XYPN’s 2024 Benchmarking Study Highlights LIVE
With Alan Moore and Michael E. Kitces
Episode No. 400 | November 13, 2024
Featuring
Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL
XYPN
Alan Moore, MS, CFP®
XYPN
What’s the real trajectory of an RIA? How early should you start hiring, and is a niche worth it?
Co-Founders Alan Moore and Michael Kitces hit the stage at XYPN LIVE 2024 to discuss insights from the seventh-annual Benchmarking Study on episode 400 of XYPN Radio. Each year, the study gathers information from XYPN member participants to get an accurate picture of how advisors are doing in their firms.
From revenue growth paths to client acquisition through niche focus, this episode gives a candid look at what scaling indeed involves, including when to bring on staff, how fees impact client profitability and the advantage of specializing early. Whether you’re new, established, or planning to launch, you won’t want to miss these data-driven insights into what’s working (and what’s not) for fee-for-service RIAs in 2024.
Listen to the Full Interview:
Watch the Full Interview:
What You'll Learn from This Episode:
- The ideal timing and approach for hiring staff as you scale your RIA.
- How focusing on a niche can improve client acquisition and growth.
- Practical insights into fee structures and how they influence client profitability.
- Key trends in revenue growth, client retention, and operational efficiency among XYPN member firms.
- How to hire & delegate effectively as your firm grows.
Featured on the Show:
- Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL | LinkedIn
- Alan Moore, MS, CFP® | LinkedIn
- XYPN LIVE 2025
- Chart 1 - Average annual revenue for members who join with few clients
- Chart 2 - 2023 Revenue growth for members joining with few clients
- Chart 3 - Revenue and profit per engagement
- Chart 4 - Sources of new clients for firms with and without a niche focus
- Chart 5 - Percentage of advisors leaning on in-house and outsourced staff.
This Episode Is Sponsored By:
Read the Transcript Below:
Alan Moore: Hello and welcome to this episode of XYPN Radio. We are recording live from XYPN LIVE 2024, and this is episode 400.
Michael Kitces: Out of just sheer random coincidence that it lined up perfectly to the week?
Alan Moore: Yeah, I'm sure marketing was random and unplanned.
So, if you would like to see the show notes or additional details, you can go to xyplanningnetwork.com/400. So, today, Michael and I are going to be walking through our 2023 data for the 2024 Benchmarking Study. So, this is the sixth, seventh year?
Michael Kitces: Seventh year now that we've been running the Benchmarking Study. This was something that we started seven plus years ago. Now, XYPN's been around 10 years two or three years in, once we basically got past the, is this thing going to survive moment that, you know, all of us have when we started business. We had the same thing when we started XYPN, you get two or three years in, it's like, okay, people have shown up, there's some revenue, I think this thing's going to last, now I have to actually treat it like a real business.
It was sort of the realization to me, we're building around this thing where advisors do fee-for-service models, building around subscriptions, some were doing advice-only. We saw the first layers of advice-only starting to emerge, and it hit me similar to when the AUM model first showed up 20, 30 years ago in the late 1990s, and the big thing at the time, the big person at the time was a brilliant practice management consultant named Mark Tibergien at a firm called Moss Adams and they started doing the first benchmarking studies on this emerging new model where advisors don't charge commissions to sell insurance and mutual funds, you charge an ongoing advisory fee for asset center management. What?
And so, Mark's firm started doing benchmarking, basically documented the growth of how advisory firms began to evolve and develop. And so, the path to a billion dollars, the ensemble firm was coined out of those studies. And so as we started doing this with fee for service, I basically went to Alan and said, we're creating this new thing, we need to start running benchmarking studies and just figure out how does it work, how do the firms grow, what happens that might be similar to other advisory models, what happens that's different, and so now basically we're seven years into documenting what this evolution looks like, like how a fee for service advisory firm actually grows over time.
Alan Moore: It's really shocking to everyone in the room and listening that you wanted more data. Yes. Who saw that coming? And I can put it in a spreadsheet. And folks will ask, you know, why are we doing this? Is it just a comparison game, basically, of making you feel like you're not worthy because you didn't hit the same numbers that are in the benchmarking survey?
That is absolutely not what the purpose is. Early on, what I really appreciated about the benchmarking data, and we'll get into it here in a second, is that we wanted to be sure that we weren't overselling the dream, that we weren't, you know, people would call and they'd say, “Hey, I'm thinking about starting my own firm, and I'm, I'm confident I'm going to make $100,000 in my first year, and I'm starting with no clients.”
And we're like, whoa, no, you're not. So having the data actually allowed us to set realistic expectations that no matter what your background and experience, the first couple of years are just hard. And we wanted to be honest about that so that folks knew going in, and so they were ready.
Cause I'd much rather someone launch, in five years when they're ready versus trying to launch a firm today and not make it because they launched too early. Additionally, what we wanted to provide was just a bit of a waypoint. So, you can see, okay, what's the average median sort of what are firms who have been doing this three years do it?
How am I doing? And if you are above the number, that average, fantastic. If you're below the average, you can ask the question, well, is that because I'm serving fewer clients, I'm building a little bit different of a business, maybe my fees are a little too low, you know, there, there's a variety of things.
So, we hope it serves as, you know, the intent of it is to be a practice management resource. It is not meant to be a winner loser game. It's not a zero-sum game, but it’s not meant to be depressing, you know, if you're not hitting those same numbers. It's more just to be information.
Michael Kitces: And I think to me, it's just, it's perspective, right?
For when you're building a business, when you're building something new, particularly when you're going down a path you haven't gone down before, and there's just this fundamental, like stuff's happening, right? You're going through the rollercoaster often the same day, of elation and depression as, as a new client signs and then the client leaves and we go through that process.
That it gets really hard to figure out, is this normal? Is where I am normal? Like, I've been grinding really hard for a year or two. I guess I've made progress. Is this how much progress I'm supposed to make? Am I ahead behind? I think as you said, it's not about being competitive, although I know a few of us happen to be wired that way. If you are, more power to you.
But to me, it's more just from trying to get perspective, is where I am, is where my firm is in the progression, is the way I'm doing things, whether that's pricing or hiring, cause we're going to talk about a lot of that today. You know, is what I'm doing normal? And I guess that still feels, even as I said out loud, a little bit loaded, because you can do things a different way.
It doesn't make you abnormal. Like we have choices about how we run our businesses, we come from a lot of different paths and circumstances. But at least give some perspective of, am I like way outside the rest of the herd, or am I actually great where everyone else is? And turns out it's just sort of sucky for everyone at this stage, or everyone's dealing with this problem, or like, oh, I came up with a cool solution that's actually just what everybody does at this stage, yay me.
