Executive Summary
The value of an advisor’s time is one of the core questions of building an advisory firm. After all, this value not only affects business decisions, but advisors need to be able to explain (and justify) the value of their advice to new clients. Over time, many advisors find ways to talk clients through their concerns – but the fee conversation is nonetheless a common part of prospecting discussions. However, some clients pose the opposite problem: they enter into the advisory relationship willing to pay an advisor considerably more for their time than other clients. While positive on its face, this can also pose a series of operational (and existential!) questions to the advisor – ‘should’ they let that client pay more? If so, how much more?
In this 202nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss clients who are willing to pay over the advisor’s standard pay grade… and what that could mean for the value of the advisor’s advice. On one hand, this could be a signal that the advisor has undervalued their service – or that the value of their advice has shifted as their expertise has grown! On the other hand, some advisors may feel that the client is ‘overpaying’ – and that if their firm is already profitable, there ought to be a maximum that clients pay for their services. If the firm is viable and the advisor is content with their lifestyle, is there a ‘point’ in earning more?
While some advisors pose this as a question of ethics, it is perhaps more useful to consider what the advisor wants to build. Some advisors are extremely income-motivated, or aspire to grow their team and firm. In that case, the goal is likely to make this prospect the first of many higher-paying clients – as the line of logic goes, one higher-paying client can likely give referrals to others like them. Or the additional cashflow may give the advisor an opportunity to scale the firm, evenif the long-term goal isn’t to find more clients at that level of affluence.
On the other hand, other advisors may not strive for the complexity that comes with maximizing growth – after all, being paid more often means providing more, in one way or another. In that instance, the advisor may opt to institute a fee maximum or similar guardrails to curtail how much any individual client pays. One benefit of this approach is that it can prevent a ‘hierarchy’ of clients, presuming everyone is paying relatively similar fees, which means the the advisor ‘just’ has to refine their advisory firm offerings around a very set fee schedule.
Ultimately, the key point is that while advisors can create different frameworks to prevent or promote fee differentiation amongst clients, there is no ‘right’ or ‘wrong’ answer as to how to handle a high-paying client. The end challenge for advisors is to know what they want to build!
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
- Getting Ahead vs. Having Enough by Carl Richards
- Behavior Gap Episode 1526: Keeping Options Open Is The Risk
- K&C 201: When Keeping Your Options Open Is Riskier Than Making A Commitment
- #FASuccess Ep 093: Building A High-Income Lifestyle Practice Efficiently By Running It Like A Real Business with Sunit Bhalla
- #FASuccess Ep 094: Crafting Your Optimal Solo Practice By Simply Charging What You’re Worth With James Osborne
Kitces & Carl Transcript
Carl: Greetings, Michael.
Michael: Hello, David Carl Richards III.
Carl: I'm thinking about changing my name. The kids and I talked about this the other day, because we've got a daughter getting married and they're talking about their last names. And I was like, I want to change my name to Zeke. I think I might change my name to Zeke or Thor.
Michael: Your first name or your last name or...?
Carl: Well, I like... Zeke Richards.
Michael: If you become Thor Carl Richards III, are you still going to go by Carl or are you going to become Thor?
Carl: Thor III. I'm just going to skip all the rest. Let's not spend any time on that. How are you? What are we talking about today?
Michael: I'm doing well. I'm doing well. So I have what I think is an interesting conversation for you today.
The Ethical Dilemma Of A Client Willing To Pay More Than An Advisor’s Fees? [00:58]
Michael: I'm going to start with a hypothetical example. I may be able to come up with a better one as we go, but I think this will get the discussion going. So imagine for a moment I'm an advisor and I figured out the value of my time is about $300 an hour to do what I want to do. It's roughly 2,000 working hours in a year. If I can do $300 an hour things with my time, I generate $600,000 of revenue, pay my bills, and I make a really good income, net take home. There are lots of frameworks out there that use some version of this where they figure out the value of your time, delegate everything below that line so you can lift your highest and best use, all kind of built around what's the value of our time so that we can be cost-efficient, drive revenue, delegate things that are not effective to that time so we can leverage and scale ourselves up. And then you get a new client, a new big whale of a client...
Carl: Big whale.
