp on feature requests. He said, "We try not to scar on the first cut." So I think it's really interesting to...we try not to overreact to one experience. Like, hey, really important, what went wrong here? How do we fix this? How do we make this right? And maybe it's isolated. Maybe we don't have to extrapolate that through the entire business now.
Michael: If something bad happens, right, I got cut, I got hurt, let's not form a whole bunch of scar tissue with a really extreme reaction to what might have really just been a crappy one-off fluke.
Carl: That's exactly right. Let's deal with that in all its importance. And we don't need to extrapolate it through the whole business.
Michael: So I like this. So what was the line? Don't scar...
Carl: Don't scar on the first cut.
Michael: Don't scar on the first cut.
Carl: Now, if this is happening four or five times, you suddenly realize you've got a problem with your processes and...
Michael: Well, yeah. So be a pattern recognition person. If there's a pattern happening, we definitely...
Carl: Yes, we've got a problem.
Michael: ...need to look at the pattern. But I think that's a good framing of be careful not to scar on the first cut.
Practical Strategies For Advisors To Reduce Client Litigation Risk [15:48]
Michael: I do want to get, I guess, a little bit more practical of at least one...
Carl: Yeah, why don't you talk a bit about after all you can do, we still have this pile of risk. What's a couple of things that after all you can do that are the things you should be thinking about?
Michael: So, stuff I do think about. I do think Alan's approach of sign-offs is real, is appropriate. It works. And to his end that at some point you're signing off for freaking everything big and small and it's getting really tortuous. I started thinking about sign-offs in high-stakes situations. So define high stakes for whatever it means to you. Different firms will be different sizes, but you, I don't know. If we're doing a big liquidation and the client's going to rack up at least $100,000 of capital gains, we're going to do a sign-off for them.
Carl: Some threshold.
Michael: And maybe it's $200,000 of gains for your clients. Maybe it's a million dollars of gains. Maybe 20 grand of gains is enough. Just decide where your threshold is for your clients. If we do it and something goes wrong or they want to second guess us that something went wrong, how big is big enough that I'm going to want the piece of paper to pull out? And what's small enough to say, if we really have a well-intentioned dispute, let's be honest, I'll grumble and settle because it's not worth the legal fight and it's not worth scarring on the first cut. I'm not going to blow up all the rest of my systems and processes. So maybe it's a sign-off for a certain size trade. So if they don't come back to you with a trade error complaint. Maybe it's a certain size of gains exposure because you didn't tell me about the gains that we definitely had a conversation about, but now you're pretending you didn't hear it because you don't like the outcome. Many of us have been there and got some version of that.
Maybe it's not even a trade. Maybe I'll put my Roth conversions in there as well. Anything that generates a six-figure tax event for my clients, we're going to have a, "I acknowledge the circumstances and consequences here." But I set a threshold. So I'm not burning everything everywhere, but I'm putting an additional layer of risk protection in things that are big enough that that one would hurt if I had to settle and resolve or be really expensive if I had to hire the lawyer to fight because the bill is that big, that's worth putting some risk reduction in place. There's this good old...Oh, go ahead.
Carl: You already mentioned insurance.
Michael: Yeah, insurance, having...
Carl: That's a given.
Michael: Actually having...Not 100% of us have it. Please don't blow up your business. Just get the coverage. There's the old stalwart, just taking contemporaneous notes so there's things to refer back to, at least if you need to produce notes of what was happening at the time. Now more and more of us have AI note-takers, which at the least captures what was discussed. Maybe if you're using a full recording note-taker, you can literally pull out the entire conversation, say, "We discussed all this." As some of my lawyer friends will point out, if you are using one of the AI tools that records the whole conversation, that is also discoverable for your clients if they sue you. So if you really have good conversations, they're great to have recorded. If you don't have good conversations, you might want to be careful about what you put on the record. Ideally, we're doing the good things, but...
Carl: That's right.
Michael: ...worth recognizing there's a reason that certain firms are choosing not to have anything that actually captures the entire meeting recorded because...
Carl: Yeah, yeah, I can imagine questions like, "Oh, so Mr. Advisor, you asked them?" Or, "Oh, Mr. Advisor, you made that clear to them?"
Michael: Like, "Let's run the tape and see if the jury agrees that your explanation was clear. Are you sure?" Now, if I'm not clear, I'm like, "Yeah, pull it out." And if I'm not as confident that all my advisors were clear, “Well, the notes say it was definitely discussed.” To me, in that vein, I think about advisor selection. Who are you hiring as advisors in the first place? Either from just, where are your competency standards? Because frankly, that varies a lot by firm. Some of us have very high standards and put advisors through a lot to work in our firms. And some of us are much more flexible as long as you kind of do these talking points, get clients and bring revenue in the firm. And that can increase your exposure as well is just, let's use the term du jour, how emotionally intelligent they are. Because the reality in pretty much any services business, although doctors are probably known for it the best, the doctors who get sued the most are not the doctors that make the most mistakes. They're the doctors that have the worst bedside manner.