Alan Moore: Yeah, because the reality is what we are not currently gathering this data. It's something that we're talking about how to get is that, if your goal is to make a hundred thousand dollars and you're making 120, you're excited. If your goal is to make $500,000 and you're making $120,000, you feel like you haven't made it yet.
So with this data, we're just showing you the total amount of money that someone is making. We are not currently showing you the targets that folks have set, because some of you want to make a million dollars, and that's fantastic. I talked to other advisors who want to make $100,000 and work 15 hours a week.
Fantastic. We're very supportive of both. And so that doesn't necessarily show up in the data. To jump right in, this first chart, Figure 1, and again for those listening, you go to xyplanningnetwork.com/400, and you'll be able to see these charts because we'll go through the numbers rather quickly.
But what this chart shows is the average revenue growth path of a firm who joins and launches with XYPN who has basically no clients. So if someone is joining with clients, they already have a couple hundred thousand dollars of revenue, they are on a different growth trajectory, they have a different journey.
We've pulled that data out, and we're just focusing on the folks who started with no clients. Over the five years that are shown here, from 2019 to 2023, Basically what it shows is that year one, they, on, on average make a gross of $9,000.
Michael Kitces: I feel like you got to clarify, I mean, we're sort of talking about what people are making, but this isn't actually what we're making.
This is revenue. Total revenue. This is not net. This is gross.
Alan Moore: So gross, $9,000. Year 2 starts to look a lot better, hitting $40,000, and then by year 3, we're at $113,000, for most of us, that's starting to replace or, pretty heavily supplement pre quitting my job, and launching my own firm income. By year 4, we're at $210,000, and by year 5, just shy of $300,000.
So, Michael, one question I've gotten here at the conference about this chart is, this is great, but what about survivorship bias? What about the folks who aren't in the data set because after two years they decided to close up? Can you address survivorship bias in this data?
Michael Kitces: So there certainly is some layer, right, where, where this isn't meant to graph the survival rate of firms, which is kind of a different calculation. This is the income trajectory of those who do survive. When we look at XYPN in the aggregate, you know, in any particular year, XYPN loses about 10-12 percent of its members per year from like any of the particular stuff that happens.
And of that, we ask folks as they're leaving, just like, why are you leaving? What's going on? Cause there's a wide range of reasons. I got acquired. I'm merging. I found out I'm getting divorced and don't want to be starting a firm as a single payer. It has come up more than once. And then every now and then it's like, it's just not working.
Like I've done it for a while. It's not working, you know, hard to say like the failing word, like it's failing. And I'm just going to go and do something different. And what we see is out of the folks that are failing, it's about half of the total attrition. So what we see in essence of the aggregate is about 5 or 6 percent of advisors that have come to XYPN fail and leave at least XYPN and doing it on their own in a particular year. They don't leave the industry, they may go get another job, they might actually merge and tuck their firm in with someone else, I don't like running it, but you're hiring an advisor and you've actually got a lot of client flow coming in and I really hate this getting my own clients thing, so I'm just going to join your firm and I'll work with your clients and I'm not going to run my own where I have to get my own.
So it shows up a number of different ways. Relative to XYPN overall and kind of the numbers, what that means is these numbers are not drastically distorted by survivorship bias simply because we don't have a like 80 percent or 90 percent of people fail as like some certain large financial services firms do in the product world.
So, the numbers don't get massively shifted from that perspective, but it is fair to acknowledge, like this is not the prediction of every single person that goes down this path because some don't get to the numbers and don't continue on. This is where we go as we get there. But I do find there is an interesting milestone effect that crops up.
Very few people who get to anywhere near these numbers leave in year 3. Cause once we're here, at least like if we got to $100,000 and we have not already like run out of financial reserves or lifeline or spouse willingness to let us do this thing that apparently they decide to let us do. The numbers usually at least are good enough at that point and you're feeling some business momentum that folks tend to stick it out.
One of the reasons why I actually sort of championed doing this chart originally and wanted to get this data is I talked to a lot of advisors and members that were thinking about leaving in the early years because they said, I've been doing this like two years and grinding my backside off. I'm trying to figure out how long it takes me to get back to like some level of six figure income and I made like $32,000 gross last year.
And I feel so far from getting something like north of a hundred because I could get a frickin salary job as an experienced advisor and someone would probably pay me $100,000 right now. Maybe even more. And they were feeling frankly like really depressed. And so, where should you be in year two for the compounding curve?
And what we found as we started doing this is like, no, actually that's pretty normal. Like you might've just quit before the times were going to get good, or gooder. And because we do find this sort of interesting, I say almost cruel trajectory to this, that, right, another way to look at this chart is for an advisor that's growing, for everything you do in the first two years working your backside off, it more than doubles in the third year, and then the fourth year adds almost as much as the first three, cumulatively, because you get these doubling effects that start to kick in, and I suspect for some firms, the momentum may be better than that, ironically, one of the challenges that we're already starting to see in the data, we're probably going to ask a couple of additional questions in the survey.
In the future screen for this, some people, by the time they get to year four, they're already making all the money that they wanted to make and they stop accepting clients and pick their foot off the gas. So the year five numbers actually get pulled down a little bit because some people actually deliberately stopped growing after year four.
Again, to each their own about, income goals where they're trying to get. But if we found this phenomenon, or at least I found this phenomenon coming up where, when you're into like year two, you are here. The phase of this chart, and you can't see what comes next, it feels pretty bleak, cause that's 700 days of doing this, or like, it's easier to zoom out and say 2 years, it's very different when you're like, I've been doing this for like 700 days, and I'm at 17 clients, and that hurts a little, cause that really might be where you are, 17 clients, 2 or 3 grand per client, you're like right in here in these numbers.
And then it starts to pop. And, you know, some of I feel like what we tried to do at XYPN over the years is figure out how to help members launch better and accelerate this curve a little bit. And these numbers have come up very slightly over the years, but frankly, not dramatically in the first two years.
They wobble a little, but they haven't really moved significantly. It just takes a certain amount of time to get known and liked and trusted in the space that you're working in to get going. just seems to be the reality, and so every year we do this chart, it is almost exactly the same curve, it is almost exactly the same numbers within a few percentage points every single time, and I can even say having like built A number of different businesses over the years, like this curve, year three is often better than the first two combined, and year four is as good as the first three combined.
Like, I have replicated this in almost every business I've, I've launched and built. and I cannot figure out how to make it faster. Every single time, it's like you, the numbers keep going to year three, and you're going, where the heck were you people in the past two years while I was grinding this out?
