Executive Summary
If the initial stages of building a firm are mostly about survival and prospecting, and the middle stages are about scaling teams and processes, then the latter stages of the firm become about determining what is "enough". This is especially true as the firm is able to do more complex work for higher-paying prospective clients, meaning that each new client can pay a not-insubstantial amount… to say nothing of the headline-grabbing promises of acquisition multiples from private equity.
Given that firm revenue (and valuation) can have such meaningful consequences, advisors may be reluctant to slow their firm growth. After all, even if they personally feel that they have 'enough', advisors may (reasonably) be reluctant to leave money on the table. In this 198th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how to navigate the urge to grow for just a 'little' longer against the real-world multiples. After all, the issue is less maintaining growth for a year or two… but that advisors may continue to move the goalposts to justify growing for a "little more" before they dial their work back. This can create a perpetual cycle where the advisor is 'almost' to the end all the time.
Advisors can start with clarifying their business purpose and their end goal. There is nothing wrong with continuing to build a larger business – or even enjoying the challenge of growth – so long as advisors are clear with themselves as to what they are building towards. There can always be another tier of clients, fees, team, and revenue to reach – so advisors must carefully consider where they direct their energy. This mindset can be especially clarifying when presented with new business opportunities as advisors consider what will move them closer or further from their goal.
Ultimately, after a certain point, advisors must clarify within themselves what purpose their business growth ultimately serves. Whether that purpose is building a legacy, helping as many families as possible, or spending more time in the community, that in turn can be used as a guiding light… not the promise of 'more'. In the end, advisors who can be discerning and consistent may find themselves building a practice that enables them to live more of the life they imagined!
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
- Helping Clients Align Their Capital To What's REALLY Important When They Don't Know What Is: Kitces & Carl 197
- What Makes Financial Advisors Happy And The Second Kitces Research Study On Advisor Wellbeing
- Use Of Capital And Plannin
- Why A 14X EBITDA Sale Price In Headlines Often Really Isn't By The End
Kitces & Carl Transcript
Michael: Well, greetings, Carl.
Carl: Hello, Michael. What's new today?
Michael: What is new today? I don't know if there's a lot new. Some new video games are coming out that I'm getting to play with my son.
Carl: So fun.
Michael: So we're enjoying the gaming time these days. New season of "Gunfire Reborn" and a new season of...
Carl: That's a thing you guys do?
Michael: Yes. Yeah. I was a hardcore video gamer.
Carl: This doesn't surprise me.
Michael: I grew up in the era where my parents said, "Don't just play video games all day because someday you're going to need a real job where you can make a living." And who knew esports was going to become a thing? I feel like my parents snatched my future livelihood away from me. So I had to satisfy this by being a financial planner instead. Otherwise, I probably would have been a gaming streamer at this point. So now I still enjoy my roots of it by getting to play video games with the kids.
Carl: So good. So good. Yeah.
Michael: I was so close. I was...
Carl: You were right there.
Michael: Not even a full generation off, it's like a fraction of a generation off.
Carl: That's right. That's right.
The Challenges Of Aligning Capital To Values (And Slowing Firm Growth?) As A Financial Advisor [01:28]
Michael: So, for today's discussion, I realize indirectly this kind of ties to the theme we covered last episode around figuring out what's important to us, aligning capital. But this week I wanted to talk not in the context of clients, but back to us as advisors. So I've heard this issue cropping up more lately. I'm very curious if this has come up for you as well, if you're hearing this in advisor conversations as well. It's something... I've heard a few different versions, but something to the effect of, "So I grew this successful practice. It's been an amazing journey. I'm 15 or 20 years in. I make more money out of this than I ever thought I was going to when I was starting back in the dark days. We can cover our goals. My kids are going to school. I'm going to be able to retire. We live a good lifestyle. I don't know that I really need to grow the practice a lot more. It's in a really good place. But there's all this discussion these days of advisory firms selling for three times revenue, give or take something. So I got this new client recently. It's like a good million-dollar client. And I realized that was $30,000 of enterprise value. And I'm starting to struggle with, feel guilty with, feel obligated as a good steward of my family..."
Carl: Right. That's my favorite one: "obligated as a good steward of my family".
