Will McKenna:                 Hello, and welcome to the Capital Group webinar series. I'm your host, Will McKenna. I wanna thank everybody for joining us today. It's really great to be with you. And I'm really excited. I think we're all in for a real treat today because we have Michael Kitces joining the program.

And Michael's gonna deliver a presentation that he's been sharing with RIAs and advisers around the country to help you figure out the right business model for you and your client. And he's got some really eye-opening research on different adviser models and the relative trade-offs in terms of things like revenues and lifestyle. And that's all in the spirit of trying to help you figure out the best approach for you and of course the best approach for providing outstanding service to your client. So very excited for this event.

                              Uh, before I introduce Michael, let me cover a couple of housekeeping details. You know, if you click on the docs, as in documents tab on the right-hand side of your screen there, you're gonna find everything you need, including the slides for this event. I saw some questions come, come in about slides. And if you click on the Q&A tab, that's where you'll be able to type in your questions. And after Michael's presentation, we're gonna set aside a little time for Q&A. So feel free to enter your questions at any point while Michael is delivering his presentation. We'll gather those for the Q&A. And, and if we don't get to your question, of course follow up with your Capital Group team, uh, to dig into more detail. If you do have any tech problems, let us know in that same Q&A window. With all that, let me introduce Michael.

And of course many of you know him already, but Michael Kitces calls himself the chief financial planning nerd for kitces.com. And he's publisher of the financial adviser blog, Nerd's Eye View, which has upwards of 60,000 subscribers and growing.

And he's the host of the Financial Advisers Success podcast. If you're not following that, you go, go do that after this event. Um, and of course, uh, all in the spirit of making advisers better, helping them master their craft and become more successful.

                              Michael has 20 years of experience as an adviser himself, so he knows what it's like to sit in your chair. And he's spoken at over 700 events for financial advisers, including this one. Uh, and in his abundant free time, Michael is also an entrepreneur. He's a co-founder of XY Planning Network, and fpPathfinder, New Planner Recruiting, an adviser tech firm called AdvicePay, and, and he's also head of planning strategy at Buckingham Wealth Partners. So, Michael, many thanks for joining us. I'm gonna exit stage left and turn this over to you.

Michael Kitces:                 Awesome. Appreciate it, Will. Appreciate the opportunity to join all of you today. And, uh, apologies for my strange bandage. Have a little cut and, you know, obviously a cut and stitches, so you get a little bit of a bandage here. But appreciate all of you joining today and the opportunity to talk about what it really looks like, how it shows up as we start to build and scale our advisory firms.

Uh, I find most of us say, uh, you know, it would be great to grow it and make it bigger. As financial advisers, we are, uh, very goal-oriented, I think by nature of, of what we do. You know, we help clients, uh, uh, set and achieve their goals. We often like to set and achieve our own goals. But there is some ... I would say like there's some baggage that comes with what happens as we grow advisory firms larger and it creates some choices about how we try to grow advisory firms larger. And that's really what I wanna focus the conversation on today. Because we all do this with some kind of end in mind that we're trying to achieve, uh, you know, some definition of success that we have.

                              Now, if you literally look up the definition of success, uh, in, in the dictionary, you get something to this effect, success is the accomplishment of an aim or purpose. And one of the things I find interesting about the, I guess the, the technical definition of success is that you can't actually define it without defining your aim or purpose, right? There is a sense of this definition of success that means success is to some extent in the eye of the beholder, because we all may have different aims or purposes that we're going to try to achieve with our careers, with our businesses, with what we do. And so to kick this off, I'd actually like to hear from all of you what your definitions of success look like, what that word success means to you. So, uh, you should see on your screen here, uh, an opportunity to participate. There's either a QR code in the upper left if you're so inclined. If you're on a desktop and you can't scan, uh, you can just go to slido.com and enter the code, kitcescg, uh, for Capital Group 2024. And, uh, if your technology is working, all willing, uh, you should see this question popping up and an opportunity to answer for yourself what does this word success actually mean to you? How do you define it in the context of your advisory firm?

                              So I see a couple of responses starting to come in. Ideally answer your own before you look at everyone else's, just so we don't (laughs), we don't influence ourselves, 'cause the whole point is like what is your definition of success, not do you happen to share the definition of success that everybody else, uh, uh, has at the same time, although we do often see commonalities as we go through this. So I see some words starting to come in. Accomplishment, peace of mind, efficiency, comfort. So, uh, uh, our handy technology here tries to, uh, uh, uh size the words by their frequency of what's occurring, so I can see a couple that are cropping up more often than others. Freedom, being the big one in the middle. Flexibility is a close second here and, and I think very much fits in the same domain, right? We get, uh, freedom from flexibility. Flexibility gives us freedom. I see fulfillment and accomplishment of goals cropping up again. Many of us like to, uh, really target a goal and achieve the goal, and it feels good to fulfill and nail and achieve our goals.

                              So you can see a little bit more of what's coming in here. Now, one of the interesting things that I find ... I've done this with, uh, literally now thousands and thousands of advisers across the country ... is that, you know, our industry has a certain traditional definition of success around it, right? It's even embodied by, uh, organizations like MDRT, y- $1 million, $1 million of revenue, $1 million of producer.

I find a lot of advisory firms still like to talk about how they can get their revenue, their practice, their client base up to $1 million. Even large-scale firms often look like how can we get to $1 million per adviser? Now, the interesting thing that I find is, as all of you just saw in your, in your responses, literally no one wrote $1 million producer. In fact, no one even wrote a number as a definition of their success. We mostly write about the things that, that the money can buy or achieve or help to accomplish, right? Freedom, fulfillment, flexibility.

                              The dollars become kind of a, a, a means to some other end, even though the industry typically defines it by the dollars themselves. Now, the interesting thing is even in the context of $1 million producer, there are a lot of ways to get there.

