In this episode of Elementality Reese Harper is joined by Michael Kitces, Chief Financial Planning Nerd, and co-founder of XY Planning Network as they discuss trends in advisory firm growth.
Michael shares his personal journey and strategies for writing impactful content, growing a financial advisory practice, and exploring new service models like the subscription-based approach. Discover how serving underserved markets can lead to substantial business growth and why adapting to client needs is more crucial than ever.
Transcript
Reese Harper: Welcome to another episode of elementality. Everybody. I’m your host for the day. Reese Harper interviewing. Um, I don’t know how you would even introduce this young man. Um, Michael kitties is, is, uh, he’s been a big influence on my career and many of you probably listening as well. It’s always fun, uh, to be able to reconnect brother.
Thanks for joining me.
Michael Kitces: I appreciate Reese, appreciate the opportunity to join you in the, the incredibly kind young, young man intro. You, [00:02:00] you just, you just gave me there. I feel like it’s the funny thing for, um, you know, when you start in the industry, young as like, as I did straight out of college, like I, I mean, I, I grew the facial hair originally because I wanted to look older because I was like 23 and I looked 17 and I wanted to at least appear in, in my In my 20s and like I would, I would hide what year I graduated because I didn’t want people to do the math and be able to figure out like how old I must be based on the fact that I hadn’t graduated from college all that long ago and you I, I graduated in the year 2000, which is now a number of years ago and I still like my voice catches.
When I’m going to say what year I graduated from college, like they’re going to figure out how, how young I am. Oh, I’m actually like not that young anymore. I’m feeling some gray and circumstances have changed.
Reese Harper: well, you always felt young to me and you never every time I see you, you have a similar wardrobe on. Um,
Michael Kitces: Well, I keep that [00:03:00] simple. Yes.
Reese Harper: yes. And I like that. And, uh, I don’t know. I just you’re a curious person. You’re one of the most curious people I know. I think what people probably don’t know is what least what I’ve learned from you is when I email you You actually emailed back some most, I think I’ve, you’ve always emailed me back, but, um, I don’t want to set that precedent.
Cause I don’t actually know that that happens with everyone, but your
Michael Kitces: I email back as many as I can. It’s hard. There’s a lot of email
Reese Harper: and I bet as it keeps piling up, it’s harder and harder, but like,
what drives you to write? Like, why, why do you write right? And what is it that helps you stay motivated and consistent?
Michael Kitces: I, well, there’s kind of a couple of layers to what,
what would you sort of ask there? You know, I, Um, you know, to use the famous saying, I, I [00:04:00] write to figure out what I think. Uh, I’m one of those people that I have to talk through what’s going on in my head to process it and figure it out. Either talking it through with other persons.
Like I have an executive coach that I do a lot of work with, uh, or. I’ve, I’ve just got to write it out so that I can organize my thoughts and kind of then look at what I wrote. So like, that doesn’t make sense. And then challenge my own thoughts and like that, that’s how I process and, and figure stuff out.
And so being someone that is, is kind of very. Wired for curiosity, a pretty voracious reader. I’m just, I find the world fascinating and have a lot of questions. And I’m always curious about like, why do we do it that way? And I was, I was very much the, like, why is it that way child that I’m sure was very painful to my parents growing up.
Uh, so there was this like, always, always stream of curiosity. Plus as I explore things, I need to write about it or talk about it to figure out what I think and process that. Yeah. [00:05:00] And that turns into a pretty regular stream of articles and podcasts and videos. Now we do it on a lot of different modalities, but it very much started in the writing realm and that, that is still my.
Anchor and go to so that I can really just process and crystallize my own thoughts and a lot of the blog and the platform he wrote really just started with, I, I was doing that for myself because I needed to write through things to figure out what I was thinking and a process when I was taking in and I got some feedback from coworkers that as I would write through that stuff, they would say like, this is really useful.
You should share it with more people. And so I did and for years, the blog really wasn’t much more than I was going through my own personal learning journey and processing my thoughts and just found out that when I shared that with other people, some other people found it interesting as well.
Reese Harper: Well, that’s a great, it’s a great insight there to, for people to take with them, I think, which is, you know, how [00:06:00] are you press, how are each of you listeners today processing what you think about the world? I think there’s something about writing and journaling that can just bring things into a more concrete fashion and.