Michael: "How can I not keep trying to grow this when each client adds that much?" And I feel like there's always... As advisors, we are very goal-oriented people. We've actually measured this on our Kitces research. The typical advisor is two to three standard deviations more goal-oriented than the average person in the American public. We are extremely goal-oriented people as a baseline. So on the one hand, financial planning is awesome. You get to be goal-oriented and help people orient their goals and achieve their goals. It's like the only thing better than achieving your goals is helping your clients achieve their goals as well. Yay goals! And that means we always, I find in the advisor world, have this tendency to move our own goal posts. When you're goal-oriented, it's not very fun when you achieve the goal and stop. So we always have to keep setting new goals, and we love the "If you're not growing, you're dying" kinds of things.
So I will acknowledge that has always been out there for us. And I'm just finding the conversations are different now. They're taking on a different tone. And I think it's literally this, I guess we've talked about some prior episodes, this weird phenomenon where advisory firms are remarkably liquid and you can really capture this capital asset, that if I just think, generically, of the million-dollar client, $10,000 in fees, if I'm running a 30% margins, $3,000 of profit, and I get paid quarterly. And there's a point where I'm making pretty good money and taking on another new client and doing all the work so the business can make $750 a quarter just doesn't really move my needle at some points. I've covered the major things in my life. I'm enjoying my lifestyle. Do I really want to work that hard for another $750 per quarter of income? I don't know, but it feels different when someone says, "Yeah, but that client is $30,000 of enterprise value." It just literally re-anchors the number. Suddenly, we're not talking hundreds of dollars of profit every quarter, we're talking about tens of thousands of dollars of enterprise value.
And so I'm finding these conversations cropping up more often with advisors these days who seem to be finding this newfound, let's say, pressure to grow. I don't know that that's the right word, but hard to ignore how much growth and wealth get created with each new client when you start thinking about it in enterprise value terms. Have you heard this? Am I alone in this phenomenon?
Carl: No, the version that I recently heard or had a conversation about was something to the lines in this...I'm paraphrasing, but this was an actual conversation recently. Something like, "I thought I was done this year or maybe early next year, but, man, if I just keep..." It was the exact thing that you just said, "...but if I stick around two or three more years, enterprise value will be $X. And how can I..." and I think the words were, "...in good conscience..." And so to me, there's nothing wrong with that. It's just, I think the dilemma, as you've already stated, is the goalposts are going to continue to move. And the question just becomes, why? What is it?
Michael: If you do that math on how much bigger your enterprise value is two years from now and decide to stay, guess what conversation we're going to have in two years about what it'll look like two years from there.
Carl: Yeah. Talk to me in two years. So I think that, to me, this all comes back to a bit of what we talked about last episode, is if we could just get more clear about what's important to us, the... What was... I'm going to probably get in trouble for this. Some general said that...and people will correct me, I'm sure. Send the emails to Michael.
Michael: Thank you.
Carl: The strategy... What was it? Tactics are easy when the strategy is clear, or strategy is easy when the vision is clear. Something along those lines. And the dilemma here is...
Michael: "When the vision is clear, the decisions are easy". That one?
Carl: Yeah. There's some version of that, though, that was from a very well-known general. And my point here really is, it turns out we're just humans that need financial plans too. And if we had a really good financial planner, our really good financial planner would probably help us get some sense of clarity around what it is that we care about, and then it would help us align our use of capital with that. And so when we say, "Hey, if I just stick around two more years," our really good financial planner would pull that document out and say, "Hey, let's just reconcile these two. It's okay to change it. This document is written in pencil, but here's what you told me two years ago. Has this changed? Is there something..." We'd have something to anchor ourselves back to because without that anchor, we're going to be thrown around with every wind of doctrine, just like everybody else.
Michael: So I'm just struck by how you frame that. So I would paraphrase. One of the benefits of going through some kind of financial planning process is we have a paper trail of what you said was important to you years ago so that when you try to reset your own goalposts, we can at least have a constructive conversation to say, "Look, a few years ago, you said where you are today is enough. So you're allowed to..." I mean, as you said, "It's your life, it's your journey. You're allowed to change your mind, but let's just go back for a moment where you said getting to where you are today was going to be enough. And can we talk about what's changed?"