Michael: ...who is very high dollar and is the kind of person who has $1,000 an hour lawyers and $1,000 an hour accountants because they're an executive who makes a zillion dollars an hour and says, "I think you're undercharging. I'll happily pay you $500 an hour for the work that you're doing. It's really good. I value you at more than $300 an hour." And I find when you get to some scenario like this, there's this very interesting split that very quickly emerges amongst advisors where some say something to the effect of the client values your work at $500, apparently you're undercharging. You're worth $500 an hour, that's what you should be charging to do what you do. Almost sort of by definition the market has stated what the market will bear is the value of your services, and off you should go.
And another group says something the effect of if the value of your time is $300 an hour and that's what you do to run your business successfully, it would be unethical. It comes up as a very overt ethics framing. It would be unethical to charge the client $500 an hour when you know darn well you can run the business successfully at $300 an hour. And not a lot of us charge hourly in practice. I set up the example this way because you can now translate this to lots of situations. So it's the client who has $5 million when your average client is a fraction of that and you do the math and realize they're going to pay 3x, 5x, 10x the AUM fee and they're not that much more complex, they're not going to take that much more time. It's the subset of us who have said I'm going to put an outright cap on my fees for my largest clients. It literally doesn't matter if they wanted to or were willing to pay me more. I believe I can run the business profitably and successfully at this fee and charging more than that is not ethical.
And so I'm just fascinated by this dichotomy. If you want to get into the nerdy pricing theory of this, this is essentially a subset of folks who would advocate for a value-based pricing approach, which essentially is what is the value in the eyes of the client or the customer who's buying? And another set of us that says, no, no, no, the right way to price this is cost plus a reasonable margin. And if this price point is enough for you as a cost of your time to run the business profitably, you shouldn't charge anything more than that.
Carl: Yeah, that's a lot. Can I ask some questions?
Michael: How do you think about...
Carl: Yeah, totally. Let me ask some questions first.
Michael: ...this, strange divide, fascinating divide?
Carl: Yeah, yeah. I just am curious about some questions. I'm curious about that because I have some personal feelings about how I would approach this. And I'm curious about the language around ethical and moral and you also use the word right. Is that the kind of...?
Michael: I'm speaking words I've heard very directly in this conversation. Yeah. And there's strong words, that's why...
Carl: Yeah. I'm curious about, is there...so if we go to any other business, we're talking about saying that there's a moral or ethical margin?
Michael: Yeah.
Carl: Is that right? Like I make the widget for a dollar. It's unethical for me to sell it for $4. It's ethical for me to sell it for $2 though.
Michael: Well, depending on how far you want to go down this path, yeah, it's kind of an interesting thing. So there are certain products and services where we societally have deemed this acceptable. Luxury goods, fancy...
Carl: I was just thinking about the art I do.
Michael: ...watches and boats and such...
Carl: A piece of canvas that took somebody two hours to draw a line on and they charged $5,000 for it. I've sold $5,000 pieces of canvas.
Michael: And then there's another domain where we are not so happy about this societally, like how we price medical services.
Carl: I was just thinking of, yeah, prescription drugs.
Michael: Cuban has literally launched Cost Plus Drugs to say there's a moral and ethical margin on what you should charge for prescription medications. And there's a lot of consumer shift towards him doing that and some growing backlash over what is the right and appropriate margin or what is the acceptable value-based pricing for prescription drugs? Value mechanism kind of gets messed up when it's life or death medication. Very different if it's a piece of canvas, it's an automobile. So maybe there's a spectrum here of things of things like medication and utilities where we have very directly expressed consumer sentiment, moral sentiment, or outright government regulation to say there's a certain level of margin that does not seem societally appropriate. And then we get another set of luxury goods on the other end of the extreme where people can do what they want to do with their money, including pay more for certain things. So maybe in that world, where does financial planning sit on that spectrum? Or can it sit across a lot of that spectrum? If we serve people in need of one side of the spectrum, are we still allowed to be a luxury good for people at the other end of the spectrum?
Carl: Yeah, I think let's talk about that for a minute. I also want to talk just about our own personal preferences because I have a preference for this and the preference revolves around “enough”. I'm not actually interested in maximizing profit. I'm bored of it, I'm tired of it, I'm sick of it. I'm interested in maximizing impact and thinking of profit as permission to continue to have an impact. And again, those are sliding scales and personal preferences. But back to the...yeah, another version of value-based consulting would be...We've all run into this. I can remember specific...specific client names are going through my head right now where I made specific suggestions. And I can remember one that was...I remember actually having a discussion with them because we had a discussion about fees maybe like 18 months after this event. And I helped them make a decision that saved them something like $54,000. I could show them like, you were going to do this, I intervened, we did this. And I would never do this except that 18 months later, they wanted to really talk about pricing or how I billed. And their fee was $12,000 and we saved $54,000 that year. And I remember sort of thinking like, hey, you owe me.
