When an advisor first opens their own firm, they are often eager to take on any willing client in order to generate enough revenue to ‘keep the lights on’. But after getting through the first few years of business, many find that the time they spend working with early clients hinders their ability to bring on new, more profitable, clients. This leaves the advisor with the option of hiring additional staff members to handle the growing client base (and perhaps taking on debt in the process) or of terminating the relationship with less profitable clients… both of which involve very difficult decisions for the advisor.
In our 82nd episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can ‘upgrade’ less profitable clients by referring them to other advisors, why they might need to overcome the scripts in their heads to achieve better growth, and how they can use different models to help underserved populations.
As a starting point, it’s important for advisors to recognize that, given the limited number of hours in the day, they cannot serve every potential client who might need help. While serving others is often one of the primary motivations of advisors, this must be balanced with the need to run a sustainable business (because if their firm goes out of business, the advisor wouldn’t be able to serve any clients!).
For advisors who want to continue serving at least some of their less profitable clients, one option is to set a fixed number of clients in this category. Another option is to set aside a certain number of hours each week to work with clients on a pro bono or low-cost basis. These strategies can help the advisor continue serving clients in need while also keeping enough time in their schedule to serve more profitable clients (and to keep themselves in business).
Clients who the advisor can no longer serve profitably can be ‘upgraded’ to a new advisor who can meet their needs profitably. While it can sometimes be difficult for advisors to move on from long-time clients (particularly those who were willing to work with the advisor when they were first starting out), it is important to recognize that these clients might actually get better service when referred out to a different advisor who specializes in their particular needs and who has the capacity to give them more attention.
Another option for advisors who want to grow their firm but have hit a capacity ‘wall’ is to consider hiring additional staff to help service their growing client base. In cases where the advisor’s current revenue might not initially support new hires, taking out a loan can be a viable option to cover the costs. And while taking on debt to pay employees could trigger an automatic script in the advisor’s mind that they are making a bad financial move, actually running the numbers can confirm whether this option (which would potentially allow the firm to bring in new and more-profitable clients) would result in greater overall profits in the long run!
Ultimately, the key point is that while the desire to help others is one of the primary motivating factors for many financial advisors, time constraints and the need to run a sustainable business often mean that advisors can’t always serve every potential client. But this doesn’t mean that advisors have to ‘fire’ every unprofitable client; instead, advisors can choose to continue serving some of these clients while referring others to advisors who might be a better fit, or else consider options that allow them to expand their capacity (such as hiring additional staff). Which can help advisors grow their firm profitably while at the same time ensuring that all of their clients receive the level of service they deserve!
***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 Stitcher.
- “How Entrepreneurs Can Increase Their Revenue Every Year” By Dan Sullivan
- Nick Murray
- How To Gracefully Let Go Of (“Fire”) Small Clients As A Financial Advisor
- Kitces & Carl Ep 57: Transitioning “Good” Clients Who Simply Can’t Be Served Profitably
- Kitces & Carl Ep 10: Transitioning Long-Standing Clients To Create Room To Grow
- Is It Wrong That Firing Difficult Clients Is Considered A Best Practice?
Kitces & Carl Podcast Transcript
Carl: Greetings, Michael.
Michael: Hello, Carl. How are you today?
Carl: I'm great. How are you?
Michael: I'm doing well. I'm doing well. I'm appreciating the thin blue line there...
Carl: The thin blue line.
Michael: No blue couch today, but we've got a blue line, and I'm assuming this is your art. This is not just a random blue line. This is...
Carl: Oh, no. Yeah. I've been selling those pieces on the interwebs, on Twitter as one of ones, and it's been super fun. So yeah, that's just one of them that hasn't been framed yet.
Michael: Wait, so you've amped up the blue couch into a blue line, and you're selling blue lines.
Carl: They're not all blue. I got to get a green. They're not all blue. I've got green, and red, and yellow, but this is a new phase of art that I've been working on for... And we won't make this show about this, just so that you don't think that listeners, but I've been working on this idea of trying to capture energy in single lines for a very long time. I love lines that tell stories, which should be obvious from the sketches, but the next wave of that, that I started working on probably 7 or 8 years ago is just kind of abstract drawings that capture. So, it's like a deep meditation, and then just "woo," one line. That's one example. You don't have to like it, Michael, but that's what...