Carl: Yeah. Yeah. That's it. And it's okay for me to say, "I just love the game, man. I just want to keep building this thing. And I love seeing the number go up. That's all I care about." That's totally fine with no judgment. But what's more interesting to me, most of the time, is, "Oh, yeah. Yeah." And we get to... I have found that, especially with really goal-oriented, driven people who are focused on a number going up into the right, there comes a spot where when we're really forced to think about what we really care about, what's enough, "Hey, I said I would be done. Hey, I even made commitments to staff", all of these sorts of things, and we get there, what's really interesting to me is the thing that sits underneath it is almost always fear of some sense of identity and, "What am I going to do with my life now? Yeah, you're right. I could. You're right. I got there. What am I going to do?"
I just had this conversation with the CMO of a publicly traded company that you would all recognize. And his CEO is very publicly going to retire in the next couple of years, he has announced it. And he has said, "I'm going to leave when he leaves." But he's like, "I have no idea what I'm going to do. I don't, I don't have any hobbies. My kids don't really know me. My wife and I... I've been working so hard." Back to our last conversation, we just picked a forcing function. He happens to live in LA and he lives by the ocean. A forcing function was, "You're going to go buy yourself a paddleboard right now. We're going together. And what day can you go?" "I can go every Wednesday." "Okay. Every Wednesday." And it wasn't that paddleboarding mattered, we just grabbed a thing so he would ask some questions. I think we're talking about the same thing here.
But there's also nothing wrong with deciding that it might be really important for you to grow enterprise value because "Make hay while the sun shines". There's nothing wrong with that. It's just, do we have the framework to have a conversation about it rather than just be tossed around? Live your life rather than being told. This is just another version...it's the advisor's version of Instagram, enterprise value goes up.
Has Private Equity Created A New 'Anchor' For Firm Value? [12:48]
Michael: Right. Yeah. For better or worse, I think the part that sets my spidey sense off, my alarm bells off, is hearing a lot of folks were literally...I can tell the goals are changing in real-time. Really. I felt pretty good about where we are, and enterprise value goes up, big number. And the question just starts to kick off again. I mean, there is a version of, "I want more money to buy more things". And that's very valid. And there's just a number go up because we're driven, goal-oriented. And some that I've really heard that come through that lens of, "It feels like a failure of stewardship to not take advantage of the growth opportunities." But what strikes me is you weren't saying that a little while ago when we weren't all talking about enterprise value. I mean, it was there, we could have calculated it. Something feels like it's changed in the tone as though a lot of advisors are...
Carl: The number is bigger.
Michael: ...outright re-anchoring from... It used to be, what is enough for an income stream? And now it's, what is enough for enterprise value? And yeah, the numbers are different. The numbers are bigger.
Carl: The numbers have gone up, and the private equity people have gotten into your head too. You know what I mean? And again, all fine. All fine, but if it's not... It's all fine if it aligns with what you say is important. I'm sorry, not what you say. That's funny. That's the sketch I changed after 10 years. It used to say, "Use of capital..." There was a Venn diagram that said, "Use of capital." And it was the real financial planning one, "Use of capital." And the other one said, the other circle said, "What you say is important to you." And the word "say" bothered me. I didn't know it was bothering me, but I was like, there's something about that. It turns out, I do care deeply about what you say is important to you, but what we really care about is what's actually important to you. You know what I mean?
Michael: What did you change the word to?
Carl: I just got rid of the word "say" and just said, "What's important to you." Yeah. And so, yeah. I think the reason this is cropping up more is because the number is bigger and everybody's waving their hands about the private equity people, and they've now rented space in your brain too. And you're paying them rent by paying attention to this number getting bigger. And you should just be honest about it. And the honest should be, "I care and I want to make more money." Or the honest could be, "Gosh, thanks for the reminder." I can just remember...what is it? The old Upton Sinclair's quote. "It's difficult to get a man to understand something when his salary depends on his not understanding it."
Michael: Yeah.
Carl: This is a version of that. It's difficult for us to get clear about our values when the numbers going up and everybody's waving their hands about it.
How To Anchor Financial Goals As An Advisor [16:27]
Michael: So, how do I re-anchor myself? The advisor struggling with this...