So, uh, the gentleman you're seeing here, uh, his name is Jack Matthews. So Jack was a 30-year career agent at New England Life Insurance. He started out selling life insurance door-to-door back in the 1960s, early 1970s. And Jack was to this day one of the best natural-born salesmen that I have ever met. Uh, back in the mid-1990s, he actually won Agent of the Year by doing more than $1 million of commissions in a single year. And this was back in the 1990s when that was like a really, really big amount of production. And, and as a reward for his, uh, success of being Agent of the Year in the company, he had an opportunity to become the managing partner of the local agency, which was where I met him. Jack was my first boss when I came into the industry because I started at New England Life.

                              Now, the interesting phenomenon about Jack and the experience of everybody else that was at New England Life at the time was that there was some incredibly successful advisers doing what they did, trying to become and achieving the, the milestone of $1 million producers. And then at the end of every year it started over, right? That's kinda the nature of the commission business. We're so appreciative of what you did last year. Here's an award to recognize it. Now you're back at zero. Get out there. Go find some people to talk to. Go create some opportunities for yourself. Now, for many of us, this is what we've done in the business so long that just like, well, yeah, that's how, that's how the business works. Like you go get clients. Financial planning is about sales and business developments, what a lot of us say. But that's not quite always the standard model. So I contrast this with Matthew Jarvis. Uh, we had Matthew out on our podcast to tell his story, uh, now about seven or eight years ago. He's since launched his own, uh, podcast called The Perfect RIA, talking about his progression.

                              So Matthew spent the better part of 10 years building his advisory firm up to the point where it too was $1 million practice, was generating $1 million of revenue. Matthew was on the AUM model, so this is classically getting to a hundred million of AUM at a 1% fee. Now, the interesting phenomenon around Matthew's practice is that because he built on an assets under management model and accumulated up to $100 million, there comes a point where you wake up on January 1st and you have clients with $100 million, which means a- all you have to do [inaudible 00:10:15] which all you have to do is provide amazing service to retain those clients and hold on to them. And there's $1 million every year without one iota of sales effort. And in fact, when Matthew had first joined us, uh, to, to tell the story, the thing he noted that was most, uh, significant was he was up to 83 days of vacation the preceding year, not just like vacation including holidays and weekends. Like 83 work days of vacation. In fact, he was very comfortable at the time with where the practice was generating $1 million more than enough to, uh, feed his family, put his kids through college and be able to retire.

                              And so he wasn't even particularly focused on trying to grow the practice anymore. His goal was how efficient can I make the practice to get more days of vacation freedom without compromising on client service and maintaining my revenue? And he had been building it over time, and he got 30 days of vacation. He got 50 days of vacation. He got 70 days of vacation. He got to 83 days of vacation. Now, the interesting thing to me, relative to, again, our, our traditional industry definitions, these were both $1 million producers.

They both showed up with $1 million of revenue in a traditional GDC context, but the actual nature of their practices was very, very fundamentally different because Jack's commission-based model had this challenge. It starts over every year, not completely maybe 'cause we get a little bit of trails, but almost all of his revenue started over every year, and so success was all about getting new clients and like maybe seeing your existing clients 'cause you can have an opportunity to do a new sale with them. It's been a couple of years. Their needs may have changed.

                              Whereas running advisory fee models are fundamentally different. Every year adds to the prior year. And so now we don't necessarily succeed by going getting new clients. There comes a point where the primary way that we succeed is by retaining our existing clients, and then maybe we get a few more along the way. In fact, we serve the existing ones well enough. A couple of referrals tends to knock us up to the, upside the head every year. And a lot of advisory firms can maintain 5% to 10% organic growth rates just, just from the passive referrals from serving their existing clients well. And so I'm not just trying to highlight this from the industry's debate around commissions versus fees and conflicts of interest and, and standards of care. That's a whole conversation for another day.

                              To me, there's a much more fundamental distinction that occurs as our business models shift, which is how the focus of the business self begins to shift from I only survive by finding the next new client to I primarily survive by serving my existing ones well and what that does to the business itself, because when we run advisory fee models where we have the incentives to serve our clients well and maintain very high retention rates, there's almost a sheer inevitability that our clients accumulate over time. We add far more than we sub- subtract, and so they begin to grow.

If we look at this relative to industry benchmarking studies, if I look at the [inaudible 00:13:22] studies over the years, if I go back 20 plus years ago, like in 2000, the average RIA was like $18 million and an assistant. By 2007 it was about $100 million with a staff of three to five. By a couple of years ago we were getting up to about $180 million with a staff of six to nine. It's a 10X growth cycle in where the typical advisory firm was on the independent end because clients accrue. We just keep accreting more and more clients, and if you take in more than you subtract and you allow time to pass, the firms just inevitably grow larger and larger.

               And so I ... we find this distinction. If I look at how commission-based businesses typically grew historically, it looks something like this. In the, in the first few years we work our tails off trying to figure out just how to sell, how to prospect, how to get clients in the door. I started with variable universal life and disability insurance. You may start with something different, depending on the channel you're in. Eventually you hit a point where you're getting pretty good at that, you've got your core client, uh, uh, target client you work with. You're pretty good at selling the thing to them. And it just starts to get into like a wash, repeat, rinse, uh, wash, rinse, repeat cycle. Uh, we accumulate a little bit of 12b-1 fees or trails over time while we continue to sell, and, and income ... total income's slowly grows. Now, when we look at how this shows up for advisory firms, it's fundamentally different.

                              The irony is it's actually much, much worse in the beginning years. At least when I started out, if I could get a $100 thousand client, which 25 years ago was a pretty sweet rollover, if I could get a $100 thousand client to put, uh, all $100 thousand into, uh, Growth Fund of America, actually at the time ... Uh, that was where I started ... I might get a $5,000 a share commission. Minus my grid payout, and like that's gonna show up in my bank account in two or three weeks. If I got the same $100 thousand client and I put them into an advisory account, instead of getting a five grand a share commission in a couple of weeks, I get 250 bucks three months from now because that's one quarter of my annual 1% fee billed on the first quarterly basis a couple of months from now when the first quarterly fee hits. It's really quite brutal. Advisory businesses are really, really rough to grow at the beginning. And what we often find in our data, it takes advisers anywhere from about five to 10 years ...