Now, if you're two years in and you've got eight clients after two full years and it's $20,000 of revenue, now there's some conversation to be had and about at least do we need to do something different? So, my goal with this ultimately was, you know, can, can we help cut down some of the failures that otherwise lead to survivorship bias by reflecting like, yeah, let's just be honest, it is rough in the first two years. But when we're doing the things that build the business and traction, it gets a lot better.
Alan Moore: Yeah, this chart really encapsulates, year one is all energy. We're just all excited. We launched a firm. You hit the ground running. Year two is the, oh, shit, what did I do phase.
What is going on? By year three, it's like, is this thing going to work? It might work. And then by year four, it's like, oh, shit. I would never go get another job. And that really is the entrepreneurial path that we see so many advisors on. It's sort of the emotional roller coaster. It's not quite that clean, it's a lot of ups and downs, but overall it sort of averages, starts to go up.
Alright, moving to the next figure, the next chart. So, this is figure 10, and this is the impact of a niche. So Michael and I have been preaching the value of a niche from day one. We just released a second edition of the monthly, now it's called the monthly subscription model.
The monthly retainer votes that we wrote years ago, right? I guess we were about a year into having launched XYPN. So 2015, I believe.
Michael Kitces: Yeah, I think we wrote in 15 and published in 16.
Alan Moore: And I was rereading that first edition when we were going to update the second edition. We talked a lot about niche in a, as a theory of, hey, if you'll just focus, you'll do really well.
And we think you can grow faster and have more revenue per client, help your clients more, but we didn't have the data to support it. And now we do. And so it's always nice when the data actually proves you right. And in this case it actually did. Sometimes it goes the other direction. So what this chart is showing are sort of the three phases.
We'll say launching, building, and scaling. Launching is I've launched my firm but have fewer than 25 clients. Building is 25 to 75 clients. And then scaling is 75 clients plus. And, you know, this is revenue growth for members, again, that joined with fewer than, it says 10 percent of current clients, but basically joined with few to no clients.
And their journey, through those three phases and the average revenue, growth that those members have had just in 2023. This is not total revenue, this is just revenue growth for the year. And the difference between niche and non-niche firms. And what you see are firms without a niche, grow, you know, in the early, early stages now, just half as much revenue growth as those who have had a niche, which is different than previous benchmarking, study results that we've seen, we've usually seen that the early years are maybe a little bit leaner for the niche firms, but over the long term it pays off.
But this year we saw that it pays off even in the early days.
Michael Kitces: Yeah, this to me has been an interesting evolution that when we first started doing these, the niche firms were behind in the launching phase, kind of caught up in the building phase, and were growing faster by the scaling phase. And we would use analogies at the time, it's like a slingshot.
You pull it back a little bit, but if you pull it back a little bit, it fires forward better, better later, and it was like, this is an investment into your future. And the numbers usually were pretty dramatic at the end. It was like, yo. Okay, in the early years, you grow 5,000 less, but in the later years, you're growing by 20,000 or 30,000 more, this will be a really good payoff for you.
I mean, look, at the end of the day, having 6,000 of revenue in the first year sucks, but if you're at 11,000 instead of 6,000, it's still pretty sucky, so, well, let's just admit that the first year kind of sucks either way. It's not really about the first year, it's about what we're building up to, and look how much stronger the numbers were in the out years.
Then, over the past few years, one that we've been running the benchmarking study, they got even, and launchers were doing about the same, whether they started with niches or not. Now we're seeing launchers actually start to outperform, and I think what's actually starting to happen now is, I guess like we have preached the niche message so long, That what we're starting to see crop up is something that, for lack of a better term, I'm going to call “pre-nitching” behavior, which is it used to be, I'm going to start a firm, hang my own shingle, I applied to XYPN, I'm going through the process to get my firm registered, I'm going to figure out who I start working with, and when I get going, like I'm off and running.
That's And now, we get people who reach out to the XYPN team, this is like, I'm thinking about joining, at the end of the year, cause I want to get started next year, I'm like, that's so awesome, yeah, I'm ready to go, I'm going to be ready to go on January 1st, I already know my niche, I've made it a blog, I'm kind of running off on the side, but it's going to get going, and they're like, oh, so you, you're already like six to nine months into getting going that everybody else used to just not even start until after they began their registration process in their new firm.
Not everyone, sometimes we can't do that given current employer constraints and other dynamics, but sometimes we can at the least. Everyone's being much more thoughtful about what they're going to do when they launch, not launch and then figure out who they're going to start going after.
And so I think effectively what we're seeing is they're getting the seeds of their niche started earlier, which means what used to start happening in their niche in near, You know, 6 months or 12 months or 18 months into the in, in, is getting pulled back into the first 6 to 12 months and just it's pulling the whole growth curve a little bit further to the left because it's so ultimately just the show up and repetition and building any kind of specialization, like you got to get out there and get known for your thing and build a reputation in whatever community it is that, that serves, that, that reaches.
And the sooner you start getting known, liked, and trusted in that world, the sooner you get the reps in to get the compounding going.
Yeah, the later phases of your business, when you're 10, 20 years into doing this, the majority of your new clients will probably come from existing client referrals. In the early days, it's all about your audience, and it feels a little cliche to say this now, but it's like, you've got to build an audience of fans that have eyeballs on what you're working on, that know you're an expert, that come to you, Even if it's virtually, come to you for the expertise that you have.
And those folks are the ones who will ultimately develop that trust with you and will sign on to be a financial planning client in the early days. And so, honestly, if there is one piece of advice, if people say like, hey, I'm going to do nothing that you say except one thing, what's the one thing you want me to do?
I would say, find a niche. Like, figure out your niche, focus there. You can always expand later, you can always change niches, there's a lot that goes into there, into that. But there are so many decisions that you have to make, particularly when you're launching a business, about your marketing strategy, and the technology stack, and your fee structure, and what custodian you're going to use, or what investment philosophy you're going to use, and over and over and over.
And anytime somebody asks me those questions, and they say, well, what should my fee structure be, where should I invest my marketing dollars? Like, well, tell me about your niche. Like, I can't answer any question until I know who you're trying to serve, once you tell me that. And you get really clear there, then all of a sudden the rest of these decisions get a lot easier, and so we don't have the data on this here, but I think our launching firms are spending a lot less time doing inefficient activities, kind of spinning their wheels trying to figure things out, because these niche firms are really focused and it's really clear where they should be spending their time.
Yeah, there, we don't have it in some of the charts for the podcast here, but, we're seeing increasingly stark differences between how niche oriented firms are growing and the rest, the ones with specializations, we see a lot more traction in, Google and related searches, cause you know, people are looking for answers to their problems, they find their way to you, advisors with specializations are getting a material amount of growth from social media related channels.
Advisors without specializations have social media related growth that rounds to zero. Nothing is showing up in non-IT terms. It's just so crowded to be like the 172,000th advisor that explains why Roth conversions are good. But they are. But it's really hard to stand out in a crowd from like every other media publication, any other advisor that can put out.