Michael: We're literally already mathematically ahead. Come on, Mr. and Mrs. Client. We're banking four years of prepaid fees off my savings already.
Carl: That used to be my favorite way to think about the value that I provided was...I would say to new clients, I would say, "Look, I don't know what it's going to be, but there's going to be an event. And it could be market related, economy related, it could be related personally, it could be some tax thing we find. I don't know what it will be, but I could go through every client and tell you what the event was, except for privacy reasons, I could do that. And we'll make up a multiple of our fees in a given year. And we'll do that it seems like once every three to four years. So that was always my favorite way to describe it. But one version of value-based pricing is that you say like, "Okay, we saved you $54,000, we get half of that." In the consulting world, people price things that way. Like, "What difference will this make in your business? Okay, great."
Michael: I get a portion of the tax savings, I get a portion of tax savings, I get a portion of...
Carl: I get a portion of the added revenue or the cost reductions.
Michael: ...operational efficiency benefits.
Carl: That's right. That's right. So, man, I don't know, I have a personal preference, which is like, do we all have to be always optimizing, trying to find ways to...? And so I would... that gets me close to that ethical discussion.
The Price (Or Profit!) Of Goodwill As A Business Owner [12:09]
Michael: I hear you. To me, this isn't even necessarily an optimizing discussion. Yes, this is a thing you can optimize, but I'm more fascinated about the sentiment of anti-optimizing, which is, no, we're going to have a fee cap. If a client says it's more valuable, I will deny them the ability to pay me that much money. Seriously.
Carl: I love this. It's a great conversation. Because yeah, we were...
Michael: Or for those of us who maybe don't do a cap, but we have some version of it. I just got a...or how people have some version of this. I just got a prospect. It's by far the biggest one I've ever had. And I just made up one or two new breakpoints on my schedule that didn't even exist before because I took out my current fee schedule and I did the math on what the client would pay, and I felt so mortified that the client would pay that much money that I just immediately started reducing what my fee is going to be with new breakpoints. I haven't even talked to them about it. They haven't even told me they don't like it. They might have even looked at my fee schedule, already figured this out and called me anyways because it's not a blocking point for them. But I have voluntarily taken steps to reduce what this person would pay before they even have the opportunity to say, "I believe you are that valuable and I am quite happy to pay you that and more."
Carl: Yeah. I love this because, yeah, I know it seems...I don't know if it's increasing in frequency, but it does seem like I've been told by more people just in passing, min and max fees, right? Like we've got a minimum, we've got a maximum. And I've always wondered about...That maximum, it's super interesting...because that's something that resonates with me. I've been like, "Yeah, that's enough." The psychology of it is very fascinating, which is like, is that a statement of me saying, "Hey, you know what, for the work we do, that's enough?" Or is that a statement of me saying, "Man, I don't know if I'm worth that much. I'm mortified that the client would pay that much."
Michael: Or I feel like it's going to make more profits. Right? I guess there's two versions of it. It's going to be a more profitable relationship than I need because I've got enough. It's going to be a more profitable relationship than I think is morally acceptable.
Carl: Okay. So morally acceptable, let's get to that one in a minute. One time I remember I developed at least some framework for me...I had to fit it in a graph and it had to be on a Sharpie and card stock. And all it was was what I could charge, and then it was just a bar chart, for those of you not looking at my amazing bar chart on YouTube. It was just a line.
Michael: For those who are listening, he is drawing a bar chart with his hands that are just...
Carl: By just holding my hands.
Michael: ...a certain distance apart, approximately a foot apart.
Carl: That's right. And so when I could charge what I do charge, let's just cut that bar chart in half, and I was labeling that difference goodwill. And that goodwill had some value to me. The value was like, I'm not always...my clients, my readers now, the people who buy my art now, the people who come to workshops now are like, "This was so valuable." There's a bunch of goodwill priced in there. That's how I finally started...kind of like the mental model I developed for thinking about that in my own head was like what I could charge, what I do charge, and the difference between those two is goodwill. What I charge, what it's worth, and the difference between those is goodwill. And that goodwill actually has some intrinsic value to me as a business. It's long-term goodwill. Maybe it's even the best way for retention, long-term trust, all of the things that we gain. So that's how I thought about it.
