There’s a well-circulated dollar amount that identifies the most successful advisors in the industry, but to be really successful, an advisor needs recurring assets under management and a clear understanding of when to stop pursuing bigger just for the sake of size, according to advisor Michael Kitces.
“Any particular definition of success is dependent on the particular individual and how they define what their aim and purpose is going to be,” said Kitces, an industry consultant, at last week’s Invest in Women conference in West Palm Beach, Fla. “But if you look at the industry, we have a definition for success, and that’s being the million-dollar producer.”
Not only is this arbitrary number a nice round milestone, he said, but the financial services industry is built to help advisors achieve it in a lot of different ways—ways that are now shifting and fundamentally changing the way advisors build their businesses.
Giving two examples with hints of with “build your own adventure,” Kitces contrasted the path of a highly successful insurance producer who earned over $1 million in commissions in a single year and ended up managing partner of the agency with that of a highly successful financial advisor who generates $1 million in AUM-based revenue annually and takes 83 days of vacation.
“These were both million-dollar producers by traditional industry definition, but their differences were radically different,” he said.
The insurance professional’s $1 million commission was one year only. The next year his commissions reset back to zero and he had to start finding new clients. The financial advisor’s revenue was ongoing from year to year as long as he kept his clients.
“I think this is actually the fundamental reason why consumers are flocking to the advisory model,” Kitces said. “Yes, some dynamics of standard of care do matter, but I think it’s actually much more fundamental. Clients notice when all your attention is focused on the next new clients instead of retaining them.”
Advisors have more options now than they’ve ever had in aligning their business with their own deep, personal needs, he said. There’s the Lifestyle Practice, where the advisor focuses on high-value clients and outsources a lot of support, the Small Giant, which requires building an ideal team to serve ideal clients, and the Enterprise, which requires big thinking.
What’s not clearly correlated to firm size is owner income, he said. The average solo practitioner may take home just under $200,000 a year, the owner of an ensemble practice over $300,000, the owner of an enterprise ensemble just under $500,000 and the owner of a super ensemble just under $600,000. But a top-performing solo practitioner will take home about $550,000, without all the other kinds of work that go along with big financial planning houses.
“Some of us are actually really excited to be financial planning business owners, and some of us are really excited to be financial planners and sit in a chair across from clients,” Kitces said. “The pain comes when we accidentally flip from one to the other and we didn’t want to and didn’t need to.”
The journey in the beginning is the same for everyone in the business, he said. Get clients, get revenue. Get someone to help with administrative tasks, then get a right-hand who can help with meeting prep and financial plan prep. Once an advisor is at the maximum capacity for what a three-person team can do, then it’s time to make the growth decision.
This is what Kitces calls the Capacity Crossroads.
The Capacity Crossroads
To help the audience see that growing bigger isn’t necessarily better, Kitces shared inspiring, if not a little unorthodox, stories of some of the choices that very successful advisors have made: One advisor, for example, built a very focused clientele of about 30 clients, with average revenue per client of $8,000.
“She has a ludicrously good take. She has no expenses whatsoever. She doesn’t even have an office,” he said. “She works about 20 to 30 hours a week, and does one or two client meetings a week. That’s comfortable for her.”
Another advisor prefers to spend his entire day talking with clients, and doing little else. His solo practice utilizes a back-office TAMP platform, and grew to over $1 billion in management with no other staff.
“He has about 250 clients, all multi-millionaires,” he said, admitting that this number far exceeds what most people can handle, but this advisor’s brain was wired with greater capacity for relationships. “All he does is talk to them, every day, because that’s what he liked doing. Everything else was outsourced so he didn’t have to worry about it or care.
Advisors in a solo practice do have a hard cap on the number of clients they can service, whether it’s because they can’t keep track of more or because they’re feeling overworked. And when they hit that wall, they have to be willing to stop taking additional clients. “Otherwise you’re going to violate your own capabilities and capacities and people aren’t going to be served well,” he said.
These firms can still grow, however, but it means the solo advisor has to become comfortable with letting go of the bottom 10% revenue-producing clients to make room for more in the top 10%—sort of a one-in, one-out policy.
And that is the business of the solo practitioner. A small team with the advisor at the center and maybe an administrative assistant, maybe an associate advisor. This is the first Capacity Crossroads, according to Kitces.
“This is where we have to make the decision whether to go multi-advisory. Because the moment we do, all of this changes,” he said. “You’re now on the growth multi-advisor wagon that you can’t get off of, or at least not without some very disruptive change.”
Multi-Advisor Firms
What separates the next-level practice, the Small Giant, from the solo practitioner? It’s more about a mission to serve a community than a desire to build something for one’s self, he said.
“Now the reality is that businesses that choose to be great instead of big often end up being big given enough time,” but they’re driven in a different way, where the focus is on culture, purpose, values, and how they give back to their communities.
An example of this, he said, is advisor Barry Glassman, which as of a couple of years ago had 250 clients, $1.5 billion in AUM and 11 core team members.
The firm website displays all the won awards—fastest growing advisors, top advisors—but it makes a point of highlighting the award that really matters to the firm: Best Places to Work.
“It’s about their culture, not their clients,” Kitces said. “When you take great care of your team, it turns out clients get very well taken care of, too.”
But for advisors who still want more, there’s the Enterprise business, where growth by any means is the focus.
And advisor in an Enterprise business might opt to take an interesting growth opportunity even if the firm is not yet built for that capacity, Kitces illustrated. To take the opportunity, the business would need to do a hiring wave, and perhaps bring on people with less experience. And even though the business may not have as much time to train them, they’ll still be put in front of clients, which could lead to a 5% increase in client attrition.
“But it’s a 22% growth opportunity minus the 5% increase in attrition, so that means you’re winning,” he said. “Now, if we’re a Small Giant mission-based firm, we can’t do something that would knowingly compromise the service for a single client. It would be unacceptable. It’s just a different frame.”
Know Thyself
In deciding what kind of firm is best for them, advisors need to know themselves and what they want to be, and they can’t do it be looking at what the industry deems to be successful, Kitces said. In general, the advisors who get platforms in the press or at conferences tend to be at enterprise firms. And a few people who are building boutiques.
“Which is a nice way of saying 90% of the people you see in the media are the people you don’t actually want to be. I think it’s become a fundamental problem in the industry and why I like to think about that definition of success, which is achieving your aim or purpose,” he said. “There are no wrong answers. All these options can be good. As I tried to show you earlier, you can make incredible money at any of them.”