Generic content that way versus getting known for your thing, whatever your thing is. A conversation I had a few years ago with an advisor, it was like thinking about going after architects, had some background from that world and was like really trepidatious about how to do it.
I was like, well, do you have any sense of what your marketing plan is going to be if you don't do that? He's like, I'm not really sure. Probably going to get involved by local chamber of commerce. And like, there's a business networking national thing. I was like, or you could go off to the architects and join the architect’s association, get involved in local architect chapter, go on some architect podcasts, find the architects conference, submit a session on their speaking page.
I'm like, well, we could probably make a two-year multi-pronged marketing plan in 30 minutes. That would be exponentially more concrete than anything you're going to come up by just going to your random chamber of commerce meetings and shaking hands with people. And he had no idea how to get that specific until he picked a thing, and then the moment he picked, he was like, okay, maybe I will go after architects, and suddenly he has this beautifully polished marketing plan.
I'm going to do these exact things, I'm going these exact places, I know exactly who to call, and where to be, and who I'm trying to build a relationship with, and how I'm going to get in the door, and what I'm going to do, because it all got magically easy as soon as he picked a thing. Because as you said, I don't know how to help you with marketing until you tell me who you're trying to reach, and the moment you tell me who you're trying to reach, all this gets so much easier.
Alan Moore: Now, I should have looked at this before the recording, can you remind me the definition between no niche and niche? What percentage of clients do you have to have in your niche before you get into niche? Do you know the answer to that?
Michael Kitces: I don't, I don't remember how we defined it in the context.
Alan Moore: Different words may pull it differently.
Michael Kitces: You don't have to be 100 percent of your clients in the niche to be framed here. It's essentially around like, are you primarily holding out that way? And I believe it was the majority of your clients are holding your niche, but I'm not positive that that was how we framed it this year or whether it got updated.
Alan Moore: All right, so this next chart shows revenue and profit per engagement. So this is per client engagement, shows both revenue per client as well as operating profit per active client, from 2016 all the way up to 2023. And while there was some strange anomaly that happened in 2017 here. There's an error on the data.
Michael Kitces: Yeah, I think the label is incorrect for the first two.
Alan Moore: Yeah. But ultimately these numbers are going up and to the right. What do you credit sort of the increase of revenue, year over year, increase of profit year over year that we're seeing from the advisor base?
Michael Kitces: I think in the simplest sense, this is, the longer we're doing this as a network and the higher, the average tenure of the member in the network, the more confident we get in what our value actually is and fricking charging the number that it's worth, basically everybody under charges out of the gate.
And we have tried to highly encourage everyone not to do that. And we all do it anyways. And it's fine. Don't beat yourself up about it. Like we do it, you know, you sit across to the first client and, they say, how much is it? And you're like, it's 3,000 a year, but it could be 2000 unless you want to do 1500, but that's my final offer.
And they didn't say anything. You just like negotiated yourself down 50 percent out of the gate. And then at some point you've done this for a few clients that don't fire you, and you say one at $3,000, and you manage to catch yourself not negotiating down, and they don't freak out, and then you get one at 3,000, and you get another one at 3,000, and you're like, maybe it actually is okay to charge this, and then one client, bless their souls, is like, I love what you do, you like, you undercharge me, don't raise my fees or anything, but like, I love what you do, and you're like, maybe I should raise my fees.
And the number starts to pick up, and I think what we're seeing here just at large, right, again, there's kind of a cohort effect that occurs here, if you look at the numbers back in the early years, again, I was doing some work with the underlying data, the bars are correct, the label is just wrong at the beginning, we were so timid in expressing our pricing early on, and when XYPN, at the beginning of this chart, everyone is new, cause there was no XYPN, there basically was no fee for service before, XYPN's like, everyone was new.
This is based on the expression of everyone in the network was so freaked out that the average advisor across the whole frickin network was terrified to charge even 150 a month. Cause that would be 1800 a year and the numbers are lower. As we move on, like if I get to where we are now, we've got a mixture.
About a third of members are still in the launching, implementing, early phase. So first 10 or 20 clients and probably are still mostly in the, I'm trying to say the number and not negotiate myself down in real time. And then somewhere by the time we get out to building and scaling phases, which now, from XYPN, the aggregate is about two thirds of members.
We start getting a little bit more of that fee confidence, people have said yes, they're sticking around, they even tell other people who come in and seem totally fine with this price, maybe I can even charge a little more, some of you here for a keynote last year where I slightly, gently suggested that maybe a few of us should fix our fees.
And I think we're seeing that now starting to play out, like fee confidence in the aggregate for the network is building. And now suddenly what was, we had trouble charging 150 a month on average, now is we're getting closer to 350 a month on average. And it just gets a lot easier to run the firm. We can actually hire at that level, we can reinvest at that level, and we can run healthy, profitable businesses at that level, and so you can see us as revenue per client has moved up, so too has profit per client.
No, not as much, cause, you know, we grow more and work with more afflu -work with people writing bigger checks. We got to reinvest a bit more into team and support and the depth of what we do for clients. But higher revenue per client is still driving higher profitability for clients.
Alan Moore: Yeah, in the early days of doing this, benchmarking study, we found that, at one point, we had to validate the data cause nothing in statistics is a hundred percent.
And 100% of respondents said they had raised their fees in the first three years. Yep. And so we have put a big emphasis on going and when we saw that, we said, okay, that means folks are undercharging, they're charging less than they're worth coming out of the gate. And so you could spend a couple hours with one of our executive business coaches and they can walk you through the process of building your confidence in terms of your fees.
Or I can just tell you what the answer's going to be. And that's whatever you think your fee should be. Just double it. Totally up to you in terms of how you want to spend your time. You can believe me
or they can convince you. Meaning whatever you think you're going to charge in the first year or two because that would be enough to get clients, double it and that's what you should do.
Double it and that's where you should be charging. Otherwise, you're just going to double your fees in a year or two and lose those early clients anyway. You might as well just double it out of the gate. And we do not see the difference in firms' growth if they start much cheaper versus, going ahead and increasing the fees.
Michael Kitces: The one other thing I would, I would note to this effect, fee discounting in the early years is normal. Ideally, you take Alan's advice and just don't do it and double what you were thinking in your head, cause that's how you got from 3,000, 2,000, 1,500, back to the 3,000. But if you're going to do it, like it's fine.
The reality is, some revenue is better than none. I'm frickin’ terrified. It is easier to quote the fee a little bit more confidently after a few people have said yes than when literally no one has ever said yes to you before in this model. So, to me, look, it's fine. I think the biggest asterisk to it that I would give, though, is if you're going to do that, don't commit it for life.