The moral side, I'm like, man, that's a challenge. I don't know how...because would I be making a blanket statement about the morality of it? Like if it's immoral for me, would that mean anybody who does it, it's immoral for them? That's where I get into a conundrum is like, I'm not really in the business of deciding...in a certain scale, I'm like, you do you and I'll do me as long as it's not illegal. As long as it's...the one thing we've all agreed on, transparent and, obviously, legal and disclosed. We're not talking about that.
Michael: Yeah. I'm assuming we're...All of this starts with a happy, willing client who effectively says, "I value you more than where you are pricing yourself for setting your fees, or setting your cap, or setting your break points," or whatever it is. And to me, what gets it to be an interesting question, is it good business to charge as much as the market will bear, which the client will bear...
Carl: That's a different question.
Michael: ...or morally inappropriate if it makes you too profitable? Whatever quite that means, but there's some thresholds, whether it's appropriate margin on utilities and prescription drugs or on our time. We seem to kick that meter in at some point, different places for different people, but...
Carl: Yeah. Yeah. No, I think the good business one is where my mental model was helpful for me. And I feel like having some goodwill built into my business is good business. It's good long-term business. It'll keep somebody happy. It'll keep...not always trying to optimize every relationship in terms of what I can "extract." And instead of having some goodwill priced in...and that goodwill might be based around, this is enough, it's enough. And look, maybe this is terrible business advice, I don't know, but long term, it feels like good business advice. It's not even advice. Long term, it felt like a useful frame for me to make decisions. How do you think about that?
How Fee Decisions Can Shift An Advisor’s (Business) Capacity [18:42]
Michael: I come to it, I guess, from a different place because at least if we're talking about our ourselves, it's like, who do we want to work with? What do we want to do? We all have this finite capacity limitation where like there's only so many seats on my bus that I can onboard clients to before the bus is overfilled and standing room only and not a terribly pleasant bus to be on. So once you get to client capacity, whatever that threshold is, we've all got a different number of spots, but at some point you get to capacity and either you go get more buses and hire a fleet, you go hire multiple advisors and make a big team of teams and enterprise thing. Even then you still got the capacity of your bus. Some of us just want to hang out in the solo boutique bus. There comes a point where no one else can get on the bus unless someone gets off because otherwise the bus is going to start getting overcrowded and be uncomfortable.
And so it's an interesting phenomenon to say, so at some point the bus is going to be full and someone's willing to pay more to have a slot on that bus now and forever, and I won't let them pay more to hold that slot. Or if my bus is full and they say, "I'll pay you more because you're a great advisor and I want a seat on the bus," that we can't possibly have someone else part ways to make room for someone who says, "But the seats on the bus are really a lot more valuable than this, so much so that I'm willing to pay more to have one of those seats." And so I I know for some of us, the moment where you're at capacity, you have to think about asking someone to get off the bus so someone else can get on gets a little more awkward.
So I'll start with the bus isn't quite full yet, but it's filling up, and you got to decide who's going to get the seats. And so if someone's willing to pay extra for a nice seat on the bus, can they have it? If someone's willing to pay extra because they value you that much, and that lets you give away another seat for free, is that better? That's kind of the barbell approach... I'm going to have some very high-value clients so that I can do more good work in the community for which I charge little or nothing because I make enough dollars on the people I serve very, very well. I'm not overcharging them, but I'm going to charge them what the market will bear and redirect those dollars elsewhere. Or maybe I'm just going to do more extra things for my top clients. A lot of us do additional things for our A clients to retain and reinvest in our top relationships because they are profitable enough that we can put something back into them.
Carl: This reminds me...The feeling I'm having right now is reminding me of, I'm assuming, what would be our last episode that was released right before this about options and closing doors. In fact, I got notes from a few advisors that had listened to the "Behavior Up Radio" episodes about optionality and the risk of optionality. And they said something very similar to this, and we both know some really happy, really, really happy financial planners that decided years ago that 75 clients at $7,500 was enough.
Michael: Top billing of revenue and efficiency run.
Carl: And never looked back, not spend one moment, back to "burning the bridges." There's no other options. Never looked back. Some of the happiest planners I know are just like, "Well, should I give up a seat for a new client?" No. I've tried to refer, in one case $12 million, in another case $18 million client to one of those advisors. And they have said, "No, I'm full." I don't know. And they've been saying that for 15...we're going on over a decade, I'm assuming now. And you've had advisor success with Sunit. He carefully considers, but he only carefully considers once a year, he decides to...sets aside a little bit of time to think about it. I love that.