Carl: Yeah. The big question I have is, have you done your work? And please, I'm being really careful here. Have I done my... I fall prey to this problem every week, "Oh, that's right. I'm spending a bunch of time doing something for money. That is not what I said was important to me." Or, "I'm sacrificing something that's deeply important to me because there was a big number over here." I'm doing this all the time. So what helps me is when somebody reminds me of what I said, and it's pretty easy because I've said it publicly, time with my family, mainly outside. Is this helping me or hurting me towards that goal? That's what helps me. That seems to be what helps people that I work with. And it seems to be what helps advisors working with clients. And sometimes those are punch-in-the-nose conversations and sometimes they're empathetic hugs. And the number of times I've had to say, or had somebody say to me, "Hey, you might fire me as your friend for what I'm about to say. But you should definitely fire me if I don't. I think you've lost track of..." Or, "Hey, you told me this, you're behaving this way. Let's talk about that."
Michael: Okay. So that's what I get to do for my clients because we have a conversation. And perhaps this is just a version of the discussion: doctor heal thyself; planner, get thee a planner. But how do we go this path when we don't necessarily have the person to push back on us? Because in practice, not a lot of us have our own financial planners.
Carl: Yeah. I don't know. I can just speak from what helps me as I've got...that statement is seared in my brain. It's written down so many places. I have a really clear sense of what's important to me. It's evolving, but I think a lot about what's important to me. Now I get off track as much as anybody, if not more.
Michael: That's your statement of financial purpose?
Carl: Yeah, but there's a baseline that I realized was when I've deviated from. And so, maybe hire somebody to help you go through that process or journal about it, or have a conversation with a spouse or partner. What's really important? What am I doing this for?
Michael: How did you set the baseline for yourself then?
Carl: Well, early on, I...it's funny, I can remember exactly where I was, in my old office, looking out the window, having a conversation with somebody about an investment they wanted me to make. "Hey, do you want to help me with this thing?" And me getting super distracted by it and spending two or three weeks going down a rabbit hole, only to say no. And then doing that ten times a year and then realizing...finally, I was like, what am I doing this for? I remember getting super upset with myself. Just like, "What am I doing this for? What's the whole point?" And I wrote down, with a bunch of energy, with a Sharpie, and a piece of card stock, "Time with my family, mainly outside!" And I put it on the window. And then I remember the next person who approached me about whatever, this private equity deal, this deal, that deal, that deal, and I saw that piece of paper, I was like, "I don't need to spend two or three weeks going down this rabbit hole. That may or may not help me, but I'm going to focus on time with my family." So that's how I got clear about it, was just I got really upset. Now, again, I want to be really clear...
Michael: And then you wrote it down and put it in a visible place.
Carl: That's right.
Michael: I feel like there's something to that, just all the power of writing it down, the power of having it right there in your face. If you put it in front of the window you like to look out of, in your case.
Carl: Yeah. Yeah. And again, I make it clear that I'm off track 90% of the time, but I know where to return to. And now I've got...now I've said it so much that our financial planner reminds me of it. My wife reminds me of it. My kids remind me of it. People I don't even know send me emails about it. So I think the more we can do to get clear... But the question becomes, okay, great, so what?
Thought Exercises To Decenter Life Fixtures [21:17]
Carl: Let's just play this out, not in a negative, but "So, okay, $30,000 times, what would be the number? Ten a month... Sorry, ten a year? What would be the number, new client acquisition number?
Michael: Five to ten, depending on how rapidly your clients are.
Carl: Let's just say it's ten. So I don't even need a calculator, I think, to do that math, $300,000 in enterprise value. You are out of play. Based on your scenario, you're at a place where you got to the place, you couldn't even imagine it.
Michael: Yeah.
Carl: $300,000 more. So then we just get to play gently, maybe forcefully, but mostly gently. So what? What would that mean? We can play the overnight test. Let's pretend somebody sold the business overnight and X dollars was in your business account...in your personal account.
Michael: "That's a healthy personal account, don't wire into the business account." You sold the business.
Carl: You sold the business. X dollars is in your personal account. Would you buy the business back? You can play all sorts of games with that.
Michael: And so, where am I supposed to go with that conversation?
Carl: Well, it's an interesting exercise. The overnight test is just...I use it with clients all the time, concentrated stock positions, or like we've talked about in the past, second homes or family cabins, legacy assets that have been around a long time, and they're still holding onto them. It's one of my favorite questions of like, "Hey, let's pretend somebody sold that overnight. You woke up in the morning, and the cash was in your account, and the family cabin is no longer yours, but there's one just like it for sale." So you've changed the default position. So in this case, we could say the business sold, you no longer own it. Your default...