Michael Kitces:                 ... to grow an advisory firm to the point that they would have been if they had just been doing commission structures that were a little bit more front-end loaded. But then eventually, somewhere around year seven, give or take a little, there, there tends to be a crossover. And then the advisory firm just keeps compounded. Because we keep adding more clients, we make up a January 1st, and we've got more of a base, and we're getting referrals, which we tend to get more of because we're incentivized to serve our clients very, very well, so then they tend to refer us, 'cause they being served so well.

                              And suddenly when we look out 15 plus years later, we see advisory firms that are 2X, 3X, 4X the size of the typical commission-based firm. And as this trend has played out, we've only seen it expand in the advisory industry today, which is why we see some of the early founders of RIAs now running firms with billions, tens of billions. A few have gotten to hundreds of billions of dollars. And the top sales producer is not dramatically different than the top sales producer 20 years ago, because there's just literally only so many new clients you can meet with and do transactions with in any particular year.

                              Now, these days, we're seeing this writ large across the entire, uh, independent channel. Not just RIAs but broker dealers themselves that have increasingly become, uh, dual registrants, and engaged in this trend.

So, the chart you're looking at here is the revenue from the top 50 broker dealers from the late '00s to late 20-teens. The yellow line is the amount of revenue they generate from commissions, and the blue line is from fees. And actually, about six or seven years ago, we hit a crossover, where even the top 50 broker dealers generate more revenue from fees than they do from commissions. Which I just find fascinating, 'cause, like, the legal purpose of a broker dealer is to facilitate the sale of securities products for a commission.

                              And even the top 50 broker dealers have not been in, primarily in the commission-based business for almost a decade now. They're primarily advisory fee platforms that have legacy brokerage business that has not wound down yet.

Now, my goal with you today is not necessarily to talk about, is, like, the comparison of compensation models and how they build businesses, like, kind of by definition of who joined us, uh, for the event today as part of, uh, Capital Group’s Practice Lab, most of you have already started going down this road. I'm, I'm simply telling you, kind of the truths and realities of what your business has already been experiencing over the years as you built and accrued clients.

                              The significance, to me, is what this does to the business itself that we're building. Now, if I look at how most advisory firms evolve, as we begin to grow our AUM fees, first couple of years is a pretty brutal grind for anyone. As I noted earlier, can actually even be harsher than the traditional commission-based world was because a levelized AUM fee is really a quite small quarterly number when you're just (laughs) getting going with your, with your first few clients early on.

But then eventually you hit some critical mass where it starts to gain a little bit more momentum. The business begins to get going a little bit further. Suddenly I actually have a decent number of clients to work with.

                              In fact, so many that I start getting a little bit tight on time, and I have to start hiring. Most advisory firms hire a, a client service administrator, CSA, first, then the associate advisor second, as they accumulate more and more revenue. There's just more clients, more people to service, more things to do to earn that fee that the fir- the firm is collectively being paid.

Now, eventually we hit a wall where there's just only so many clients that we can personally manage, so then we reinvest even further and hire a second lead advisor that expands the capacity further, so I can grow the revenue even further.

                              Then as that second advisory gains momentum, they get a CSA, they get an associate advisor, and we repeat the process. And as the advisory firm's revenue grows, so too does the headcount.

It's, it's kind of an inevitable reality, right? At the, at its core, advisory businesses are service businesses, and no service business anywhere can grow its revenue without growing its headcount. People have to be there to do the things, at the end of the day, that it takes to earn the revenue service fees. If we could really automate it all with technology, someone else would just make a tech company to do that and take the business away from us.

                              The whole fundamental reason why the advisory business has not been disrupted by decades of computers, the internet, robo, AI, all the different layers of automation, is that there is aspects of what we do that fundamentally come down to servicing our clients and giving them advice that is not automatable. And so, while our back office staffs have winnowed a little bit from what we needed in the past as back office technology in particular gets more efficient, advisory firms virtually never 10X their size without 10Xing their headcount. Now, it's something's, um, that's simply the reality of what it means to grow and build an advisory firm.

                              You wanna do more things for more, more people? You need more people to do the things for these clients.

The significance, to me, is the red line. The red line is how much time we as advisors typically spend with our clients as we go through this process. And what starts out as 100% time, serving our clients, right? I'm the only person, I get all the clients, everything's on me, incrementally starts to become less and less. Because of this, we hire, our days become more broad and mixed. I don't just serve my clients now. I also have to run the firm. I work in, on the business in addition to in the business. I don't just meet with my clients, I got one-on-ones with my staff. I've got team meetings, I've got management team.

                              I have to set annual goals and quarterly objectives, and all the different things that we start to do as the business grows and the headcount increases. And it creates this fundamental shift in time, where what started out as a business where I spend most of my time with my clients, eventually it becomes a business where I spend very little time with my clients because I spend most of my time running this increasingly large and complex higher headcount business. Because that's what happens when we have incredibly high retention rates, add more clients than we subtract, and keep getting referrals and bringing in clients. The faster we are at growth, the faster we hit this crossover.

                              But virtually every advisory firm eventually gets to these points, these thresholds. And they're driven by the fact that, as human beings, we just really can only handle so many clients and relationships.

And there's actually some fascinating research on this from, uh, a gentleman named Robin Dunbar, who, who did the original research around this domain, and found that there are sort of discrete circles around which humans tend to organize. The first is our, kind of our inner circle, our five closest people that we interact with. These are our best of friends, these are the people we turn to for, uh, not just sympathy, uh, uh, when we're going through hard challenges. These are our, like, would bury a body with me, uh, kinds of folks.

                              Beyond our very close inner circle, this is often spouses, a key family member like a parent or sibling, my one bestie friends that I've been with since forever. We then have a slightly larger circle that is our close, very intimate relationships. These are still people I can turn to for sympathy. They might not help me to bury, bury the body, but they will at least mourn the loss with me. Shoulders I can cry on and it's not awkward, because we're really that close and intimate in relationships. Then we get a slightly larger circle. This is usually about 50 people. These are our close friends. I don't necessarily get to hang out them all the time, but, you know, if you're in town, we're totally going out for dinner and drinks and doing something together.