Sort of help make you when you read back what you write. You finally realize how wrong you are.
Michael Kitces: When I, I, I’ve always, I mean, it’s interesting from a journaling and I’m, I’m not a journaler and haven’t gone that route. I do it all on computer when I write, because I need to actually then look back at and say, like, That’s dumb. Delete. That makes no sense. Rewrite. Okay, that doesn’t really connect. That should have been up here.
Control X, Control V. We gotta like, move some stuff around. And it, like, the, the computer’s ability to then, like, reorganize the thinking once I’ve dumped it out on the page, to me, is actually part of the process. Like, I can’t I can’t do if I try [00:07:00] to hand, handwrite it out sort of traditional journal style.
Reese Harper: So let’s just say for journaling, though, let’s say I’m not gonna let’s just say people are typing it. How?
How have you used generative AI to help you in your writing process? If at all? What have been some of the lessons you have learned about both the disappointments and the things that have been working, you know, in this medium?
Michael Kitces: Yeah, I, so I’d say like have been experimenting a good bit with generative AI, have not found it helpful for my writing and not that I don’t think it’s helpful or that it wouldn’t be valuable for a lot of people. I think part of this is just the sort of. career stage and point that I’m at right now. So to me, like the most powerful thing around generative AI is it solves the blank page problem. [00:08:00] It’s really hard when you’re sitting in front of a blank page and trying to get started, right? You got the proverbial writer’s block, uh, Uh, all sorts of ways that we can come up with excuses, not get started on the thing, cause it’s just hard to get started on things sometimes. And generative AI to me is fascinating in that end because it eliminates the blank page from phenomenon.
The moment you hit the generate, you’ll give it a decent prompt to hit the generate button. You’re not writing now you’re editing. And for most people, it’s much faster and easier to edit than it is to create. So anytime there’s a blank page phenomenon, I’m not sure how to title this. I’m not sure what to Uh, uh, uh, like I need, I need to get something going on this article.
I need to get something going in this like message I’m sending someone. If, if it’s, uh, uh, even an email context, Jenner of AI to me is like really good at solving that. So if you’re someone that gets stuck on the blank page, [00:09:00] like Jenner of AI can be your breakthrough, it’s like it, it, it just gets it started, then you can change it and edit it, and by the time you finish, you may not have anything that was there originally, but it’s so much easier to adapt it than it is to generate.
For better or worse, I’ve done this for, well, probably almost 15 years as a writer. In the, uh, blogging and platform work that I’ve been doing. So I had to find my own tools and techniques to deal with writer’s block and, you know, how to, how to feed the content beast as it were, uh, long before generative AI showed up.
And for me, I, I ended out in my own process of, you know, keeping what actually for most of the past 10 years has been an, a running Evernote of. Anytime I’m talking to anyone and like, oh my gosh, like I have more to say about that like that That could be an article. That could be a topic. Like, give me one moment.
And like, I will pull out like, so sorry, I will pull up my phone. Like I need to capture this really [00:10:00] quickly. I’ll be back with you in a moment, you know, thumbing in there really quickly. So I keep like a running Evernote of anything that’s cropped up in conversations with clients, with folks that I’m working with, say like, I.
I have more to say about this. I have more to think about this. Like, let me capture that. So it doesn’t get away. So by the time I sit down to need to create something, I mean, like the Evernote for this is literally hundreds and hundreds of lines of things that have come up in conversations or interactions of, I might want to do something more with this.
Could just be like a fleeting thought of like, you know, talking to someone What are the implications around, um, you know, the FTC banning non competes and how’s that show up in our industry. And so just been like scribbling random notes for the past couple of days. Like, Oh, like here’s an angle that might be interesting.
Like, Oh, here’s an angle that might be interesting. So by the time we sit down to write something, like I don’t really have a blank slate. I have a giant list of potential topics and I just pick whatever strikes my [00:11:00] fancy that day. And as I get going, I just start brain dumping everything, anything that’s been bouncing around in my head from that.
