Determining the value of your time as a financial advisor is crucial to setting an appropriate price for your services. After all, if you don't know what an hour of your time is worth, you won't know what you need to charge to reach your income or revenue goals for the business.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the thought process in how you should think about valuing your time as a professional - and the key mental shift from valuing your time based on what it's worth to you, to valuing your time based on what it's worth to your client instead.
In fact, the reality is that if you're really providing valuable services to your clients - especially if they have a significant income or net worth - the value to them could actually be significantly higher than how you price the time for yourself. In other words, you may unwittingly end out significant under-charging for your services by solely focusing on the value to you, instead of considering how much value you're really creating for the client.
Of course, the reality is that early on as a financial advisor, the goal may be just to get any clients and bring in any revenue. But as the business grows, recognize that at some point, viewing the value of what your time is worth to you may limit your own growth and success!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome everyone! Welcome to Office Hours with Michael Kitces!
For our topic today, I want to talk about this idea of time, the value of your time, and how you figure out what your time is worth.
Pricing The Value Of Your Time As A Financial Planner
When we look at this issue of the value of our time, I consider it on a couple of different levels.
Number one is just as a business owner, as an advisor, if you've got a personal goal of "I want to make a certain amount of money", there's only so much time in our day, there's only so much time that we can work. So ever getting to an income goal ultimately drives off of: 1) how many hours can you work; 2) what can you make per hour of time; and 3) how much do you want to make. That's the math. Time multiplied by dollar per time equals how much money you could make in a year.
I know of advisors that set their income targets for themselves by saying, "Here's how much I want to make. Here's how many hours I've got in my day to work. By the time you back out the time to run the business and a little bit of personal time and all the rest..." You can figure out how many workable, client-facing hours you can have in a year, and you back to the math to figure out how much it is that you ultimately are going to have to charge. For instance, if you want to make $150,000 a year and you figure, realistically, you could have 1,000 hours of time sitting across from a client, you better be billing $150 an hour for your time or the math isn't going to add up.
I wrote about this in an article a couple years ago, you can do this math to actually figure out what your time is valued at right now. The simplest way is to take how much money you made for the year, divide by 2,000 (which is roughly 50 weeks at 40 hours a week), and you can figure out how much money you're actually making collectively per hour of your time. For some people, I find it's surprisingly high, for some people, when they do that math, they find it surprisingly low.
I've used that for years as a mechanism to figure out what should I keep doing myself, and what should I delegate. If I've got a target for my time and I do the math, anything that doesn't come in at that number is something I need to delegate to someone else because if I'm valuing my time higher and I can pay them some smaller amount, I expand my business, I expand my income potential, I expand what I can do by delegating that task.
But I don't want to talk about this just in terms of setting our income goals. The point of the conversation is also about pricing for clients. Once we get to this income target, or this hourly target, I still know a lot of advisors (and we do a version of this internally), where when we want to set our pricing, particularly for something like doing a project financial plan, we might come to someone and say, "Well, my estimate is it's going to take about 20 hours to construct your plan. We bill at $150 an hour. So this plan's going to cost you $3,000." And we literally price out the value of a plan by saying, here's the value of my time, here's how much time it's going to take, price of time multiplied by the hours is how we price things out.
Refocusing The Value Of Your Time From You...To The Client
And here's the fundamental flaw with that approach - and this was a dramatic moment of realization for me - the problem with this is that it's all about valuing what your time is worth to you. Saying "my time is $150 an hour times this many hours is, here's what the price is..."
But the real way that we should be pricing our services, is not actually about how valuable it is to us, it's about how valuable it is to the client. What's the value for them of the service that you're providing?
Here's where it actually hit me. Ironically, the first time I had this realization for myself, it actually wasn't from the financial advising work I was doing with clients. It was from the speaking side of my business.
So the reality for the speaking business, it has a funky balance. You get up there on a podium, and talk for an hour, and you get paid for the day. The actual hour unit is a really nice income, even just when I was getting started. Early on, I was doing some writing and consulting and worked with clients, and I figured the value of my time was about $150 an hour, and then someone came along and said, "We'll pay you $1,000 to give a speech." I went, "Holy crap! That's awesome. I'm going to get paid $1,000 and I'm only up there on the podium for an hour!"