                              I'll take any excuse to get to hang out with my close friends when I can, even if it's not quite all the time, 'cause life gets busy. From there, our circles start to widen. It's about 150 people that are kind of our casual friends. I call them a friend, I know who they are, I know their background, I know their contacts. I know what they do, what's going on with their, uh, kids. I can ask them meaningful questions when we catch up. But at the end of the day, I, I really might only see them like once or twice a year, sometimes not even that often.

                              And then from there, our, our social connections tend to get looser. About 1,500 people who are just kind of loose acquaintances. I kind of know who they are and can catch up with them and chit-chat when I see them, but it's not often. And about 1,500 people that I just, like, my brain could put a name to before I just can't even pluck them out of a crowd to say like, "We've met, right? I think." That's our 1,500 person circle.

Now, the reason why I highlight this here is that when we look at the advisory business itself, most of us, the relationships we form with our clients are at the level of being friends. This is why many of us have been to weddings and funerals and, uh, uh, uh, bar and bat mitzvahs and confirmations of our clients.

                              We're at this level of friends relationship with the people we work with. Now the significance of that is, if our brains can literally only handle so many relationships before the brain just can't keep track of it all, then I am limited into how many clients I can ever actually have that my brain can keep track of. And part of Dunbar's research is he found that the part of our brain that keeps track of these relationships, literally the physical size of that part of our brain, dictates where this threshold is, across species. So when they look at different mammals that have larger or smaller segments of this brain, they can predict the typical size of a herd. Humans, our part of this brain, ends up at about 150, which is why ancient villages often would grow to 150 and then split in a new village. And there's been a military unit right around the size of 150 people going back for several millennia discovered across multiple cultures. It just seems to be a physiological constraint around how our brains work. Now, again, the significance of this from the advisory context is that means most of us, our brains, no matter how amazing the technology ever gets, our brains can only ever actually handle a certain number of relationships that starts to cap out somewhere around 150. And I can't just do this with my clients, 'cause I also have like, my, my friend-friends. Like my, my friends. My personal circle of friends, before I get into the clients that I work with. And so, if I've already got 50 of my own close friends, and then I'm supposed to keep track of other folks as well, it actually gets harder to keep track of more than about 100 clients outside of our own personal relationships.

                              Which is why when you look at industry benchmarking studies for the better part of 20 years, the average number of clients per advisor has, i- with active clients, has hovered around 80 clients per advisor for 20 years of technology improvement. A lot of us say, like, "Well, I, that's silly. I've got, I've got 150 all by myself." It's like, well, cool but you have an associate advisor. So if you're a two-person team serving 150 clients, it's still 75 per advisor. And two decades that, these numbers have been tracked in benchmarking studies, and the advent of the internet, the smartphone, robos and AI has not moved that number one iota. Because I don't actually think it's a technology limit.

                              It's a human brain limit. You get much bigger than this, you just literally can't remember, you can't keep track of the clients in your head anymore. Which gets kind of awkward when we're trying to maintain deeper relationships with clients. Now, what this means to a perspective of scaling advisory firms, again, is that adding advisors is essentially a sheer inevitability as we add client headcount because I will hit caps. Maybe I get close to 100, it gets overwhelming and I add an associate, and that gets me up to 150. But if I wanna go much more than that, I'm really gonna have to start adding more advisors. But most of us start hitting a wall by 100 clients, that were like, leading the relationship on and have to keep track of.

                              Now the significance in this sort of business perspective, if I look at how a lot of advisory firms grow when we're solo, if my revenue is the total height of the chart that you're seeing, the light blue is the overhead expenses and the dark blue is the profit. Almost everything is profit. A lot of solo advisory firms take home 70% of their gross revenue, plus or minus a little, because there's just only so much overhead, particularly if I haven't hired a lot of staff yet. Then eventually, we hit the wall and we add our second advisor feeling like, well, if this is how much I make off of 100 clients, then if I double my business with the next 100 clients, I can like, double my income, right? And that's not what happens. Because I add the second advisor, and I gotta compensate them.

                              And if I, and if, if it's because I'm good at business development, I need to hand the clients off to them and they're not necessarily good at business development, then that's fine. That makes it cost-efficient. But that often mean's like, they're expecting a salary 'cause they're not an eat-what-you-kill advisor. If they were were eat-what-you-kill, they don't need to work for me. They can just hang their shingle themselves. Who comes to work for me is someone that doesn't need to, or doesn't wanna hunt for their own clients, that wants to service the clients that I'm getting. So I can do that, but I've gotta pay them a salary, which puts an immediate dent in my profits because I add this additional, uh, compensation zone that I've gotta pay them.

                              On top of that, my overhead goes up. I need more software licenses and now they need a CRM license, they need applying software license, they need a portfolio management software license. I've gotta do compliance oversight for them, like some additional overhead crops up, and I might hire the advisor and grow my client headcount by 25 or 50%. And my revenue actually goes backwards. I lose ground. Oops, ’scuse me, I lose ground as I'm doing this. Now eventually, I can double my revenue by doubling my client count because I've got this additional advisor capacity. But if you look at where we end up, I might get 100% revenue growth through this process.

                              But if you look at where profits were originally, relative to where they end up, I might only get 15% profit growth. I doubled the business and my income only went up 15%. And this is incredibly common in the advisory world, and when I was making 70 cents on the dollar for the first 100 clients, going from 70 cents on the dollar from the first 100 to 15 cents on the dollar for the next 100 is a really rough downshift. But this is the reality, right? Once, once you're not just servicing the clients, you're building a business that has revenue minus staff expenses equals net profit margin, the reality at the end of the day is advisory firms that scale often earn somewhere in the neighborhood of 25 to 30 percent profit margins.