And now I don’t have a blank page. I have a brain dump of some thoughts and then I start editing and cleaning up and moving it around and turning it into something looks more like, like written, written prose, as it were. You, I, I don’t write in like a finely structured style. I basically just brain dump thoughts that are bouncing around in my head and something looks very, either very unjumbled or like a really loose, disorganized outline of bullet points. And then I figure out how they flow and how they connect and move them around and then bullet points turn into sentences and paragraphs and now like a whole article appears.
Reese Harper: you say are your content pillar or like your go tos, but maybe categories that you find yourself drawn to a lot? I mean, obviously you’re in the personal finance space. XYPN is a big part of your life and you know, your, your blog itself is a big part of your [00:12:00] life. Yeah. But like what, what categories do you, do you even think about it that way?
Is it ever that way? I’ve
Michael Kitces: I don’t really think about it in terms of categories like, Hey, I need to make sure I do this many text articles and estate articles and also a practice management article. Uh, it, it, in practice, it largely flows to where my interests and curiosity are. And if you If you zoom out and look at the blog and what we published or like cumulatively over again, it’s basically 15, a little more than 15 years.
Now we first, we first launched as a newsletter service in 2008, and then with a blog extension in 2010. So. Writing for 16 years, blogging for 14, if you want to want to frame it that way. And if you look, what you will see is that I’ve probably crafted [00:13:00] almost a half a dozen different specializations and focal areas as my interests have grown or evolved, or just like the advisor landscape has evolved.
And I find new conversations cropping up. I want to spend more time here or new stuff that’s going through my head that I want to delve deeper on. So if you go back to those early days, well, I mean, even before I launched the, the, uh, the newsletter and the kids. com site, you know, my, my first specialization was annuities.
Back in the mid 2000s, uh, you know, when, when all of the annuities with living benefit riders were first coming forward in the early 2000s, I, I was the nerd that read all of the prospectuses and met with all the wholesalers who were talking about them, like really learn how the products worked. And I made the world’s most ginormous spreadsheet of all the different living benefit riders and exactly how they worked and like reverse engineered a bunch of them to figure out.
Which one’s [00:14:00] actually had good internal rates return or not. And that turned into a book. Uh, I still got a lot of people ask me, like, am I ever going to write a book? I’m like, I wrote my first book 20 years ago. Uh, it was on, it’s called the advisor’s guide to annuities. We’re on the sixth edition now. Uh, mostly my coauthor that that’s doing, that’s driving the updates at this point.
Cause I’m not as annuity heavy in the writing research work that I do now. But like I spent years on annuities. Then, uh, the 2003 tax law passed. And tax brackets started shifting and AMT became a big problem. Uh, and I had three or four years where I was just writing and speaking about alternative minimum tax.
The first time I ever spoke at an FPA national conference was the financial planning implications of the alternative minimum tax. In the fall of 2004
Reese Harper: and those drove and like, you got energy from that research and they drove you to document it. I mean, right. I just think
Michael Kitces: yeah, like, Hey, Hey, this is interesting. I mean, a lot of it back then I was, [00:15:00] I was doing a lot of, I was much more directly in front of clients as well. So a lot of it was like, I’m looking up and researching things for actual client situations. I was like, I spent a lot of time on this. I figured out some good stuff.
It’s kind of sad that it like ends with this one client. So I was like, crap, you do all the analysis, craft the recommendation of the client and then onto the next client, whatever their thing is. I’m like, that’s kind of sad for me. Like, I’d like to see this work I was doing live on a little bit more. And so.
It was alternative minimum tax for a couple of years. Then it was safe withdrawal rate research in like, Oh, eight to, to 2010. Then I was back deeper into like tax efficient withdrawal strategies and glide paths and a lot of that research that I did with Wade Fowl, then robo advisors cropped up and as far as we’ve still been able to find, we were actually the first people to call them robo advisors on the, on the blog.
We were the first ones to put it in print. About well front and betterment. I didn’t coin the term I will give full credit came from Bill Winterberg. [00:16:00] Uh, that in February of 2012 did a, a somewhat like snarkily titled session, our robo advisors coming for your clients because well front and betterment and like just launched two months before the T3 conference that year.
And so I wrote a response article like a month or two later, like why robo advisors are no threat. It was like a response to. Uh, Bill’s article and then RoboAdvisor started cropping up everywhere as a label. And so we got really deep into technology. That’s when like early versions of what’s now the FinTech map started that we created from, from that.