Carl: That's right.
Michael: Right, there's a level of, yes, litigious people are going to be litigious, but in the middle, there's people who are well-intentioned and angry when something doesn't go well. And a good relationship sometimes can work through that and a bad relationship calls lawyers.
Carl: That's right. That's right.
Michael: So how strong really are your advisors' relationships with your clients and their emotional skillsets? Sometimes to me then it gets into, I guess I'll call it...there's advisor selection, there's client selection. Some of us I know out there have very strong views like, I will not work with litigiously-oriented clients. They're unpleasant and life is short. I know a few advisors that will actually have somewhere in their intake process, "Have you ever worked with an advisor in the past? Have you ever been in a legal dispute with an advisor in the past?"
Carl: Yeah, interesting.
Michael: A lot of us ask, "Have you worked with an advisor in the past?" So you kind of know what their history is. But I know a few that basically ask, "Have you ever been in a legal dispute in the past?" So if they're like, "Oh, yeah..."
Carl: No, you go, "Do you know an attorney?"
Michael: Yeah. You hear, "Oh yeah, I sued my prior guy. He was horrible, but I'm sure you're going to be better." I'm like...
Carl: Yeah, yeah, think carefully about that.
Michael: "That's good to know. Tell me more about that."
Carl: I remember having a client who I actually knew, I climbed with him, rock climbed with him. It wasn't a client, but he came and was a prospective client. And he once told me, he's like, " Carl, I'm not going to hire you because one of the major roles that I want an advisor to play is I need to have somebody to yell at. And we're climbing partners. I don't want to yell at you."
Michael: Yeah, yeah, yeah, I don't want to yell at you.
Carl: And I was like, "Well, even if we weren't climbing partners, that's not part of the job description that I'm signing up for."
Michael: And look, obviously there are reasons where clients really had a bad experience with someone who had sued them, but might be helpful to know that they're litigiously oriented.
Carl: That's right.
Michael: I also then think in the context of just the dynamics of advisor comp, advisor incentives. So I know a lot of firms that their service advisors are so heavily comped on either the revenue that they keep or the retention rate that they've got that they can't actually terminate a high-risk client because it'll tank the advisor's numbers. Which means the firm has unwittingly created an incentive system that says, you should keep all the high-risk clients. Because otherwise, I'm going to dock your pay for failure of retention without making any distinction that there's a difference between I served the client poorly and they left and can we please let this client go because they seem really unpleasant and litigious and I don't think we want them in our ecosystem? So have you unwittingly created incentives? Is the firm too retention oriented or too growth oriented that your advisors either don't feel they can say no to a high-risk client coming on board or don't feel they can say no to a high-risk client in their book?
Managing Complexity Between Internal Process Risks Vs External Risks [23:45]
Carl: Yeah, as you're talking, I'm broadly classifying these as internal processes and external risks. That idea of let's make sure we've got advisor skillset, record keeping, insurance, all of that stuff. And then let's also make sure that we're being thoughtful about warning signs that may be smart to pay attention to.
Michael: And then, at least the last that comes to mind to me is, what stuff are you implementing with clients? Right. Just call this product selection. Not all of us are necessarily in the product sales business now, but there's things you implement clients into, whether it's various types of investment products and vehicles, some of us still do insurance and annuities, as Alan did in writing in, it was a little bit of his business. He's doing tax returns now as well. Which offerings or lines of business do you want to be in? Because the reality, very clearly, if you look at our industry, there are certain products that have a much higher rate of lawsuits. I'm not going to say the product's bad, but there are clearly more lawsuits that occur in the vicinity of illiquid private investments, and there have been for 50 years. There were clearly more lawsuits that occur in the camp of certain types of permanent life insurance. Clearly more lawsuits that happen in certain types of annuities with guarantees. So, many of those are built as features that are supposed to be benefits to the client. So I'm not trying to broadly castigate the category. We can do that another day.
Carl: Not here.
Michael: But if you want to think about this from a firm risk end, if you are going to have portfolios with a healthy percentage to highly liquid private investments, your liability risk is definitely going to be a lot higher than if you go 60-40 Vanguard total market-Vanguard total bond. So, you can decide where you want to be on the depth of your value prop versus your legal risk. But to me, just I feel that bears recognizing. Because, frankly, when I talk to some companies like product manufacturers, why aren't there more adoption of even the fee-based annuities that don't have the commission dynamics that some of the RIA community dislikes?