                              So it's actually normal that this number would go up by no more than 25 to 30 percent. And if we're just building out the staff infrastructure by adding our first additional advisor, there is some additional overhead costs that come with that, that usually, we're not even making 30% at the margin. It's something lower.

And the significance of this, when we look at how it plays out over time ... So, if you look at the typical take-home income from partners at multi-advisor firms, this is from, uh, the investment news, uh, on [inaudible 00:31:25] sites that they've been doing over the years. Uh, numbers are from a couple of years ago but they basically stay stable every year, just plus or minus a little bit of inflation.

                              Typical solo practice, actual netting take-home income is a little under $200,000. By the time you get to a multi-advisor ensemble firm, it gets a little over 300. Uh, this would be like, firms with one to three million of revenue and two partners. By the time you get to enterprise ensembles in the, uh, ensemble practice definition, these would be firms that are somewhere in the neighborhood of about three to ten million of revenue, and then super ensembles are ten million plus. Think of these as billion plus dollar firms. And by the time you get to the billion dollar firms, you-

Michael Kitces:                 ... [inaudible 00:32:00] billion-plus dollar firms. And by the time you get to the billion-dollar firms, you often see partners taking home more than half a million dollars each. Now, the total profit of the firm is higher than that, but you usually don't grow to a billion-dollar firm unless you've got multiple partners who have stakes in growing this thing, so the profits increase, but the number of partners increase, and so the profit per partner rises, but not quite as much.

                              Now, the interesting thing about this data is that when you then drill down and say, "Well, let's not just look at all solos, let's look at the top performing solos," what you see is that the top performing solos, they're also netting north of a half a million dollars of income. In fact, what shows up in these studies every year that they get run is that top performing solo advisors consistently make as much as the partners at billion-dollar advisory firms.

                              Top performing solos consistently make as much as partners at billion-dollar advisory firms. Now, some of you are then saying, "Well, yeah, but you also have a bigger slice of equity in a billion-dollar firm 'cause the firm is bigger." And [inaudible 00:33:02] I say, "Well, I hope so, because look at all the numbers to the left. If you are growing to be that billion-dollar firm, you are actually taking home less in the ensemble and enterpri- enterprise ensemble stages, so I really hope you get some equity enterprise value off of this, otherwise you literally just get less money by building a billion-dollar firm than you would have by simply being a focused solo practice.

                              When we find these advisory firms consistently underestimate how profitable solos can be when they get really focused and efficient, and that's not necessarily to say, "Don't build a bigger firm," but what it does quickly come down to is if you wanna build a bigger firm, why? 'Cause there's a lot of ways to grow your income and make more money that don't necessarily require making the- the headcount ... The client headcount and the employee headcount significantly larger.

                              In fact, what we find as we dig into the data on this ... So, um, there's a, um, a famous bit of research that got embodied into what's now known as the happiness curve where, uh, Gallup did wellbeing studies around the globe and just asked people, you know, how satisfied they are with their lives in the stage that they're at, and then segmented it by age and found this phenomenon that gets known as the- the happiness curve, that, uh, we're pretty happy in our teenage years, life and happiness tends to go down as we get into middle age. I find this chart slightly depressing as a 46-year-old, but apparently this means it literally only gets better from here, because as we get through our 40s, the curve starts to lift.

                              And actually the data consistently finds that our self-reported happiness and satisfaction levels are actually higher in our 80s and 90s than they are in our teenage years, notwithstanding the fact that anyone who's got aging parents or aging clients knows, there's some st ... Hard stuff that goes on by the time you get into your 70s, 80s, and 90s, but we're still happy. We're still happier. And when we dig into the research and try to find out why, it effectively comes down to when we get into our later years, we get really good at finally figuring out the things that make us happy, that we enjoy doing and just only doing those things and not much else, right?

                              Through a lot of our lives we've got friends and acquaintances that we hand- hang out with that maybe don't- don't really always make us happy. Sometimes they're kind of a drag, they can be a little bit negative, but, you know, we still stay engaged with them for various reasons. And then by the time we get to our 70s, it's usually something to the effect of, "Yeah, I just really don't have as much fun with them, so I'm gonna not really call them anymore. (laughs) I'm just gonna spend time over here with the people that I enjoy and the things I enjoy doing."

                              And the better we focus that in, the more happiness and life satisfaction tends to rise. Now, the significance of this in the context of advisory firms is that we find a similar phenomenon shows up when we look at advisory firms and the size of advisory firms.

In fact, we did a study several years ago looking at advisor wellbeing, and found that the unhappiest advisors average $225 million under management. I'll say that again. The unhappiest advisors average about $225 million under management, and that's not just a random number plucked out of thin air. If you think about advisory firm perspective, you manage $225 million under management, most of us say we charge 1% AUM fees, but between breakpoints, the occasional discount we give a big client, uh, family householding the rest, most advisory firms don't really net 1% yield on their assets, it's more like 70 to 75 basis points.

                              So, a firm that manages $225 million under management probably has more like $1.7 million of revenue, give or take a little. Now, most advisory firms of this size staff somewhere around 250,000 to $300,000 of revenue per employee. So, $1 million usually has four people, $1.7 million firm usually has about seven people staffed to it if they're staffed for growth and not just maximizing profit. Now, if you look at a lot of management books, the maximum number of direct reports that a lot of management books recommend is somewhere around six to eight people. Higher than that and it's just hard to stay invested and engaged enough in the- in the team members that report to you to really help them get unstuck and grow.

                              And so not coincidentally, a lot of advisory firms hit peak unhappiness when their teams max out. $225 million under management is 1.7 million of revenue, is 17 members, which is about the maximum number of direct reports that most managers can take, with the asterisk that if you're doing this as a business owner, not only do you have- might you have seven direct reports, you also have like 172 clients that you're trying to serve with your associate advisor.