And I spent several years writing about tech and then becoming so fascinated with it. I made a company with, uh, with advice pay, uh, and then it shifted from there. And I started spending more on the practice man. Well, I started spending more time on the business models end. So a lot of work around.
monthly subscriptions and fee models and how scaling really works for smaller clients and what [00:17:00] alternative businesses look like and how industry fee models have shifted and that was running for a couple of years. And now I’m doing a lot of writing around, um, practice management and business metrics and like how to really think about and run advisory firms as businesses and what do you want to create and what are those revisions really look like and what are the different paths.
So, you know, I, I chuckle a little for all the advisors are like, I’m, I’m afraid to pick a specialization or a niche because I’ll be like committed to it for life. Like I’m on my eighth niche in 20 years. Like you get to morph this thing however you want.
Reese Harper: yeah, yeah. It’s a total, that’s a, that’s a great example. Like that whole appreciate the story arc there of like, it’s always, it’s always something focused. Like it’s never, like you don’t create something meaningful until you focus, right?
Michael Kitces: Correct. They’re, they’re all focused and you know, kind of the thread for me. I mean, they all, they all rhyme. Like I’m [00:18:00] still, I’m still advisor industry. Tied to all these different angles. So like I did a thing with advisors and like I did the thing in, you know, oceanography and then like I did thing in astrophysics, cause that’s neat.
Like I’ve stayed in, I’ve stayed in one industry. I’ve, I’ve stayed in one broad domain, but you know, there’s so many different things that happen in an industry at our size, at our complexity that you don’t run out of stuff and the knowledge you get from the prior one still becomes additive. To the next stage, the next iteration, you know, the, the, the retirement research that I was doing on safe withdrawal rates in 08 to 2010 was very informed by some of the research I’d done dissecting living benefit riders in 2002 and 2003.
Reese Harper: Well, if we ask, I want to ask a little about the most recent topic that you’ve been diving into, which is This business models question that you brought [00:19:00] up and sort of like how to scale up a firm and like, there’s a lot of different directions to go here, but I think I would ask the question, what top two or three pieces of advice would you give to someone who’s trying to go from, Um, did the different stages to go through different stages.
Uh, I just like to let you kind of explain to listeners the different considerations of growth and scale and, and what it means to have a business versus, uh, maybe a personal, uh, practice.
Michael Kitces: I guess I’d ask the question a little, sort of what, at what size or stage now, because they find the, you know, sort of the, right, the business saying is what got you here, we’ll get you there, you know, the, you know, The problems you have, uh, you know, the problems you have with your first scaling, your first 50 clients to get to 75 looks very different than when you’re trying to scale from 150 to 300 clients, which looks very different when you’re trying to scale like a [00:20:00] billion dollar firm to a 2 billion firm, which looks different than what’s going on in your world.
If you’re a 10 billion firm. So the, the, the problems. Sometimes we’re just sort of artifacts of a particular firm. If you’re good at a thing, you tend to do a lot of the thing and whatever you’re weak at eventually becomes kind of a problem with the firm that you got to fix and shore up as a business.
But a lot of the problems of advisory firms and really the problems of any business scaling, which I’ve, I’ve lived now having Grown, grown and scaled multiple businesses. Most of the problems that crop up in, in business as you’re scaling are a function of just the, the size of the business, the number of people and the, the, the human and organizational dynamics and complexities that arise as you try to organize human beings who are going to do human things from time to time.
When you’re trying to organize human beings in, in pursuit of a common objective. Where you have to [00:21:00] maintain certain dynamics to make it work. So for instance, like my, my challenge is when I’m a three person firm and everybody reports to me and I need to add a fourth team member, but I’m kind of running it out of time to manage a fourth team member on top of the first three on top of my clients looks very different than when I’m the CEO of a $2 billion firm with $14 million of, of, uh, revenue.
And I have 80 people working for me. And of the 80 people, only four of them actually report to me, my leadership team, like there’s people in my firm who reports people, who reports people, who reports people who report to me. So my problems at that size look very, very different than I’m a three person team trying to get to four and everyone reports to me and I’m, I’m navigating those organizational dynamics.