It's what you charge right now for what you're doing for them right now. The biggest problem I really see advisors get into at the end of the day is not, Yeah, I know I probably should have charged three or four grand, but I only charged $1,500 for my first clients. It's that I charged $1,500 for my first clients, and I said, because you're being so wonderful to become one of my first clients, I'm going to give you $1,500 for life.
Don't do that. Like, really, don't do that. I'm giving you permission to fee discount, but not permanently. Not multi year. Realistically, please. No client who is even maybe slightly sort of questioning whether to work with you and how legit you are is going to say, “oh, since you're going to discount my fee in the 2050s, I'm totally going to work with you now.”
That is not a determining factor for anyone. In fact, their biggest concern is whether you can do this and survive. So the only thing they're worried about is whether you're going to be here in 12 months, not whether you're going to charge them 20 years from now. If they were confident that you were going to be here 20 years from now, they would just pay double the rate today because apparently, they think you're pretty good and you're going to make it for 20 years.
So, be careful about over committing to discounts permanently. If you want to have this conversation, say, look, because we're getting started, we're offering a special discount for any clients who join us in our first two years. And it only lasts for the first two years. And after that, we'll be moving to our normal rates going forward, which is basically double where you're going to be.
Look, if you don't like that after we work together for the first two years, you can totally fire me and let it go. Cause frankly, if you're going to fix your fees and they're going to fire you for that, they're going to do it anyways. So, look, you can totally let me go after two years if you don't like what the fee moves up to at that point.
Right now, you're going to get an extra special deal while you're working with me. I'm going to work my backside off for you anyways, and that's going to be the same no matter what. So, if you feel some compulsion to do some fee discounting because a lot of us do it, make it limited scope because no one's evaluating what's happening in year three plus anyways when they're just trying to decide, am I going to get money this year?
We are not that long term as creatures, unfortunately. But you will regret binding yourself in the future, because it does create a lot of challenges down the road.
Alan Moore: Alright, so we have a lot of charts to get through. So this next one should be pretty quick, but it is really interesting data. And that's basically the sources of new clients for firms who have a niche versus those who do not have a niche.
And this chart is broken down into, what, 10, 12 different labels for where clients may come from. And it is really interesting to see what the difference is between niche and non-niche. And you alluded to this earlier, but, online Google searches, 10 percent of new clients for a niche focused firm are coming from online Google search, whereas only 1.8 percent are coming, from Google to no niche firms, which makes sense because folks are generally not looking for, they're going to Google saying, find me a financial advisor that likes doing Roth conversion, videos, but like, that's an important thing. But they're, they're more so going and saying, hey, I'm looking for a financial advisor that works with architects, I'm looking for someone who works with equity comp, like someone who, who solves my specific issue.
Some of them are pretty close, like Networking General Business Development drives, about the same number of clients, but if you go all the way down, it's really interesting how no niche firms generate a lot more referrals from centers of influence. What do you think about that data point?
Michael Kitces: Well, look, when all your writing, blog writing, Google social media ads and everything else fails.
Like what's left? Yeah, because you guys just, you percentage, not you, you go to meetings, you get referrals from existing clients, and you get referrals from professionals that you build relationships with. Like, what's left? There's nothing else left. That's all you're down to at this point.
And to me, like I, so a view the other way, what I think you're seeing here, and we've seen some similar versions of this in our Kitces’ research data as well. It's that when firms get some kind of niche and specialization, a whole bunch of other marketing channels turn on. So bear mind, like even when you look here, you know, niche firms get a lower percentage of referrals from, of existing clients than non-niche firms.
It's not that they're failing to get referrals from existing clients, it's that percentage of their growth from referrals is lower because the percentages of all the other categories are higher. Bear in mind, the niche firms in the scaling phase are also generating 50 percent higher new revenue per year than the others, 62 grand versus 40 grand.
So, when I only get 20 percent of my growth from referrals, I actually brought in more money from referrals as a niche firm than a non-niche firm. In addition to the fact that my online works, I get more from Find an Advisor profiles, I get more from social media, I get more, I can even run online ads for a few people that are trying that out as well.
So, the firms that get clearer about their specialization, their positioning start activating a whole bunch of additional marketing channels that basically don't work when you don't have a niche. We don't have a niche, it all comes down to either I met them in good old fashioned like hand-to-hand combat and build a relationship, or I got referred from someone who did.
And that's all that really shows up when we don't have any other kind of specialization.
Alan Moore: Alright, moving to our next figure here, figure 17. So this is all about staffing and how firms are staffing their practice as they grow. So what this is showing are the three different stages we talked about earlier, launching, so 0 to 25 clients, building 25 to 75 clients, and then scaling 75 clients plus.
Basically, what percentage of these firms have hired. So, we've hired outsourced or in, you know, outsourced staff or services or hired, you know, in house as W2 employees, to do these various services. So we have business development, client meeting prep, office administration, client meeting help, financial planning prep, and then we also show the median client count through here.
And so, it's really interesting how, I mean, it makes sense that as firms are growing, they're hiring more, right? They're outsourcing more as they continue to grow. Do you have any thoughts on sort of why in the launching phase, there's this like, big uptick for client meeting prep and office admin that actually goes down by the time they get to building phase?
Michael Kitces: Yeah, I think a little of it is just the small numbers effect. So in the launching phase, most of us don't have dollars to do anything, cause just we don't have a lot of financial capacity to, to hire for help. If we do, we don't really have a lot of clients yet. So functionally, I don't really need a lot of help to prepare my financial plans.
Because I don't have that many clients to do planning for, I could just kind of cover myself. If I need help with anything, I need, I need a little bit of administrative help. And so not very many members in the launching phase were doing this at all. But because this is a chart of if you had staffing help, what did you have staffing help with?
And the answer was, if you had staffing help, like you were just getting admin meeting prep help because you got all the time to do all the administration, you got all the time to do all the planning work at that point, once you get into the building phase. We're all starting to mix up a little bit more, right?
At least now I'm at, meeting here, I'm at 40 clients. If I'm at my 3, revenue per client, I might be somewhere in like $100,000 revenue range on average here. So, I got some money to put forward towards some stuff. I'm probably not doing a lot of full time hiring yet. A few people start a full time hire at the upper end of this range.
Usually it's more piecemeal, it's contractors, it's I got a VA service in an outsource planning prep firm, and I'm using some tools to help with meeting notes, and I've got a platform that does lead generation, and actually what we find is that, the typical firm in the building phase has So On average of four different contractor relationships doing something.