Michael: It's blue, I love it.
Carl: Yeah, of course. Of course. We'll get...
Michael: I love it. I need a giant one put on the wall here.
Carl: A framed one right behind your head.
Michael: Yeah. It'll be like a blue halo.
Carl: Send me the measurements between those two spaces right behind there, and I'll make sure you get one.
Why Advisors Cannot Serve All Potential Clients [02:24]
Michael: Fantastic. I appreciate that one. So, for today's discussion, I wanted to dig into a conversation I had recently with an advisor that just... I hear this come up a lot. I'm sure you have as well. So here's the basic gist. As an advisor, call him John. So what John had said was, "I feel like I've hit a wall. I've gotten to a good point where I've got enough clients. I survived the early years, I've got enough clients, but I've got so many clients that, basically, just all I can do is react to clients, and do the service work for clients, but it doesn't add up to enough to hire someone. I'm doing okay for myself, but I wouldn't be doing okay if I hired another full-time person.
So I'm sort of stuck, too many clients to service in order to grow, but not enough revenue to hire the person to get me unstuck. So he said, "What do I do?" I said, "Well, look, if you want to get to this generic practice management, advice perspective, here's basically what I do. So, take your total revenue, divide it by your total clients. So this is now your average revenue per client. From now on, you're not allowed to take on anybody unless they're above that line.
And every time you take someone on who's above the line, you need to let a client go who's below the line, who, by definition, is limiting your capacity, and your ability to grow because they pay below-average fees that you can't scale with. And so, if you do this for a little while, over time, you will have the same client load because we're doing one on, one off. So you're going to have the same client load if you're really drowning to one on, two off, but you're going to do one on, one off. You only take people above the line. You always let go of people below the line, and in 6 or 12 or 18 months, however quick you're bringing clients in, you're going to get to the point where same client load, but you can now actually afford to hire someone, and you can get unstuck and move forward. To which John replied, "But Michael...
Carl: I think I know the reply.
Michael: "But Michael, I'm a teacher who came into financial planning. I do this to help people. I'm not comfortable letting go of these clients."
Carl: Which by the way is relatively common, and in no way, do I want to make fun of it...
Michael: Incredibly common. I mean just...
Carl: Honorable answer.
Michael: Yeah. We're doing fresh research just around this in some of our Kitces Research. But every time we do the study, the same thing shows up. The number one, absolutely dominant, driving motivation for financial advisors is, "I want to help and serve people." Not income potential and upside and performance-based pay, and all the things that frankly, I find a lot of advisory firms like to market. It’s to help people. Right. So I get it. My practice management advice is stop helping some people, which doesn't feel good when you got into it to help people, but John's stuck.
Carl: Right. And John asked?
Michael: And John asked. John's stuck, and I think feeling some pain, and I don't think that's unique to John, right? Just for a lot of advisors. The first few years are horrible. First few years are horrible for everyone. Somewhere like three, four, five years in, it's like, "Okay, I'm going to make it. The dollars are adding up decently. I'm getting close to what I used to make my whole job. It's getting okay." Then you go a few more years and whack, you hit this capacity wall, where I got all the clients that I have the time to serve. And for some advisors, they manage to attract affluent enough clients. They could say, "I'm going to hire someone." Take one step back to take two steps forward, but it's okay, I've got enough revenue to do it. But some folks get into situations like John, with so many clients, that it's hard to find the time to grow. And even if they did, it's kind of scary because they already feel like they're drowning. So I don't really want to grow because I have too many clients to handle without crushing myself. I don't know how to keep growing. I don't know how to move forward. It doesn't feel good because I'm working really hard, and I'm making no momentum anymore.
But if my choice is like that, or kick people to the curb, and obviously, I don't think we view it that way, but that's the script that runs in our head. Take people who needed our help, who took a chance with us early on when we were just starting out, and kick them to the curb, now that we're too big for our britches, right? These are the scripts that run in our head, and we get stuck. So now I'm stuck between a rock and a hard place, which is, I can be unhappy in my business or I can be a terrible person. So, how do we unstuck this?