Reese Harper: Yeah. Let’s, let’s pick apart a couple. Let’s say that I’m a firm that is approaching like a million dollars in revenue. But it’s still kind of concentrated around me. Let’s say as the [00:22:00] primary advice provider, the CEO, um, I’ve, I’m starting to feel a little bit stressed and maybe things might start falling through the cracks.
Uh, what are you sensing at that moment? That’s probably the next stage of maturation
Michael Kitces: So, so I find that the first big question that crops up for. Advisors that get to that, that kind of stage in particular is, is just getting clarity around what do you actually want to build? What are you trying to create in the first place? So in the simplest sense. Uh, do you actually want to need to add staff and grow in scale from here?
Reese Harper: because the reason,
Michael Kitces: dollars.
Reese Harper: yeah, it’s a great business, right? So you have, you’re at a crossroads of, do you really know what you want? That’s.
Michael Kitces: Yeah. I mean, our, our industry has a default [00:23:00] that the only answers are grow, grow or, or grow, uh, right. I mean, just, we do it as an industry. Uh, you know, we have. A long list of different industry recognition events and awards for the growthiest advisors. No one has an award for the advisor who took the most days of vacation while earning a million dollars. Even though the second one probably has a much higher level of happiness than, than most others. Uh, Uh, your, or, you know, how to earn a million dollars working the fewest hours a week so you can spend the most time on vacation or do doing PTO with your kids, uh, PTA with your kids or, or whatever it is that you might want to do outside of your business.
And it’s, it’s an important crossroads that, that, that crops up. I really find it’s not a function of revenue. It’s, it’s much more a function of client counts because client counts is where our, our, our personal capacity really kicks in. The [00:24:00] Uh, where you have to start adding team members if you’re going to keep adding client count.
And if you add team members, then you have to manage them. And not only have to manage them, but like, they want career opportunities and growth for themselves. Which means now you have to keep growing. Because you’re not just feeding your growth goals. You’re feeding their growth goals, because if you don’t satisfy their growth goals, they’re going to leave.
And then you have a turnover problem. So yeah, I, I kind of analogize it. Sometimes it’s like pumping up a balloon, like pumping up a hot air balloon with a manual pump. If you pump it up high enough, you get stuck where you have to keep pumping because now it’s too far to fall to the ground. And you would have been totally fine if you just didn’t pump yourself that far up in the first place.
But if you do, you have to at best be really careful about how you descend back to the ground because you’ve created problems for yourself by pumping yourself up in the first place.
Reese Harper: Yeah.
Michael Kitces: and, you know, part of that just comes from an industry [00:25:00] that focuses on growth. Cause if you really, you know, if you look at where the, uh, I would say where the bread is bar, like you follow the money at the end of the day, most recognition stuff in our industry comes from media publications and the media publications run recognition awards because after the recognition award, they run a recognition event and they run recognition events because if you are the most growth oriented firm.
You are kind of by definition and most in our industry these days, you are the firm that is adding the most assets, the fastest, which means if I am an asset manager or a product manufacturer, I disproportionately want to get in front of the advisors who are bringing in the most assets, because if I can get in front of them, I get the most opportunity, uh, to, uh, to work with them.
And get assets in. So media companies run events oriented towards [00:26:00] growth because the product manufacturers will pay disproportionately high sponsorship and advertising dollars to get in front of that particular audience. And I still remember the first time it hit home for me. I was, I was speaking at, um, uh, one, one of the, uh, Barron’s independent advisor summit many years ago.
And, uh, they were doing a, uh, a panel on the stage and it was Bernie Clark from Schwab, Tom Nally from TD Ameritrade when he was still running it, Mark Tabersian from Pershing, and David Cantor from Fidelity. It’s like, these are the four absolute titans. Of, uh, uh, R. A. custody, most events struggle to get any one of them to actually show up on a stage, and here’s an event where all four are on the stage, they’re on the stage, they’re even willing to share the stage with each other, which, they’re very cordial, but like, They hate doing like their time is ludicrously [00:27:00] valuable.
They don’t really don’t like doing anything. If it’s not like their, their show where they get to like do the whole thing. It’s like, they’re even willing to compromise this stage. I’m just looking at this. Like, how do you get the big four to be willing to compromise one stage at the same time that looks around like, Oh, cause there’s like 2 trillion in the room right now,
Reese Harper: Yeah.