Marketing, para planning, VA, bookkeeping, all the different ways that we might be getting a little bit of help, very piecemeal. The thing that jumps out to me on this, and then probably like even more so when we get to the next phase, when I look at this from an ideal phase of what would I expect this to look like if firms are scaling efficiently?
The bar in the building phase should look exactly the same as the bars that showed up in the launching phase. Which is, you are the planner, you do the planning things, you are not a good administrative assistant for yourself, you should hire administrative help. Delegate the tasky administrative work as quickly as we can so we free up the capacity for us to do the planning work.
And so when I see firms at this level showing up with the amount of things like financial plan, which is essentially like putting data into plans and prepping plans, I get it. There's some level of delegate the raw data entry, maybe that's helpful. Like, or just find someone else to do your scheduling your meetings and prepping the rest of the meeting going in.
And capturing the follow-ups coming out. There are so many other ways that we can delegate down more administrative level tasks that to me, the concern starts to arise that we're not delegating the administrative work, we're delegating some of the planning work. And because I know there's a certain amount of work that has to be done in the aggregate, what that really means is, some members are delegating planning work and keeping administrative work.
Cause there's not two people's worth of work yet, cause we're like, just, the firm's not that large, at 38 clients that you need two full timers in the firm. And so to me, that becomes a troubling trend. And then it gets worse when we go further out to the right, we get to the scaling phase and almost by definition, like we got 116 clients on average, there is a lot of office administrative work at that point, just like there are people want to open accounts and transfer value, move money in and out, and there's finance and planning questions and updates and there's meeting schedule, there's a lot of stuff going on, and the usage of support for admin is actually down or lower than all the other categories, which effectively says to me, what most advisory firms are doing in the scaling phase is they're not hiring admin staff to support themselves.
They're hiring associate advisors and giving them admin.
Alan Moore: You know, Michael, when I see this data, what I assumed was that in the launching phase, there’s not 40 hours of work that needs to be done by somebody else. There's probably only 10 hours a week. And so, what we're doing is hiring an office admin, and we're calling them that.
And we're having them do all of these things because they're doing a little bit of client meeting prep. They're doing a little bit of, you know, meeting help. They're doing probably not business development, but they're doing a little bit of admin. And so this is, to me, when I saw this, I thought, okay, so in the launching phase, we're hiring an admin to do a little bit of everything.
By the time we get to the building phase, we're starting to diversify a little bit. Now we've got four people doing things that they are specialists in. By the time we get to scaling, we're now starting to hire full time folks onto the team who do these services.
Michael Kitces: Yeah, I think that's a fair, fair progression of it.
The part I would, I would challenge a little bit is, and just like the nature of, Any of us in the role as, as the business starts to grow and we get some clients and we get some moment there's a fundamental question for any of us that's in the owner founder seat of what things are you going to hold on to?
And what things are you going to delegate and let go of? And because at the beginning you have a lot of time and not a lot of clients. And then at some point it reverses and there's a lot of clients and not a lot of time. And just to me, the troubling thing that I see for the charts here is that. It makes me start to worry we're keeping the wrong things and delegating, and delegating the wrong things.
That first and foremost, I should be keeping all of the clientele work that I can, but I should be letting go of everything that is as administrative as possible. As quickly as possible. you know, the analogy I tell sometimes it's like, if you, if you think about it in terms of the visit to the doctor's office, the doctor does only the things that the doctor can and has to do and everything else is nurses and support team, like the doctor does not send me the notes to schedule my, appointments.
That is someone in the front office, the doctor does not do any of the billing that gets let go of, the doctor does not even do like my blood draws, the nurse can do that, the doctor doesn't even do the initial level of the patient history sometimes, the intake is done by someone else, the doctor does the absolute part that they have to do, and that's how they leverage and scale themselves up, and in a lot of doctor's offices, often that ratio is like 3 to 1, or even 4 to 1, or 5 to 1 of support staff to doctor so that the doctor is most maximally leveraged to do the things that they absolutely truly have to do as the professional. Now when you look at advisory firms usually the ratios are not that high. Even if you look at larger advisory firms that are scaled up, even just a one-to-one ratio is fairly common.
One support staff or admin for every advisor who's a registered person that could be senior advisor support. But these numbers don't even look like one to one ratios, and I think we have some other, charts here. We certainly do in the benchmarking study that shows that, like revenue per advisor, revenue per staff kind of productivity, which ultimately is how you measure whether you're getting productivity leverage out of the team, they're not only not improving well, as advisory firms grow, they're actually going down, which is the opposite of how scaling is supposed to work.
Alan Moore: Yeah, so this next chart speaks to a, a piece of that, what we've been talking about, which is that as firms are growing, basically, how many, outsourced contractors they're hiring versus how many, direct employees, W 2 employees, are in house. And kind of interesting in the launching phase, it's showing half of a direct employee, as well as the building phase, not sure what to credit that to.
But it does make sense.
Michael Kitces: Thanks, thanks to all the spouses doing part time work. It's probably true. It would be my guess for a lot of them. Shout out.
Alan Moore: And folks trying to get their solo 401k going for their spouse.
Michael Kitces: Yes. two children, quarter each.
Alan Moore: But it makes sense for the building phase that there are, you know, we show 4.1 contractors that are outsourced doing a variety of different things that they're specialists in, as well as that half time. Direct employee. And then by the time they're getting to scaling, they're now hiring more full time people. We went from half of a full time person to two FTEs or full time equivalents.
And the number of contractors has been reduced from four to one.
Michael Kitces: You know, when I, when I look at this chart, I felt concerned about the prior chart. Like I feel better when I look at these numbers for where firms are adding up to, which is by the time we're in a more mature scale phase.
It's two full timers in addition to me, right? It's sort of the core pod. It's me, it's an associate, and it's an ad. We get some leverage from our admin so that we can stay more focused on client stuff, and I've expanded, and I've expanded my capacity. And there's a pretty, pretty reasonable ratio there for what the firm looks like.
I think my concern, when I look at how some of these numbers are playing out, it's actually less that a lot of firms, by the time they're mature into scaling phase, have three person teams, including the founder. It's that when you add those two people, the associate and the admin, which one do you add first?
And what's the right sequence to add them? The tendency for a lot of us as advisors is, I do this stuff, but I'm getting pretty busy. I would like someone to delegate to. I need someone that can do the things that I do, which basically means I need, mini me. I need me from a couple of years ago who's willing to do the lower-level work that I would like to delegate down.
And we go hire mini me associate advisor. And, when I look at what tends to scale and leverage advisory firms the most, it tends not to be hiring mini me, it's hiring opposite me. Opposite me loves doing tasks and checking things off and making sure that all the stuff gets done and following through on everything and never letting anything drop.