Now that was all well and good for the first couple of times I did speaking and then eventually, I realized, all right, this actually isn't quite such a good gig, because I've got to travel there, I've got to travel back, I can only get so much other work done during the day when I'm on the road traveling. So I might get paid a thousand bucks for the day, but I blow out a day or a day and a half's worth of time. So it's actually not really that great of a value, and that was one of the things that was the encouragement for me to realize: I needed to raise my speaking fees. I needed to at least get to the point where if I was going to lose an entire day that I couldn't really work because I was traveling for speaking, I needed to make a better value for that day. So when I targeted $150 an hour through the full span of a day, I said okay, I'm not quite making enough at $1,000, I need to raise it to $1,500.
And so I raised it there. And people kept saying yes. And my business was growing. And then I realized, for some of these events, I've got to travel the day before or the day after as well. I'm really losing a day and a half. I need to charge $2,000. And so I did that. And it was still basically all built around this concept I had in my head, that my time is worth $150 an hour.
And then I had a weird problem. Well, a nice problem to have. Business kept growing. People kept coming in and inquiring for more engagements. Eventually I was getting more speaking than I could handle. So I said, what the hell, I'm just going to start charging $3,000. And people said yes. "Oh cool, they're still saying yes at $3,000, why don't I try $4,000!" So I started charging $4,000. And people kept saying yes. And I started charging $5,000 and people kept saying yes.
And I had a weird problem the first time I tried to quote someone $5,000 for a speaking engagement. Because I still had this thing going on in my head: I'm going to stand on a podium for an hour and talk and someone's going to pay me $5,000. This is an insane payoff to time.
Realizing What Your Value Means to the Client
This started screwing with my head a little bit. I felt like I had to take every engagement. After all, how bonkers do you have to be to decline something when someone says "I'll give you $5,000 an hour"? It was amazing to me. I couldn't believe it. And I was really struggling with this: "Why does someone pay me $5,000 to stand up on a podium for an hour?" Because I didn't think I was all that amazing. I like to think I do some good stuff. But I'm not $5,000 an hour worth of brilliance. I couldn't accept that. There's a lot of other smarter people out there!
And the transition moment that I had, the way I had to rework my thinking to get over this, is to recognize that for the event that hires me, it's worth $5,000 for them. It's worth it for them because it's good content for them, which lets them take their entire conference, which might be 100 or 200 or 500 or 1000 people, and get those people to come back in the future. Because they received good content. My involvement might bring audience. For instance, with most of the FPA chapters' local events I go speak to, I'm often the biggest meeting they have all year. I get a good turnout, because the industry is familiar with the name. And so for them, they're willing to pay more because I bring audience in. I bring registrations, I bring sponsors. Other people come in.
The key point here is that I realized my value to them can be way more than just the per-unit time to me. Because they're leveraging the value that I bring in other ways: registration fees, sponsorships, good content, bringing people back in the future, providing them other services while they're at the event.
Your Value is More Than The Cost Of Your Time To You
So here is the takeaway: I was getting hung up on the pricing of what I was charging for my time because I was viewing it through my lens, and not through theirs. And I think that's a hang-up and a trap a lot of us get into. Where we start, but as you have some success, as you gain momentum in your business, and higher income, higher net worth people start engaging you and often paying you a higher price point, I find a lot of us start getting this hang-up where we start saying, but is the value of my time really worth it? We have what Carl Richards calls the "impostor syndrome" that crops up for some of us, where you start saying to yourself, "Am I really worth that? I like to think good about myself and that I'm worth a lot but really? Is my time really that valuable?"
And I think it's entirely a trap that we get caught up in ourselves, looking at the value of our time based on what it's worth to us and not the person we're actually delivering services to. But the value really is in the eye of the beholder! It's not about the value to you personally!
And this applies in the same manner to how we interact with and charge clients. Why do we charge the same 1% AUM fee to a $1 million client versus a $2 million client where it might not take us twice as much time to serve the $2 million client as the $1 million client? I think perhaps the answer to that question is as simple as: because for both of them, to them, it's worth 1% of their AUM to have someone oversee the other 99%. It's not about how many hours of time it takes for us, it's about how much value it is for them, whether that's in terms of their time, or something else. Maybe they're just content to say, "I am comforted by the peace of mind of paying 1% of my assets to make sure someone is overseeing the other 99%." They might not even be calculating it in terms of time. We do that time calculation to figure out our own personal productivity in business metrics. But that's not necessarily what the client is doing at the other end!