How To Overcome The Fear Of ‘Firing’ Clients [07:47]
Carl: I think, the approach that you outlined is the common, right? You...
Michael: What's the nerdy spreadsheet answer? You could literally calculate it on a spreadsheet.
Carl: Yeah. It's exactly right. You just slowly upgrade, and there are some other answers too, right? You could get more efficient, you could start getting more clear. Let's pretend you don't want to fire anybody. You could start saying...
Michael: You don't have to pretend, you just actually don't want to fire anybody.
Carl: Yeah. You don't want to get rid of any clients. You want to keep the current clients, but you want to bring on some new ones, you could just implement half of your rule, which is you only bring on... I love Dan Sullivan's, “the biggest check”, or I think he calls it the “largest check” that every new project has to be bigger than your last one. And what did Nick Murray used to say with your suits? You had to get rid of 20% of your suits every year. And the new suit had to be 10% more expensive than the last one. And, again, I'm not advocating any of that stuff...
Michael: Well, I have really failed that one, but okay.
Carl: Me too, but the math is very similar, right? You could say, "I'm not going to get rid of anyone, but every new client has to be equal to my top 10% instead of my average." And then figure out ways to get more efficient, and more efficient could be instead of thinking, “I have to hire a whole person at once”, I can afford to start outsourcing little bits and getting more efficient. One of my friends, he is an ER doctor. He was my neighbor and my friend, and we climbed a lot together. We skied a lot together, and I got hurt once. And he took me into the ER through the back door, and he sewed me up on his kitchen table once. But this one required, we had to actually go to the ER.
When we went in, everybody was so happy he was there. Whatever, I'll just call him doctor. He was walking through, the admin staff, the nurses, the other doctors were like, "Doctor, doctor"! They'd give him high-fives. And I was like, "Man, what's that all about"? And he said, "Things get stressful around here when they get backed up, and I get things moving". He actually used a relatively crass phrase. He said, "I move the meat." And it just sounds kind of crass in an ER, but I don't want things to get backed up. And I was like, "Well, how do you do that?" He said, "I only do what only a doctor can do". And he gave me examples of like, my partners will call the primary care physician because they have a question, and they think it's only going to take two minutes to get the primary care physician on the phone.
And even if it did only take two minutes, somebody else can call the primary care physician, and get that information. The doctor doesn't have to do that, and it ends up taking 20 minutes. That's an example of, you can get in that mindset and say, "Okay, how much could I clean up so that I could not get rid of anybody, and afford to bring on some higher-end clients"? Maybe I can do that through outsourcing. And it's pretty shocking how much you can delete, and delegate because delete, delegate, do, right? It's pretty shocking how much you can delete, delegate, do. So that would be one way, right? We've talked about that before. Just being more efficient, you are the way you outlined, right?
Michael: But how do you get comfortable with it? I mean, I don't think John's question at the end of the day was literally, "How do I grow"? The answer is fairly straightforward. Get a few more people who pay you more. I don't think that's really what the blocking point was. He's a sharp guy. It really comes down, to me at least, I think it comes down to the scripts in our head about why we can't do that.
Carl: Well, I think there are different scripts though. Let me just introduce one other idea. If the current business is profitable, then the other idea would be, well, John, if you can't afford it, if you've got an opportunity to borrow some money, borrow a dollar so you could make two because you're convinced that you got to have X to hire someone instead of splitting X up into fractional like we just talked about. Then, every other business I know, like dentists, you better believe they borrow money to grow their practice. That's a good use of leverage. I'm not suggesting it necessarily. I'm just saying that would be another option.
Michael: If you've otherwise, at least got some folks coming in, maybe there is some growth you just don't have the time to take them or handle them.
Carl: And you really don't want to get rid of anybody.
Michael: Then borrow money to hire the person, to increase the capacity, to generate the revenue and profit, to pay off the loan.