Michael: Maybe take on one more client...
Carl: Maybe one.
Michael: ...31 instead of 32 or whatever number of clients he's ever had.
Carl: And now, listen, there are other ways to do business. Those are just some of my favorite ways. Right? Because I'm talking about our friend James Osborne. He's been full for more than a decade. What's he doing? Hanging out with his kids and riding his bike. And every time I try to get him to take a new client, he's like, "Why would I do that? Why would I even think about it?" I love that. That's my favorite kind. That's not the only kind. And many, many people listening to this would probably say that's the stupid kind. Fine. For some of us, at least, a really beautiful life. And so, I don't know, but the moment we start throwing around morality and ethics...That's why I'm trying to understand, maybe I'm missing something ethically about this, but I don't know. I would just be careful. Under the boundary conditions we've already established, I would be careful trying to decide that one pricing model or one way of thinking about it might be moral or immoral. Right? That doesn't quite resonate with me. It might feel like an absolute personal preference. And now we know things about how to price in this business that are immoral. We're not talking about those.
Michael: Yeah. Again, I start all of this with the client willingly and happily is ready to pay you because they find the value this positive. It just adds up to more than what you were going to quote them, or do quote them, or what your fee schedule already says, or where you put your cap, or where you put your hourly rate, or whatever it is.
Defining Enough Vs Chasing Business Growth [25:22]
Michael: And so on the one hand, this may be a whole other episode, at least for those who like to pursue that path, how many of us foreclose on those opportunities without even realizing it? You negotiate against yourself that it seems like my fee schedule is going to be too high for this high dollar client and never want to actually just give them the opportunity to say, "That seems very reasonable. I think you're worth it." And I find for more of us, it does very strange things to your brain when you set a line in the sand that I think a lot of us fight to get to over the years to be really clear about what our value is and what our time is worth. Because mostly we're trying to convince people who think it's worth less to explain why I really am worth the fees that I charge and the things that I do. And along comes someone who doesn't blink twice at a much bigger number. And what do you do with that?
Carl: Yeah, no, I love that. It's a fun discussion. And my conclusion would be I call that goodwill because that's not the game I'm interested in. But that's not the right answer for anybody else.
Michael: And again, how do you frame the goodwill of that?
Carl: What somebody's willing to pay, or even what it's worth, and what I charge, the difference between those two is goodwill. And I like having some goodwill priced into things.
Michael: Meaning you're going to take the lower price...you're going to continue to charge your lower price and say the difference that I didn't charge the client is a goodwill deposit with them.
Carl: And, look, value is in the eye of the beholder, of course. And so it's not like that's always the same. Every individual client, what it's worth to them...I sure hope what it's worth to them is way higher than what I'm actually charging, is higher than I'm actually charging. In some cases it's going to be way higher, in some cases it's going to be 2%, some cases it's going to be 50%. I don't know. But that difference there to me is not necessarily...it's goodwill to the benefit of the client, but it's also just like...I could also call it karma and just creative energy. It's not an interesting question to me to think...I've been in lots of workshops like this. "Did you know you could double your fees?" Now, if I'm continually complaining that I can't make my business work and somebody helpful helps me understand I'm way undervaluing what I charge because of some untold story, that's massively valuable in terms of consulting, right?
There are plenty of advisors who need to charge more. Because we want them around, they need to build sustainable businesses. But in this case, I just think one interesting framing is just that idea of goodwill. But look, I think what a fun discussion because it opens up all sorts of, what's the story behind that gap for you? Why are you doing it? There's good reasons to do it. There's bad reasons to do it. There's your reason to do it. That's the most interesting thing here is not that there's an answer, but that it's a really interesting question.
Michael: Yeah, because for a lot of my very maximizing, optimizing advisor friends, I've had this conversation with a few, it just very quickly becomes like, "I guess I was underpricing, so I'm going to fix that and charge what the market says my services are worth. This is an 'easy' answer. Apparently, I underpriced, now I'll charge accordingly. And I'll reinvest my profitability as appropriate into expanding my business or services to my clients to value-add my way up. But who am I to deny that they say it's worth this? And apparently, I was wrong about my own values. So I'm going to update my inputs."
Carl: Totally. Nothing wrong with that. Cheers, Michael.
Michael: Well, thank you, Carl. Okay.