If you work with some folks that are higher income, they just may value their time differently altogether. For any of you out there that have ever worked with some folks that are at very high net worth, very high income levels, the kind of folks who might pay $300, $400, $500 an hour for services and not blink twice about it, the reason is pretty straightforward: because they value their time even higher than that, and if you can take a problem off their plate for "merely" $400 an hour when they value their time at $500 an hour, you're adding value to their business and their lives by letting them delegate to you, even if they're paying you more than you're accustomed to getting paid yourself.
What's The Value Of Your Time To Your Client?
So just think about that concept of how you price your services, and how you value your time. Because again - I've written about this in the past - but all these ways that we can figure out the value of our time by taking our available hours and dividing it by our income goals and figure out what our hourly rates should be and then start charging that. Or figuring out how much time it takes to work with clients, and multiply the time by your hourly rate, to figure out what you should price them at... I don't think that's a bad model. Frankly I lived that for a long time myself and it allowed me to grow my business. But ultimately I think you hit a wall with that. And the wall that you hit is that at some point you may find yourself working with people who value your time differently than how you value your time.
And the reality at the end of the day is that they're the ones that are paying the bill, not you. If they find it incredibly valuable to pay you the equivalent of $500 an hour to do what you do and they're happy with it because they feel it's valuable to them? That's not something I think you need to feel guilty about. That's not you ripping off some clients because they're paying you $500 an hour and you used to only bill $150 an hour. That's you delivering that much value. Frankly that should be you saying, "Wow, I need to find more clients like this who think this is my value because people who value me this way are willing to pay $500 an hour and people who I just bill my hours to only pay me $150 an hour!"
But recognize that dynamic, that the value of our time as a professional really ultimately at the end of the day shouldn't actually drive off of how we value our time. It should drive off of how the client values the time. Now certainly, you have to hit your goals as well. If you're working with clients who only value your time at $30 an hour, this may not hit the long-term goals that you've got. What that means is you're going to quote them things at $150 an hour and they're going to say no and you're not going to work together, which is fine.
So it's not necessarily about saying, I have to do whatever the client wants me to do, whatever price the clients wants to pay. But just recognize this transition, that ultimately it's not about the value of your time to you, it's about the value of your time to the client you're trying to serve. What do they value it at? Can you define that effectively? If you've got a good match, you're going to charge high prices - or what might feel high to you - and they're going to say yes, because it's not high to them, because it's worth the value to them.
So I'm curious for thoughts from some of you. A few of you have been adding comments as we've gone along. Does this resonate with you? Have any of you ever gotten the Carl Richards "imposter syndrome", maybe working with your biggest clients, saying to yourself, "I feel like I'm really valuable to this client, but I honestly still can't believe they actually pay me this much money to do what I do." I know at least offline, I've heard this from a couple of you out there. We get caught up in this feeling at some point. If you're having success, if your business is growing and you start saying, "I can't believe how much they actually pay me to do this work," especially if you like what you do, right? "I can't believe I get paid this well to do this work that I like to do!"
But just recognize the reason is, it's because of what the value is to them, not just what the value is to you. What the value is to you, I think, is the floor, it's the minimum. If the client can't at least value your time at this level, you don't want to work with them. But when you're trying to grow from there, recognize that at some point, it's really going to be about the value of your time to them, not the value of your time to you.
And of course, ironically, the reality of is that the further you move up the income and net worth scale, the larger the dollar amounts tend to get, and people with larger dollars tend to value time higher. Just that's how the math works for them. I think that's frankly one of the reasons why we see so many advisors creep up the income and net worth scale as they're more successful. Because that's where you transition from what's your time worth to you, to what's your time worth for the client. And the people with the larger dollar amounts value their time more highly, and that tends to float down who they're serving.