Carl: That's another spreadsheet, I believe. Right, Michael? You could build that spreadsheet that would tell you if that's a good idea. So we've got a couple of different ideas, right? One is, one for one, get rid of somebody. Another one is get more efficient. A third one could be almost a hybrid of those, borrow a little bit of money. All of them come with scripts because that's the reality of this.
Michael: You triggered someone's debt script as soon as you said borrow money.
Carl: Oh, yeah. The word that you think you are using does not mean what I think you think it means, whatever that Princess Bride thing is. It's not about that. It's about the scripts. So, should we talk about those a little bit?
Making The Switch By ‘Upgrading’ Less-Profitable Clients [13:29]
Carl: Because the one you outlined is so classic, of course, you don't want to do that. No, no. You can't kick someone to the curb who's supported when you were just a little struggling tyke, and now you're too big for their britches. Of course, you would never do that.
Michael: All right. So how do you flip that script?
Carl: Yeah. If that script is playing in your head, of course. So how do you flip it? How have you seen it flip? I can give you a couple of ideas of how I've seen it, but how have you seen it flipped?
Michael: So, I've seen this flipped a couple of ways. One is, look, let's be honest. The smallest clients do tend to get less service, right? It's the difference between when your biggest client calls, you call them back right away, when your smallest client calls like, "I'll get back to it." Because I feel the moral obligation, and not kick them to the curb, and I'm trying to be a reasonable human being, but probably not the fastest phone call that I respond to because there's some other stuff going on, and just getting honest about that. What that often comes down to me, and we've said it on this podcast before, your C client is still someone else's A client. And your A client is someone else's C client. So, let's be fair here.
Some of those clients that are below the line for you would actually get better service from someone else. I'm not trying to knock John, or anyone else, just, it's how our brains work. It's how a service business works. You always have to make some real-time decisions about triaging. Who's getting the fastest response, particularly, if you're at capacity, as John was describing, somewhere out there, there's an advisor who is in a different place, a different age, a different stage. And that would still be a great client for them as it, apparently, was for John back in John's early days. So, maybe it puts a little bit of work on you because you have to find that person, but find that person, for whom that would be a great client, for whom that might even be a positive service for them. And, I get it. You don't necessarily also want to send revenue out the door, so you can still pair this with the one on, one off. When you get one on, you don't kick them to the curb. You literally find someone who will serve them better than you.
Carl: Right. Right. It's an upgrade.
Michael: It's an upgrade for them. And I feel like it's hard for us because we've seen how many horrible advisors are out there, right? We all see it when clients come in, the bad things that a lot of other advisors do or advisor, air quotes, do. So, you don't have to send them out into the wilderness and make them find their own, find it for them. Find someone that you're so confident will be good that you actually feel good. I found a great advisor for whom you would be a great client. She's literally going to serve you better than I do because of where I am at the stage of my business. And so, I'm going to connect you with her so that you get better advice from her. And it turns out that advisor who is a great and up and comer, but doesn't have a lot of clients yet, and might not even survive the business, if it wasn't for the fact that you gave her some clients that were not a great fit for you, but were A clients for her, and get her to stay in the long run, right? Just we can see some next generation of advisors, again, with clients like, "Look, I had to get rid of you anyways because I'm already at capacity." So I'm doing a one on one-off. We've done some prior articles about just literally how to have the conversation. We’ll link them in the show notes.
Carl: Yeah. I think that's really valuable. I remember, I think I may have shared this before, but when I went to sell my firm in 2012, John Bowen told me, "The greatest disappointment of your career is going to be when you go to sell your firm and nobody cries but you." Because I was so convinced through conversations with him...
Michael: They all want me, they love me.
Carl: They'll never. They'll never. And they literally, to this day, whatever, what is it? Ten years later. To this day, I still know plenty of those clients. I see them. Some of them are my friends, before they were clients or because they were clients, whatever. I still see them, and they tell me, "So and so, the advisor that took over for me is so great. So amazing". I would've been a disaster the last 10 years, you know what I mean? So, I think that's really actually true.