Michael Kitces: it was, it was Barron’s top 100. And these are firms with billions and tens of billions of dollars like oh, okay there because there’s like Trillions of dollars in the room. A little like that’s why you show up. So, you know, you get it from the media companies, you get it from the, the custodial platforms themselves, right? The number of advisors has not grown in 25 years.
So the only way you grow as a platform for advisors, you need same store sales growth. Like you need the advisors on your platform to grow. So they don’t grow unless we grow. So all they want to do is talk about how much we’re growing and put growth on a [00:28:00] pedestal. Because that grows them broker dealers do the same thing.
Every top producer pro conference is the person who moves the most GDC because the platforms only grow when you grow. So they only their definition of success. Is growth. So they paint that as our picture. And then we get stuck answering someone else’s definition. So long winded way of saying the big crux comes with, what are you actually trying to grow in the first place?
You know, if you just want more revenue, let go of your smallest clients, only add new clients that are above average, and you can double your business without hiring anyone, I guarantee it.
Reese Harper: Mm.
Michael Kitces: Just only add clients above average and let go of clients below average. Every time you add one, that’s above average, you will never have to hire.
Your margins will just go through the roof. And there really are a bunch of advisors out there that have million plus dollar revenue with [00:29:00] zero or one staff that take home like 80, 85, 90 percent margins. And do not work a full time week at this point because their clients have been with them so long. It doesn’t take a lot of work.
And if you’re working with pretty affluent clients, you might only have like 50 of them
Reese Harper: So this
Michael Kitces: on time. Yeah.
Reese Harper: this thread a little bit because I, I mean, there’s someone who you’re someone that works in a community like PN where you and Alan have done a great job of like shepherding, uh, work life balance. You have a very, I would consider
a A diverse, uh, group of advisors pursuing lots of different markets at lots of different wealth levels.
But like it seems, it seems from an outsider’s point of view, like I’m an XYPN member. Elements has a great partnership with XYPN. As I look at the level of like altruism that’s present within an XYPN [00:30:00] network. I mean, to me, that’s coming from your leadership. That’s coming from Alan’s leadership. There’s a lot of people trying to.
access, expand advice. And when I look at the concentration of like wealth, Uh, in the last, you know, in 2024, I get pulled so many different points of data, like, man, like there’s just, it’s, it’s a scary picture in the United States for me to see how little options, how little, uh, liquidity. I mean, bottom half of the population has maybe 2 percent of the wealth, you know, I mean, and the top 0.
1, uh, does have in terms of liquidity. I mean, it’s just a, it’s a astronomically high, the 90 percentile, you know, it’s just, it’s this to me is like a real, it’s a, I don’t know, I don’t want to like. I’m a [00:31:00] capitalist too, and I, we all have to pay our bills, and I’m, financial advisors need clients that can pay them well, and, but, like, what do you think about the trajectory of wealth concentration in the U.
S.?
Michael Kitces: So, so relative to advisors and this, this sort of draw that so many of us seem to have, because we, we end out working with A subset of fairly affluent folks who make, who pay us pretty darn well. And it’s good income and it’s good dollars since very valuable for them. And then at some point we get the, like, but there’s a lot of people I’m not serving who can’t even afford the fees that I charge now, because I’ve, I’ve, I’ve drifted up markets to these people who pay me very well for the service that I provide them.
And I’ve kind of boxed myself in there. Right. I. I see this playing out just sort of most commonly, I guess, one of two, one of three ways for advisors. The first [00:32:00] is for some of us, like that picture I painted, you know, look, you can keep growing without ever hiring staff. You just have to only take clients above your average, and then you have to let go of your least profitable clients below the average.
If you want to grow your business and you don’t want to have to hire and deal with management and all the rest, like that’s the formula and it works. And it works almost indefinitely. I mean, I’ve seen ludicrously multimillion dollar size practices that have played out that formula. Uh, the problem that crops up for some is like, but then you have to let go of clients and I just don’t, I don’t want to, I don’t, I don’t want to, or, or like, I’m, I’m so driven by the mission of what we do that I feel a need to keep serving them anyways. And if that means I have to hire people, then I’m going to hire people and figure out this management thing, because I just don’t want to stop expanding my, my reach. Um, I feel like this is a version of, you know, Bo Burlingham’s, um, small [00:33:00] giants, like businesses that they’re not trying to be big. They’re just trying to be great for the community that they serve.