But in any event, I hope this is helpful for you as some food for thought. Maybe it's a new way to think about how you price your time, how you price your services, who you're trying to serve, and what you're doing for them. Don't think about it just in terms of how much time does it take me to deliver this. That should set the minimum charge you're going to make, because you don't want to go backwards on your personal growth. But ultimately it's not about what's your time worth to you, it's about what's your time worth to them and how can you add value to the client at whatever price point is meaningful for them, which may or may not have any relationship to how you value your time!
So I hope that's some helpful food for thought today. Thanks so much for hanging out with me. Office Hours with Michael Kitces, every Tuesday at 1 p.m. East Coast time. Have a great day, everyone!
So what do you think? How do you price the value of your time, and the cost of your services? Do you base it on what you consider to be the value of your time to you? Have you ever tried to consider how to target the value of your time from the client's perspective instead?
Sam W says
Is the audio to these Periscope sessions saved anywhere? I like listening to XYPN radio during my commute and would love to add your previously recommended Periscope sessions to my listening list.
Thanks and love your stuff!
Michael Kitces says
Not at this point, but we’ll be exploring it in the future.
We do post to YouTube though, so at worst you can queue up the YouTube video in an app and just listen audio-only? 🙂
Sam W says
Sounds great, thanks again for your awesome content!!!
Johanna Fox Turner says
Great post. What you are describing is similar to the values-based theory in The Firm of the Future by Paul Dunn and Ron Baker.
Michael Kitces says
I’m not familiar with the book Johanna. Good read I take it? 🙂
Johanna Fox Turner says
Given your wide spectrum on knowledge, I’m surprised you’re not. TFOTF was considered a breakthrough in CPA and legal firm billing thinking when it was first published. I believe one of the authors is in Australia, where this method has really taken off, and the other is in CA. It has been updated periodically through the years – recommend you take a look at it as it expands greatly on your train of thought. As I was reading your post, I was sure you had just read the book but apparently I was wrong!
Michael Kitces says
Looks like the book came out about 10 years ago. I’m presuming you think it still holds up well to today’s environment? 🙂
Johanna Fox Turner says
Absolutely. The problem is that such a high percentage of CPA and law firms are stuck in the way things have always been done. I’d go so far as to say I’ll buy it from you if you read it and find it irrelevant. This is about rethinking the whole mindset of firms that sell “billable hours”.
Steve Smith says
It’s really not about the value of “time” at all. Every engagement is like an annual retainer, regardless of how the fees are calculated. To the client, the question is over the course of a year – or a decade – am I getting good value (for the $5,000 per year or $50,000 per decade) for all the different stuff I get from my adviser? Not only that: it might take just 5 minutes of my time to deliver the most valuable, most important piece of advice in the course of that decade – don’t sell – and hours on end of wheel spinning time to deliver advice that turns out to be pretty ho hum.
“Price is never an issue, unless value is in question.” – Dan Sullivan. I suppose this can go both ways; the client’s perspective and our own perspective.
Scot Shier says
I struggle with the valuation issue, too. I think, as an industry, we are being forced in that direction. Like attorneys, there will be fees from $150/hr to $600/hr+. The drawback is that we lose a lot of the residual/passive income opportunity, and the leverage. Oh well, “times they are a changin’…”
Mike Branch, CFP says
I wish compliance people and regulators would see it this way. Thanks for this post.
Michael Kitces says
Joe Carbone says
Hi Michael, the impostor syndrome absolutely resonates with me! I struggle with that all of the time. I charge $225 per hour and what I found is clients/businesses have no problem paying you as long as you can show value and you seem to be fair and charge a fixed price when you can as opposed to open ended hourly billing.
That’s how Apple price their products. It’s not cost-plus but what is the maximum price I can charge for this “chunk of plastic”. 😉 Shane
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Tess Zigo says
This is right on! I think “value and hourly price” is dependent on the value you provide to clients-and that “value” is relative and based on perception of value.
I for example “value” the hour at my hair stylist at $50 to $100 because she does a great job. She undercharges at $20 for her time. I always give her an extra tip to make up the difference because she is worth it.
Clients value our time differently based on 1. Their income 2. Their perception of the value their receive from us 3. Their research on what financial advice should cost 4. Their overall “attitude” with money-some people are extra frugal and are accustomed to the lowest cost provider regardless of “value and benefits”. and other factors. It’s a fine balance.