Michael: But just flipping the script from, I'm not kicking them in the curb, I'm giving them an upgrade, right? I just see it's hard because then we have to admit to ourselves, maybe I'm not actually the best advisor for every human being I've ever met. Yeah. I mean, just we're human. We're limited. Be awesome for who you're most awesome at, let someone else be awesome for the people you're not as awesome for. It's okay.
Carl: Yeah. And we went through all that language in the prior episode, I'm sure. But this is about just really clarifying that script in your head that these aren't just stories... I mean, it's fine if it's just a story, but you've got to believe it, or else it just feels like, "Oh that's a cute little way to get myself out of kicking people to the curb." No, it's actually true. Find the clients, and I'm focusing on a different specialization, I'm moving, whatever it is that you're doing, that means that those clients would be better served by somebody else. It doesn't have to be because they're small, and so that's one way of thinking about it. Let's talk real quickly about the debt script.
Overcoming The Debt Script As A Service Provider [19:15]
Carl: It's pretty funny. Huh?
Michael: I didn't know you were going to go there, but sure.
Carl: Well I just think it's pretty funny how instantaneously evil, we think that idea is, irresponsible, right?
Michael: You would borrow clients when you don't have the revenue yet? Carl, what are you smoking?
Carl: Yeah. I've had so many conversations lately with people who are like, "Well, yeah. That's called growth capital".
Michael: No, we're financial advisors. The only debt we like is mortgage debt that we use to invest in stocks because it's arbitrage.
Carl: That's exactly right. But yeah, I think it's just so interesting the script that we play in our head is immediately irresponsible. And yet, if you look at any of your clients who are business owners, the responsible use, reasonable use…and I'm not advocating irresponsible use of debt, of course, not. And I'm not even advocating doing this, to be honest, but I've got people throwing money at us right now. I get four phone calls a day, because I have gotten some list about how I could borrow $400,000 for the company, for growth capital, and we don't need it. And we keep saying no, no, no, no, no, because we don't need it. But if I was John, and I was sitting there thinking I could borrow Small Business Administration money at X, whatever X is, it's pretty low.
If you went to a normal, like go to a venture capitalist friend of yours, go to somebody who consults for dentists, go to any of those people, and show them your financials. Look, I've got people coming in the door like crazy, I just can't afford to service them because I don't want to hire somebody. And you would get, I don't know. I mean, depending on what the financial situation is, and all those things, but I would imagine you'd get 8 out of 10 people saying, "Well, why wouldn't you borrow money to grow that?" So that's just a script. And again, I'm not suggesting it. I'm just simply... See even that, that's part of my script. Oh no, somebody might borrow money, and...
Michael: It's your fault, Carl. You put someone in debt.
Carl: And especially given my history with debt, right? Very public history with making a mistake. I borrowed money at one point to grow a business, and it didn't go well, right? So, I know that. And I'm just telling you, dentists don't think that way. Doctors don't think that way. Many other service providers don't think that way.
How To Approach ‘Helper’ Client Situations [21:50]
Michael: And to me just the third option for all of this is just, look, if you want to have some clients that you help... and we'll call them helper clients because I hate the able accommodation clients. You want to have some helper clients, that's fine, but just put some limits to it. Define some limits for yourself. You know what? You don't have to get rid of all the small clients, but only keep 12, or 6, or 10, or 3, or whatever your number is. Have a limited number, give yourself permission for a limited number, but not an unlimited number that eventually becomes so many that it comes up to practice, and you lose your capacity, and you're drowning in the service work, and you just get stuck in John's situation. So, put a limit around it.
Maybe a little bit harder if you've already passed the limit. But even then you could say, "Look, I'm not getting rid of all them. I just got to get it down to this number." There's certainly some number of clients that we could reasonably handle on a helper basis, in a way that's not profitable because it's contributing to the world, and doing good in the world, even if it's not about the income of the business, fine. But if you're doing so many of those that you're stuck, that's not healthy anymore. If you've got a limit to it, and you know what the limit is, and you know you can do that sustainably with the business, awesome. Then do more good for not money balanced with the good you do for with money. So, maybe they're pro-bono clients, maybe they're helper clients who are just a much lower fee or can't afford to pay more. But just set some limits for yourself, honor those limits. You don't have to make the limit zero. Just make it, not anyone.