Michael: You have all that cash in the bank.
Carl: All that cash in the bank. You've now got to take action to get it back if you want. It's interesting just to know... In all of my years asking that question, I've only had two or three people say they'd buy it back. And that just gives us material to play with. It doesn't mean you've got your answer. It just means now we've got new information to talk about. But I just think it's a version of that. So what? How would your life be different? $300,000. Let's say you do that for two years and it's $600,000. After tax, after you sell the business, how would your life be different? Is that important to you? What then? What then?
Michael: Which I guess is even a good extension of, "You sold it, the cash is in your bank, would you buy it back?" If you find yourself hesitating on whether you'd buy it back, then I guess the fun next question is some, "What would you do with the money in your bank account since, apparently, you don't want to buy your practice back at this point?"
Carl: Yeah, I think that's beautiful because that... I really think that this is a fundamental... Based on all the conversations that I've had around this, the reason is a version of this. The reason I'm so busy and the reason so many of us are so busy is because we're scared of what we'd find when we're not. And I think, your question just now, "Okay, it's there, you're hesitant to buy it back. What are you going to do with it?" opens us to the real discussion. The real discussion is, I don't know what the hell I'm supposed to do with my life. "Okay. Go buy a paddleboard, right?" To my friends, chief marketing officer guy, okay, now we're back to our last conversation. "Okay, well, let's run some experiments. Because I do know, if I'm honest, Michael, I don't want to run this business anymore. It's met all my dreams. It's amazing. This is incredible, but I'm tired. I want to do something new, but I'm scared to death." To me, that's where the conversation gets interesting. Or it could be, "I love building this business. I'm going to do it a little differently, but I want to keep growing it." Those are both fine.
Michael: Oh, absolutely. Again, I get set off when I hear folks that are thinking about changing the path they're on.
Carl: That's right.
Michael: Much more so than the "I'm growing this business, and I love growing it. It's really fun growing it. Man, valuations make this thing really valuable. This is kind of cool." I'm like, "Yeah, it's awesome, man. Keep going. You be you, do your thing. Yay." It's the "I thought I was in a good place, but I'm doing the math on each new client and enterprise value, and it's messing with my head."
Carl: That's right.
Michael: That's the new dialogue.
Carl: That's the Upton Sinclair quote, right? I'm going to... Because you're right. We learned this from client work. If a client's... We humans are very prone to change our goals if there's some psychological burden associated with continuing to have the goal. And we'll go to pretty great lengths to convince ourselves. We'll use words like stewardship or "I can't in good conscience stop." We'll use big, really loaded words. But what you're pointing to is, "Hey, you told me something slightly different. Let's talk about that." And I just think that that's, again, a beautiful spot to be as a planner.
Michael: I like the idea and mechanism of, I don't know, if you're feeling this temptation for yourself now, it is what it is. You have to choose your path. But if you're doing the whole, "But if I go two more years and think about what it's going to be," just take a moment by whatever means and mark down, what would it be two years from now? What number does it need to get to? What goal does it achieve? And put it down on a piece of paper somewhere, or I guess dictate it if you're so inclined, so that two years from now, when you get there and feel the temptation to reset your goalposts again, you can pull out a version of this conversation. Because again, I'm really struck by the comment you made it. This might feel different if you had an old financial plan you could pull out to say, "Remember what I was going to do once I got here, before I got to the moment where now I want to reset the goalposts from here." So if you don't have that in the past, at least make one of those to carry your conversation the next time you sit down. It's not running the numbers, what's important about that money to you. What goal is the money trying to serve and achieve?
Carl: That's right.
Michael: How much do you actually need to achieve the goals that you have set forth? So that at least if you reset your goals in the future, you do it eyes wide open.
Carl: That's right. In other words, do a financial plan. Yeah. Do the plan, do that whole planning thing.
Michael: That whole planning thing. Yeah. Just because I know a few of us that like to crunch numbers. It's not the math of it, it's the clear articulation of the goals.
Carl: And it's like we talked about last episode, even below the goal is a set of values. What would be important about being there? What's the value you're capturing? Because then you're going to find yourself real quickly saying, "Well, jeez, it turns out I can capture that value now." But we're not talking about that. That's the Ninja trick.
Michael: Awesome.
Carl: Cheers, Michael.
Michael: Cheers.
Carl: Bye.