Because I like doing new things and chasing shiny objects and finding new clients cause that's why I like doing this stuff and problem solving and nerding out in financial planning software. And if I hire mini me, mini me hates doing all the things that I hate doing which means nobody actually wants to do the detail work, the tasks and follow up that actually really needs to get done.
And I just take the areas where my firm is weak and I compound it with a second person who doesn't like doing those things either. And I pay them a lot more than an admin person would have been anyways, because associate advisors are generally more expensive than administrative staff support.
Alan Moore: Yeah. Cause especially in the early days, you hire people who you like and who you get along with, tend to be very similar to you.
Michael Kitces: Right,
right. And I'm really looking for someone who's the opposite. So the gap to me is. I worry that some firms are not hiring in the ideal seat.
Now, a few of us are like super good at technology and automation and the rest. And. We really don't, we really can't basically skip the admin phase because we just like automatically wire everything up to happen with cool automation workflow sequences and it just all fires off and there's like, I got an admin, there'll be nothing for him to do.
So if that happens to be you and you are like naturally wired with that gift, more power to you, you will typically skip straight to the associate advisor phase. If that's not how you're wired though, which overgeneralizing a little, is not most of us as advisors. We're more in the, serve clients, solve problems, intellectual stimulation, help people, maybe a little bit of the thrill of shiny new objects.
So that's how we get excited about building a business and doing a harebrained thing like launching a firm from scratch, and then going to meet strangers and convince them to do business with us. If that's where we're wired, which I find crops up more often, we need the complimentary, yin to the yang that does the other stuff, which ultimately lets us let go of the things we didn't want to do and probably weren't the best use of our time anyways and leverages our time up.
To be able to be more productive in the core things that drive revenue, and then we get better margins and better profitability and better take-home pay, and like the good things that come from hiring, hiring in the effective sequence.
Alan Moore: And for listeners who are wondering, well, how do I figure that out?
One tool that Michael and I both use across our companies is the Working Genius Model from, it's Patrick Lencioni who wrote Five Dysfunctions of a Team, many other frameworks. He put out the Working Genius, in the last two years. And it basically talks about the six stages of work that every task goes through, and, you know, out of the six, you have two that are a genius, two that are sort of in the middle, and then two that are a frustration.
And so taking that test will help identify sort of where are your strengths, what do you really enjoy doing, what parts of the process you want to do, and whatever your frustrations are, hire that. And for many of us, when you go through the process, you'll see sort of later on in the process is the more detail-oriented work, the checklist, get it across the finish line.
Most of us, that's what we need. And so if you're struggling to figure out is: what is my skill set? What do I enjoy doing? Cause I have to do it all. When I'm solo, I've been doing a little bit of everything. Like, what do I most enjoy? What drives, gives me the most energy? And what should I be hiring for?
The Working Genius Assessment, it's like 20 bucks. It’s a wonderful tool. So given the time we have left, we probably can only get to one of these two charts, so you want to talk about the cost of scaling or client profitability? I
think cost of scaling. Yeah, let's talk a little bit about cost of scaling.
We might still have time to glance off both.
Michael Kitces: So, revenue per advisor is a really important metric that we don't necessarily talk about a lot in the advisor world. In the purest sense. Just take gross revenue and divide by how many people are advisors. Advisor in this context means has client facing interaction responsibility.
Might not be a lead on clients, but at least interacts and talks to them, which essentially means, helps make the revenue happen. So like, not my paraplanner. Who's really behind the scenes, not my admin who may talk to my clients, but not about planning stuff. People who have advice-oriented conversations, interactions with clients.
So, in an ideal world, as advisory firms grow, they allow their advisors to spend more time doing advisor things. And they can delegate, systematize, automate, and remove non advisor tasks. And so, as more of your time goes towards advisor stuff you tend to get more revenue productivity, right?
Like if I let go of a bunch of things, I can handle 60 clients instead of 40 clients. And now I can have more revenue with just me because I have an admin to let go of things. So I can go from 40 to 60 clients. By the time I'm hiring advisors to support me, and I've got a good infrastructure in place, often the advisor is hired to say like, look, we're growing pretty well.
I'm just going to hand you clients, service the bejesus out of them, make sure they stay forever. I'm going to go get a s’more and keep growing the business. And so often, full time service advisors are like 100 percent client facing because they don't have to run the business, do business development, do admin, and all the rest.
They become very, very leveraged positions. Which is a nice way of saying, as advisory firms grow and scale, your revenue per advisor typically expands. Roles get more specialized, people get their time focused in the areas that you want most, and your most expensive people, which is you and your advisors, Spend more and more of their time on advisor related things for which they can command value and appropriate fees and maybe even escalating fees because the more experience and specialized we get, the more we tend to be able to command fees.
So my same 50 clients gives me more revenue because I'm charging more, because I've got a more tightly defined value proposition. So as advisory firms improve, these numbers are supposed to move up and to the right. And they're going down and to the right. I mean, it's good they're going to the right because we're kind of progressing through the depth of firms, but they're moving the wrong direction.
The more advisory firms are trying to grow from solo practices that run on their own to those that are boutiques and enterprises and pursuing higher growth paths, the more that firms are pursuing higher growth paths, which means it becomes increasingly important to leverage their advisors, The worst their revenue productivity is, which effectively says to me, as I look at charts like this, we are hiring advisors and giving them admin work.
Like that's how this shows up. I hired an advisor which should double my advisor capacity and somehow, we can handle twice as many clients. We generate less revenue per advisor than we did before. That's not how it's supposed to work. And so again, I mean, this is kind of reiterates the numbers that I was highlighting earlier that I think we're creating a tendency right now in a lot of firms where we're hiring associate advisor mini me's and having them do all the things instead of creating more role specialization that says let's create great admin people who do great admin things and then get great advisors who do great advisor things because advisors are more expensive than admin staff and so you want advisors doing advisor things that have a multiplicative effect on revenue and admin doing admin tasks that are just less expensive for the business.
From a salary and benefits perspective.
Alan Moore: I also hear from advisors who are growing boutique and particularly enterprise firms, they do seem to be hiring advisors at a faster rate, and not necessarily, not always filling them with admin tasks, but they, those advisors have some capacity. And so they're kind of pre hiring for, hey, we're going to add another hundred clients, so let's go ahead and add a couple of advisors on the front end instead of, cause, You know, in the early days, you just feel like you're always drowning in work, and I've made this decision, this mistake, at times, where it's like, you get so tired of just always feeling behind that you start hiring ahead of the growth curve, which is okay, but you need to be sure that you're not hiring too far ahead of the growth curve, and that you are keeping an eye on this, because when you add, you know, just in the strictest sense, when you add one new advisor, you go from solo to boutique, You go from 242,000 of revenue to effectively 416,000 of revenue.