Carl: Right. What I like most about that though, is just the recognition of what you're doing by a title. Whatever you want to call it, helper clients that was what one of my buddies... I remember trying to figure this out myself. And there was somebody in my neighborhood. We went to the same church, who was at a really large firm, which may have the initials G and S and they had...and I always wondered because we went to the same church, and he would get asked by the same people I would get asked, and they would be way below his minimum. They had a tax at that firm, that if you were below a certain minimum, it actually cost you money to have the client. And I asked him, "How do you say no?"
Because the same people that were asking me, and I was saying yes to, he was saying no to, and he said, "It's just not what I do.” And we talked about this, I think in the last episode about this. It's like feeling bad if somebody needs an operation on their shoulder and you're an ankle doctor. But what he said was, "So I separate..." Yeah. This is the point, "I separate, that work is called pro-bono work. And if that's what I want to spend my time doing instead of coaching a youth soccer team, or volunteering at the shelter, then I do that, and I will pay that tax." And the other thing I'd like to say about that group is, not only do you limit the number but get really honest about the service.
Just get really honest about, does this client really need this? Do I really need to meet with them? The problem is, you've got to realize you're already providing 10 times better experience than they're going to get anywhere else. And you're feeling bad about it.
Models For Serving ‘Helper’ Clients [25:35]
Michael: Well, and I knew an advisor named Katie who did a version of this, but her thing wasn't like I'm going to have 6 clients or 12 clients or whatever it is. Her thing was four hours a month. It was two, two-hour blocks. I think she did them on Friday afternoons. And just anybody could come in for hourly work. It was at a lower hourly rate, kind of targeted to help her clients. That was it. So she didn't take them as ongoing clients. I don't think she even gave the two-hour block. I think it was two, one-hour blocks. So she could do four clients a month that way. But just look, come on in. This is how you sign up. We do this to help folks in the community.
I think she charged something because she wanted them to have some skin in the game, but very nominal. And ultimately, she ended up going through 100, 150 plus people in a few years by doing this because she wouldn't even take a client at a seat on a bus. It's like, whatever, it's 5, 10, 20 hours for the year for all the client stuff. She's like, "No, no, no. My helper slots are down to one-hour slots, so I can literally help far more people." Right, because let's be honest. The biggest impact is often just the first hour of advice to get them on a better path, every hour after that is a little bit of diminishing returns. So she's like, "I want to spend the hour that can most change their trajectory, and then we move on." Because I can't serve on ongoing basis, these are my helper clients. These are not my core clients. But I can help the most people since this was scratching her, like I-want-to-help-the-world itch. I can help the most people by putting time limits. So, I can literally help more people than having a few helper clients that fill an entire permanent slot on the bus, because I thought it was a cool way to handle it and set it up that she'd put in place. Because she just got to like, "Well, I guess, if I really want to help people, this is how I help more of them.
Carl: Yeah. We've been seeing more and more of those models. I've seen office-hour models, which I think are super cool. I've seen subscription, like group-coaching models where, instead of being $250 a month, it's $7 a month, and you get access to this whole library of questions I've already answered plus one-hour long Q&A a month. I think there's lots of ways to scale that kind of help.
Michael: Yeah. So maybe that'll even be a future episode for us, but just that thought like, "Look, if you want to leave some...” It's not even client's slots, anyway, it's time. Right. As your friend had put it, where do I want to spend my pro-bono time? If you want to allocate some pro-bono time to help the world with advice, that's awesome. But if you're doing that, and you're doing that to help more people, what does it look like if you then go to the even more of extreme of like, "Okay, you really want to allocate that pro-bono time to help people?" How do you really amp up the amount of good that you're doing in that time? If that's your drive.
Carl: Yeah. Amazing, and I think maybe for me the takeaway from this, at least for me personally is, it's so interesting what scripts are in planner heads. Chances are the question you're asking is not really the question that needs to be asked.
Michael: So hopefully, it's helpful for some people at least in trying out a few different scripts in their head.
Carl: For sure. Thanks, Michael.
Michael: Awesome. Thank you, Carl.