                              And that phenomenon that we hit personal team management capacity at the same moments that we hit client capacities means we see a huge number of advisors, somewhere around $200 million under management, that say something to the effect of, "Uh- uh, this thing grew bigger than I ever thought it was gonna be, I make more money than I ever thought I would, and I've never been more unhappy at my practice, because it's killing me with how many hours I have to work to sustain it," 'cause we're basically doing a full-time manager job and a full-time advisor job for our clients at the same time and then out working 60 to 70 hours a week and struggling to keep up with either one. And because of that, not all advisory firms actually get happier at the end of this. We actually find some of them continue to remain unhappy because they can't figure out how to move past that wall, because if at the end of the day you just really weren't built to manage people and buil ... And grow and scale the business, you don't really get happier as it gets bigger. It just gets more complex and unpleasant, 'cause there's more management-y things and less time sitting across from clients, which for a lot of us was the whole point of why we got in the business in the first place.

                              And so, I'd call this phenomenon the capacity crossroads. As we get north of 100 clients, an altitude of 300, where we hit this threshold where we have to decide, "Am I going to be multi-advisor with all the management and other duties that that entails or not and I need to find another path?" And this isn't unique to advisors.

This was made famous many years ago in Michael Gerber's E-Myth, right? He told it in the context of Sarah the piemaker. Sarah made wonderful pies, everybody loved her pies and said, "Your pies are so wonderful. You should open a- a -a, like a piemaking shop," and that's what she did. She opened a pie shop and it was wonderfully successful.

                              It was actually so successful that eventually she couldn't staff the front end and the lines of people who wanted to buy pies 'cause she was back in the- in the back making pies. And so, eventually she had to hire someone to do sales upfront and take people's money and hand them pies, so that she could bake more pies, and it was successful. In fact, it was so successful that eventually there was a line of people moving through, buying all the pies, and Sarah couldn't make the pies fast enough, so she had to hire another chef to make more pies.

                              Now, when she hired another chef to make more pies, now there was more pies to sell, which means they had to expand their store hours to make sure they sold all the pies, which meant they needed another person to be, uh, front of house at the cash register and the staff went up further. By now, Sarah has four to five people working for her on shifts, which means she actually needed an operations manager to help, too, HR, and payroll, and all the rest, which made the shop bigger, so now she needed another chef in the back in order to make sure that they had a steady flow of pies to, uh, manage to.

                              And over the span of this growth cycle, Sarah stopped being a piemaker and she started being the owner and manager of a pie shop, a completely different business, being than what she set out to do originally. Now, this phenomenon, we start out as the technicians that do the thing well and end out as the business owners managing other people who do the thing. It was so common that Michael Gerber called this the E-Myth, the entrepreneurial myth, that we start out to do a thing and we end out running a business doing the thing and it's very different, and not all of us make the transition 'cause some of us just really wanted to keep doing the thing, whether that was Sarah making pies or us serving our clients.

                              And so, the significance of this is as we grow through our cycles where we launch businesses and start ... Get going, we all hit this capacity crossroads. I find it to be the most essential threshold for any advisory firm where we're gonna go beyond our personal capacity to serve clients, which is constrained, not by technology, but by Dunbar's number and the physiological capacity in our brain to handle clients, when we have to make a choice about what we're going to do at that point.

                              And I find firms essentially come down to one of three choices that we're gonna talk about more in a moment. Some build and scale solo practices for themselves, some build multi-advisor boutiques, and some try to scale very large enterprises.

Now first, I wanna highlight solo practices. So, this is an advisor named Dan Goldie. So, Dan was a professional tennis player for years, went all the way to national and international tournaments, uh- uh famously built Ji- beat Jimmy Connors, uh, in the quarterfinals at Wimbledon, uh, many, many years ago.

                              And after his tennis career, he became a financial advisor, and Dan is still to this day the single most successful solo practice I've- I've ever met. He got to nearly $1 billion under management as a solo, pure solo, no team. Now, he did have a TAMP back office to handle stuff, but that way he didn't have to manage anyone. Now, he did manage to get to about 275 clients, whatever that Dunbar's threshold number is, of about 150 households before we lose track of them. Apparently, Dan was a little bit gifted and had a ... That part of the brain was a little bit larger for him.

                              Most of us doing the Dan Goldie model would probably top out at just half a billion dollars as a solo. And it essentially came from Dan's experience as a professional tennis player, which is that if you want to be successful at the top levels of a professional sport, you have to be able to completely focus yourself in the game and eliminate 100% of other distractions. That was how he was successful as a tennis player and he brought the same level of focus to his advisor practice.

                              He said, "Literally, the only thing I'm gonna do is meet with clients and everything else I'm just sending out the door. I don't even wanna manage people, because then I've spent time not with my clients, managing people," so he outsourced everything to a giant TAMP platform and just met with his clients, and made an extraordinarily large and successful practice. Now, not everybody even wants to go this far, so I also highlight an advisor named Cady North.

                           So, Cady was a journalist and a policy analyst for Bloomberg, went into the advisory business, decided she really wanted to specialize in women business owners, and she has a hyper-focused clientele. It's about 30 clients, 250 to thr ... Housed in the 300,000 of revenue. She works 10 or 20 hours a week supporting her clients and only takes one or two team ... Client meetings a week. She just doesn't need more than that. There's only so much time you need to spend with 30 clients. It's not that she's underservicing her clients, it's that she does 100% or 110% for her clients, j- just only has 30 of them and they only- they only ever want to talk to her so much.

                              And I had asked Cady once ... Uh, yeah, she was out on our podcast years ago, like, "Why 30? I mean, I'm just curious, like could you do 35? It'd be like another $50,000 of revenue dropped straight to the bottom line. You got no more overhead." And said, "You know, I got to- I got to about 32 clients at one point and I woke up one morning and I looked at all the things I had to do for my clients and I felt like I was gonna be busy and I didn't want to be busy, so I let go of two of the clients and I stayed at 30."

                              And all I could think of was like, "Wow, I'm like so far past that threshold I can't even see it anymore. Like your- your threshold was, 'Oh, I feel like I have things to do today. That's too much pressure. Let's dial it down a little,'" but this is the life balance that works for Cady and she still makes about three to four times the median household income in the U.S. working 20 to 30 hours a week with just her super deep clientele.