Like this firm is growing, but to Michael's point at scale, once you're starting to hit some of, you know, sort of the capacity constraints in, in growing the firm, we should start to see revenue per advisor go up. And the reason is because those advisors, to Michael's point, are doing a lot, or they, they should be doing almost exclusively client facing work.
But they compensate, or you know, the revenue being generated from that advisor has to pay for some of the admin staff, the overhead that comes with running a business.
Michael Kitces: One, it has to pay for the advisor, right? So if you look at, at advisory firms, they scale up, but you go and pull the P& Ls of like the bajillion dollar mega RA firms, so you're like, okay, when we're at scale.
What does this look like? And the answer is that firms that size end out spending Historically, they spend about 40 percent of their revenue on advisor team. , it's actually drifted down a little bit as more firms are going salary based and less revenue sharing and they're separating out business development, so you see some firms in the, in the 30 35 percent range.
If you want to like, napkin math to make this simple, about a third of the revenue typically is going to staff advisors, where like, they're not hunting and eating what they kill. Cause we do tend to have different comp around people who are doing business development, but like, advisors that serve clients and make sure that they're served well and retained.
Then another 35 to 40 percent goes to overhead, staff, admin, and the rest, technology, compliance, all the things that go in there. And if you spend 35 percent on advisors and 40 percent on overhead, you finish with a 25 percent profit. What that means is if I'm running a $200,000 of revenue per advisor.
I can only pay my advisors like 70 grand. If I pay them more than that, on top of the overhead, there ain't going to be no money left for profit.
Alan Moore: So, said another way, whatever you're, whatever you want to pay your associate advisor, your second advisor, they need to be managing three times their compensation.
Two and a half to three. Two and a half to three times their compensation in revenue, which doesn't go in the opposite direction with that.
Michael Kitces: And that really is where numbers show up. When you look at a lot of AUM firms at scale, frankly, you see a lot of numbers that are as high as 600,000 to 800,000 of revenue per advisor.
And at $680,000 of revenue per advisor, they can pay their top advisors $200,000. And that's how, and frankly, that's how they compete in a lot of the talent wars. And that's why every now and then we'll have a member that says, I've been grinding on this for four years and the numbers aren't getting to where I want to be.
I'm just going to go fricking take $150,000 plus job. Cause there are firms out there that will just pay someone that can come in and hit the ground running, but they're confident you can manage and serve clients. And so, we effectively start to either, you know, get the allure to say, why am I building this crazy thing?
Oh yeah, I had a vision, I got to do it. but we start getting real talent issues when the numbers are at this level. It is going to be difficult to attract and retain talent, or if you pay them enough that it takes to even remotely have a shot to, to, to keep the talent. You're just going to end up with no profit out of the business.
Which just hurts at some point, yay, you know, I managed to build a firm that's up to 600,000 in revenue, and we're serving with three advisors, and an admin staff of support, and between that and what it takes to run the rest of the firm, I actually make less than my advisors.
And I know there are a few of you that are out there in that, in that position, it's like that, that's what these numbers lead to, that's the only thing. That we can end out with, with numbers at this level. So, to be fair, there are really two ways that you actually get to problematic numbers like this.
One is advisors doing too much admin work so they're not actually getting to leverage themselves and focus in and do client stuff. The other is, we have not fixed our fees. Right, we're still dragging along the low fee levels from the early years. I see a lot of advisory firms do things like, you know, I have all these clients at the beginning, I was only charging them like 1, 500.
I feel awful to, raise their fees now, cause you know, they took the risk with me in the early years. I feel this loyalty to them, but it's really not a good use of my time, so I'm going to hand them to an associate advisor. I'm like, cool, so you hand a hu you've had great growth, you hand a hundred of those to your associate advisor.
It's a hundred clients at $1,500 a pop, it's $150,000 of revenue, and you've got to pay them like a hundred, and then you've got to give them admin staff, and then you've got overhead support, and E& O, and the rest, it's like, you're literally losing money holding on to those clients. And not to say that you shouldn't hold on to them, but if you're under charging clients, solving it with employees with fixed overhead is not a good solution.
It actually just digs the hole financially deeper. They either have to be graduated, or their fees have to move to what it takes to run an advisory firm. And the other way to think about this, just backing into it, is, look, if an advisor, if a service advisor has nothing to do except serve clients, that is their whole job, can maybe get up to 100 clients that they're doing, deep, meaningful financial planning work for.
If you can get to 3,000 of revenue per client, you're at $300,000 of gross revenue, and if they're going to get 30-40 percent of that, so that you can then cover the overhead and still have a profit margin, 3,000 revenue per client at 100 clients at least lets you pay them $100,000 to $120,000. And if you have numbers materially less than that on revenue per client, it just gets hard to even run this in a financially viable way.
Now, maybe we'll get questions in AMA elsewhere of like, I do wish we could figure out how to, in the aggregate, run advisory firms with more than 100 clients at a time, so we could do less than 3,000 in revenue per client, so we could span the reach. 3,000 does have some limitations on who we can serve, but that's just the hard math reality of where the business is.
And for a lot of people, if I said like, how do you feel about serving 100 clients, you're going like, you don't understand, Michael, how deep we do our work here. Like, there's no way we're doing 100 clients. I'm like, cool. So that means you are definitely undercharging at 3,000. You got to be at 4, If I'm at 6,000 of revenue per client, then at least I can do this with 50 clients and still be able to pay someone $100,000, $200,000.
And if I want to get their salary a little higher, either I need to get the revenue higher, or I need to get the client count higher, or some combination thereof. And so this is the other way that undercharging shows up. And one of the, I find that just the particularly pernicious ways that holding onto undercharged clients shows up, which is, I know it's not worth my time so I'm going to hire someone else and have them serve them, But if there's just not enough revenue there, we just end up undermining the whole firm.
And some advisory firms I've seen, if you really did a fair cost allocation, a revenue and cost allocation, how many clients are served, how much does the advisor's cost all in, what portion of my admin time goes to them as well, we're literally losing money on it. And then the rest of the metrics of the firm get challenging at that point.
Alan Moore: Alright, well, we're at our time limit, so, for those who, if you want to go –
Michael Kitces: You finished on a depressing note. Yeah, great. They love you and they're not firing you. When your retention rate is high, just increase your fees. It's going to be okay.
Alan Moore: It is not, the data is not all rainbows and unicorns. So, that is okay.
That's the data. The data never lies. Again, you go to xyplanningnetwork.com/400 if you would like to see some of the charts and graphs and again, show notes and additional resources that we talked about today. So Michael, thanks for joining me today on this episode.
Michael Kitces: Thank you, Alan. Happy 400.
Featuring
Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL
Alan Moore, MS, CFP®
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