And my answer back to a lot of the product firms is like, because if I put all your annuities in place with all these different guarantees and every client's got a different guarantee depending on the year and the time that they bought because it's got a ratcheting thing based on the exact month and day that they bought it. Oh, and you change the contract every two years. So, I've got the clients that have this version, I have the clients with the version two years ago, and I've got the clients with the version four years ago, I got the clients with the version eight years ago. Oh, and the advisor that worked here with them isn't even here anymore. So, no one was here with the version that got implemented six and eight years ago, but the advisor who's here now has to learn the two-year-old, four-year-old, six-year-old, and eight-year-old version of the products because he has to talk to the clients about them and not make a mistake and get sued.
And now my legal liability just starts ratcheting up, which means I can still do that, but I have to actually increase my fees to my clients to recognize the additional product training, the additional record keeping, the additional client load work, or reduced client load of people who have to delve into the history to do these things, and the fact that I'm still increasing the risk that at some point along the way, that very complex system with all the different products of all the different clients of all the different years of all the different advisors, is at some point going to have something go wrong because stuff happens, and now I need a legal allowance sinking fund to it as well. And to me, it's just an expression of there's a point where product complexity has to get expressed into the risk budget of the firm, how much are you willing to accept that you might have something happen someday? Because if you make a big enough firm, something will happen someday. And as we said, you don't even want to take that risk down to zero. But if you accept the risk isn't zero and it's going to happen at some point, it starts to change your calculus about how much you want to tempt fate how quickly based on what you use. And so, to me, product selection has to be part of the discussion at this point.
Carl: Yeah, I think that's really...excuse me. I think that's really smart. Really smart. Lots of reasons that product selection is important.
Michael: So how does that make you feel when then you have to think about, okay, but I'm just trying to serve the clients well and grow my firm?
Carl: Look, I have a bias and I have to be aware of my bias. I'm always just like, well then, why not just keep it small?
Michael: If it doesn't go beyond me, I don't have to deal with all the crap that comes with that.
Carl: Maybe not beyond me, but I just think small but mighty is awesome. And less than five is a cool number, and having 100, 120 clients is awesome, and it's a great business. But I don't want to inappropriately apply my bias. I understand, but that's what I've always done. That's what I always like. And I just think the thing to think about, the important thing to think about, this is just another example, that there aren't really ever solutions. There's just trade-offs. And I just think we've just added this...I added a conscious awareness of a piece of the trade-off that's important. When you analyze...Because I just had this conversation with an advisor today that is trying to decide, should I grow beyond...I'm at the spot where I could just be like, this is amazing. Let's just keep it this. Or should I double down? And he's in his 40s and he's like...And we've talked about this before. Is this the place you want to get your kicks? You want to get your kicks from the business or you want to get your kicks...? And we've just added another idea of, look, there's a set of trade-offs. Do you want this added...? I would call it a complexity factor, right?
Michael: I was framing product complexity. You just mean complexity factor of the business. Do you want to have a business that has to do with this part of the complexity?
Carl: This sleeve of risk we just talked about is a complexity factor of the business now. Right? And do I want to deal with that complexity? And the answer could be yes. And if the answer is yes, realize that you've made some trade-offs in saying yes and here's some things to think about. Frameworks and some tactical stuff to think about.
Michael: And again, I like that you framed this all in the risk context in the first place, right? For all of us that got trained in risk management, it's part of our financial planning process, right? There are steps we can take to reduce risk. We can retain certain risks that we can afford and budget around. It's not pleasant, but stuff happens and we can budget for risks. And we ensure the unmanageable catastrophic part of the risk.
Carl: That's right. That's right. And anyway, I just think I really liked the idea of surfacing this. I'm glad that Alan sent that note because just surfacing and being aware of it, because pretending it doesn't exist is not a good strategy.
Michael: Yeah. I think that the striking point for me is when you go through the mental shift to say...Look, I feel like for any and all of us, when we're building businesses and doing this directly for clients, I never want anything to go wrong on my watch. I was always meticulous about, did the numbers get entered right? Did the trade order details get entered right? Are we documenting all the right things? And there comes a point where it grows beyond you where even if you're trying to do the right thing for clients and you have good people and they're doing good things, there is some point where something's going to happen because stuff happens in humans or humans make mistakes. Even aside from the bad apple that does an intentional bad thing, the good apples can still typo a trade at some point. The good apples can still review a ticket and miss something.
And so there comes a point where you have to decide, are you going to keep going down the road of trying to avoid this risk and doing the things and the sign-offs and the more sign-offs, the more sign-offs, the more checklists, the more reviews, or is there a point where you can get comfortable and say, I'm just going to have to kind of mentally, or I guess if you want to literally reserve and budget a certain amount of dollars to say, stuff happens and this is my stuff happens bucket, and I really hope nothing happens and I'm going to book it to my profits at the end of the year. But if something happens, here's the line item below my deductible that's on my P&L held in a little mental or actual reserve for myself that says, here's my make good fund. Because if I do make a mistake, I want to make good. Here's my make good fund and I'm going to try not to use it most years.
Carl: Amen, Michael.
Michael: Amen. Thank you, Carl.
Carl: Yeah, cheers.
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