Now, some of us fundamentally wanna grow beyond this. We serve a community that just pulls us in deeper than the kinds of thresholds that I'm highlighting here, right?

                              The fundamental caveat to a model like Cady's is eventually she gets to the point where she's at capacity and she has to say no. She goes, "I'm so sorry, but I'm at capacity. I- I'm not taking on any new clients right now." Some of us are comfortable to do that and others are not. We say there's just ... "There's so many people I can help in my community, how can I stop here?" And if we can't stop, we keep growing, but often it's still a business that's very much built around purpose and mission to serve the community.

                              So, to me the- the book that best embodies this is called Small Giants by Bo Burlingham. If you haven't read it, I highly recommend it. It's all about what happens when we build businesses with purpose to serve that we don't necessarily build to be big, but if you build with purpose and ver ... And a great level of focus, sometimes it turns into a pretty big business anyways.

                              And so case in point, an advisor named Barry Glassman. He's actually, uh, local to the DC area here where I'm from. Founded his firm in 2009, and after a decade, almost 250 clients after his first 10 years, 1.5 billion of AUM, 11 team members. Very nice ratios here, his, uh, average client is a multi-million dollar client, and he staffs, uh, one team member for every 20 to 30 clients, so very focused on service and serving his clientele deeply. He didn't set out to build a big business, but it became quite large.

                              Now, some of us are just wired for more growth.

The Peter Mallouks of the world, Shannon Eusey who runs Beacon Pointe, some next generation leaders coming up like Neela Hummel and Mary Beth Storjohann. These are folks that are excited to build and scale bigger businesses. They're a ... They're really engaged to say-

Michael Kitces:                 They're a- They're really engaged to say, "How big can we make this? How far can we reach?" And the challenges and trade-offs and sometimes like the outside capital arrangements that come with, "How do we scale very, very large businesses? Because we really wanna see how far the reach and impact can be." And it involves some trade-offs.

                              These are typically folks who get entirely out of the client business because just, just being the CEO of a multi-billion dollar advisory firm itself is very much a full-time job. And their focus is not actually on serving clients directly, it's on how to make an advisory firm that scales the service to ever more and more clients.

                              And so I'll actually put this question out to you. We'll do one more poll. As you think about these crossroads, where do you find yourself leaning? Are you in that solo practice structure? Is that the ideal for you? Are you a boutique? You just can't imagine getting to the point where you say no and don't take on more clients. Or are you one of the enterprise builders? So I'll give a moment for responses to come in.

                              Again, uh, slido.com and the code is on the left, KitcesCG2024, uh, or you can use the QR code if you are QR code inclined. Where do you fall across this spectrum? Right, if you could make hundreds of thousands of dollars working 30 hours a week, is that appealing as a solopreneur? Or do you feel a drive that it's just got to be bigger and reach more? Or are you one of those folks that's really wired to say, like, "I'm excited to build enterprise value?" That's the, that's the game you like to play and win.

                              Now, you can see results coming in. The thing I always find fascinating about this, this is very typical for what we see in, uh, most advisory groups, barely 10% of us, plus or minus a couple percent, tend to choose enterprise. Now, the interesting thing, if you look at industry media, is almost 100% of the people that our industry media puts on the pedestal are enterprise builders, right? The Peter Mallouks and Ron Carsons of the world, and nothing against them, they built some amazing businesses, but it turns out their definition of success is actually not what most of us want to create in the first place.

                              We're much more around supporting our lifestyles or building businesses around purpose. And it takes different things. It matters because you focus differently. I love this quote from Stephen Covey.

"If the ladder is not leaning against the right wall, every state, uh ... step we take just gets us to the wrong place faster."

Because what it takes to grow these businesses really is different. If I wanna grow a lifestyle practice, it's all about getting the highest value clients. You don't necessarily have to hire a team and expand, right? The formula can be really simple.

                              From now on, you only take clients that are above your average. And every time you take a client that's above your average, you have to let go of one that's below your average. And if every time you always take on above average and let go of below average, your business will grow forever and you will never have to hire another person. Because you're not growing with the number of clients, you're growing by revenue per client. And the single defining characteristic of the success of lifestyle practices is how we can grow revenue per client and get paid more for the value of our time 'cause it's all about how much time we got before we cap out.

                              If you're a boutique builder, it's about being that small giant. It's usually not about how much can I get paid for my time, it's getting clear on what the purpose, cause, and passion of my business is and then finding people who wanna be part of that mission, right? I think about that in terms of what we do on our advisor education platform at Kitces.com. We very seriously say, "We are a team of nerds." It's literally on our team page. We are a team of nerds.

                              Now, some people kind of think the nerdy thing is overdone. It's cool, they're not our people. Folks who love to nerd out on financial planning, see our pa- see our team page and say, "I wanna be part of this company." And, like, we attract in the people who are a good fit for us. When you're up ... enterprise builder, it's all about, "How do I work on the business in a way that lifts and optimizes the business? How quickly can I get out of the advisor role so I can spend all of my time optimizing and maximizing the business, how it operates, the way it's scaling, and the enterprise value that it generates?"

                              And so, there's no one right definition of success, right? All of these can build businesses that generate hundreds of thousands of dollars of income every year, millions of dollars of wealth and lifetime value, either in terms of enterprise value or simply the fact that you get really big checks every year, uh, from your income all along the way. The question is what you want to build, right? When you only have a limited number of seats on the proverbial bus, what do you want to build that's most meaningful for you? So I hope that's helpful, some food for thought.

                                          I'm, I'm happy to field questions as time permits, if anyone's kind of processing through this for themselves and what it means for their practices and where they're going next.

Will McKenna:                 Michael, thank you. That was outstanding and lots of great feedback from the audience who are loving, loving the information here. We don't have time for a lot of questions, but I thought I would give you a couple of quick ones.

Michael Kitces:                 Please.

Will McKenna:                 Um, this one comes from Edwin, and I thought it would b- it- it's a nice, um, uh, example, Edwin, thank you, of turning the tables onto you, Michael Kitces, which is-

Michael Kitces:                 Sure.

Will McKenna:                 ... what's your definition of success?

Michael Kitces:                 Oh, (laughs) what's my def- So I am an impact and reach person. I always have been. Part of the ... Part of why I left the job, uh, in being primarily of, uh, an advisor client facing was doing my thing for 100 great clients that I could serve just didn't scratch the itch for me. I get much more excited when we do work for, uh, advisors that we support, who then each have 100 clients, as we talk about on our team, every advisor we help has 100X multiplier 'cause we help an advisor and they serve their 100 clients well.

                                             So, you know, last year, we crossed 16,000 advisors in our member section, and we put up a picture at our annual team retreat of 16 University of Michigan stadiums, 'cause that ... they hold about 100,000 people, and said, "This is the 1.6 million people that we've impacted."

Will McKenna:                 Love it. Love it.

Michael Kitces:                 So, you know, in the context of this framework, I fit within the context of a boutique. We build a very sizable business. We have 23 team members providing the advisor education content that we do. But I don't do that through the lens of trying to build enterprise value. I do that through the lens of the mission and vision that we're on. It also happens to grow a big business along the way. But I, I have lived all three of these.

Will McKenna:                 Yeah.

Michael Kitces:                 I've run a lifestyle practice for many years. And, you know, as you mentioned, well, at the beginning, I'm involved in some other businesses that really are scaling enterprises and have built very, very large enterprises with, you know, dozens and 100-plus employees. So I've lived all three of them, but personally, I'm very much wired as a boutique builder.

Will McKenna:                 Love it. And i- and you're influencing the about 1,000 people who are on this call today. Maybe one last question for you. This came from Richard, and I thought it was a good, um-

Michael Kitces:                 Yeah.

Will McKenna:                 ... prompt for you.

Michael Kitces:                 Yeah.

Will McKenna:                 Talking about maybe more of the boutique or enterprise type of practice, isn't the value of your firm increased if you have a team that can continue to work with your clients rather than an individual practice when the lead advisor retires or is looking to sell the practice? So thinking about that transition-

Michael Kitces:                 Yeah.

Will McKenna:                 ... how do you think about that?

Michael Kitces:                 So it- it's a, it's a little bit of a complex question. There's a, there's a couple of moving parts to this. Um, multi-advisor firms tend to sell for more for the sheer reality that the revenue is higher 'cause there's more people in the first place, right? If I'm a 2 million revenue firm, I'm gonna sell for more than a 1 million revenue firm 'cause there's 2 million of revenue. Even if the 2 million revenue firm is less profitable, it's not half as profitable such that the buyer wouldn't, wouldn't pay more. So yes, there is the sheer size effect to it, and the size effect does lift a little bit further 'cause larger advisory firms in general tend to get a little bit more of a premium.

Will McKenna:                 Yeah.

Michael Kitces:                 Whether you actually net more lifetime value is not nearly so clear though. You know, if the reality is, I can work in a million-dollar practice that makes half a million a year working 30 hours a week, or I work ... or I, I do the multi-advisor scaled up thing and I make a $2 million practice, but, uh, I only make 100,000 more in net profits 'cause I have to reinvest so much into people and growth and scale. And I work 60 hours a week instead of 30 hours a week. It's like, "Well, cool. I made a business that's larger, but I took home barely anything more, and I worked twice as many hours for the past three, five, seven years in order to do it."

Will McKenna:                 Right.

Michael Kitces:                 In which case, if I really wanna get down to like, "What was the value of my time by ..." I really didn't make much, like, I didn't make a more valuable business. I just got paid more for my time by working more hours in the business to try to get it to that threshold.

Will McKenna:                 I got you well.

Michael Kitces:                 And it might even be less because often my profits have to go backwards for a while, as we highlight in one of the charts, just to reinvest you enough staff to have the capacity to then hopefully grow it to a new high threshold.

Will McKenna:                 I got you, and-

Michael Kitces:                 And so when you look over that lifetime, like it doesn't actually always net positive. Now, if you're the next Peter Mallouk, it's really, really positive-

Will McKenna:                 Right.

Michael Kitces:                 ... 'cause that dude's just wired to grow things to the moon. But a lot of us aren't even that wired. If you try to grow to be a half billion-dollar firm and then you have some setbacks along the way, and you lose some advisors, and they peel some assets out, and you go backwards, and you got to regrow again. A lot of advisory firms I've seen in the end, actually end out taking home far less than they ever would have by simply being highly profitable solos-

Will McKenna:                 Yeah, makes sense. Well, let's do this. Uh, many more questions than we could get to. And I would encourage folks to connect with your Capital Group team and our, our, our teams will reach out to you to dig into this. But I think tons of engagement there, Michael, fair to say. A lot of, uh, thank yous and, and great information. Before we do wrap up, I just wanna bring folks' attention to a couple of the resources that you can take advantage of immediately.

Will McKenna:                 If you wanna dive deeper into any of these topics, you can scan one of these QR codes, head over to the Capital Group site. You can also find us at practicemanagement.com and get all that good information.

For all you RIAs in the audience, we've got a particular s- uh, part of our site, RIA Insider. It's all about you. Visit us for news and insights and, and so many other resources.

                              We also have a national team that's really dedicated to working with RIAs. So no matter where you are in the country, we've got a very experienced team that can help you with your business. And those are the folks you can connect with, uh, on some of the questions you had on this webinar. Um, just thanking the audience, all your great engagement and questions.

Michael Kitces:                 Yeah.

Will McKenna:                 Hope that was helpful to you. We're gonna send you a follow-up, uh, email survey. Let us know how we can get better, um, uh, if at all. And then finally, hey, join me in thanking Michael Kitces, great insights. And, uh, I hope everybody in the audience found that as, as interesting, eye-opening, and helpful as I did. Thanks, everybody. Have ... Enjoy the rest of your day. Have a great weekend.

Michael Kitces:                 Sure.