Except if you serve a community, great, long enough, like you actually couldn’t turn out to make very, very, very large businesses. Uh, but you’re, you’re, you’re not maximizing for, you know, Enterprise value to satisfy investors. You’re serving a community and try to build a purpose driven business that expands its impact to the community.
And if you do that with reasonably appropriate prices and service, it turns out it grows profitably and gets large. Uh, I, I kind of label these, the boutique firms and, and, and language that we like to use in talking about advisors and so for a subset, I see like they, they expand this reach and impact to serve more people.
Because they do a good thing and they want to serve more people. And so they just expand their firm. He was, as long as you’re doing it at a revenue per client level, that is sizable enough that you can just hire the team you need to hire to do the things you need to do. [00:34:00] That works. Uh,
Reese Harper: But that’s like a big disclaimer, a little bit of a disclaimer there. It probably most often due to the lack of liquidity that the customers have or their income levels, it’s difficult for me, a revenue amount to support a consultant. Is that true or not? How do you see this?
Michael Kitces: yeah, well, look, I,
Reese Harper: In other words, do consumers even have enough demand?
Is there enough consumer demand about a financial pain that’s there? It’s really nascent to pay enough to work with an advisor.
Michael Kitces: well, yeah. So first of all, that’s why almost every advisor drifts up market over time. Because basically there’s a shortage of good experience advisors. And so the marketplace in it’s slow, but messy, but inevitable way drags good experience advisors up market into higher dollar clients, which [00:35:00] eventually we just tend to do.
Cause at some point you’re like. You basically want to pay me twice as much money to do the same work I’m already doing because you value it that much.
Reese Harper: College and I still have to, I still have life I have to pay for too, so yes I’ll take a raise. Yes I’ll take a raise, thank you, I’d like that promotion.
Michael Kitces: So, you know, we, we drift up market, the more experienced, the advisor, the high edge, the high, the more affluent their clients tend to be, the larger the advisory firm, because it’s been around and build a brand. The more affluent of clients tend to be, I mean, we, We’ve shown this in some of the charts charts that we do in practice management trends on the, on, on the kids is platforming.
There is an almost like precise, straight line, linear relationship between the average size of the clients and the size of the firm, bigger, the firm, bigger, the average client, just straight line. It’s, it’s astonishing how. How consistent it is. Some of that’s a consumer demand thing. There’s some consumer preference, bigger clients have some preference for bigger firms, but we, we, we gravitate that way.
Cause at some points, like these [00:36:00] people will pay me a lot more money to basically give the advice and spend the time I’m already giving. They just value it more in a writing, write a bigger check. Why would I not take that? And to me, like that phenomenon only happens in the simplest sense, because there’s too many dollars chasing too few good experience advisors. So first of all, you get. You get that phenomenon. The second part then that comes with it is I do think the industry, you know, in, in moving in the direction of recurring revenue, cause you know, if you zoom out from 20 years ago, 25 years ago, like we were all commission based. Which is a really brutal model.
And then we discovered recurring revenue about the same time the software industry discovered SAS models. And like we all became obsessed with recurring revenue in our respective manners, software went SAS and subscription fees, uh, and advisors went AUM works great scales. Well, success stories all over the place in the industry.
Uh, but. It’s a [00:37:00] particularly narrowing model when the way you’re getting to your minimum revenue per client is a percentage of their assets. Because now you can’t just work with people who are willing to pay you. You can only work with people who are willing to pay you and can do it in a manner that is attached to assets that happen to be liquid and available to manage and movable, which really narrows your market.
And, and so to me, like that was part of, from our end, like founding mission around XY planning network was there’s a whole giant swath of people out there that are quite willing to pay for advice. You just have to build them for it. You can’t attach it to assets that they might not have, or might not be liquid or might not be available, or they don’t want to move, or they just literally don’t need the service to manage their money.
They can do that off their smartphone now. They need advice and they’re willing to pay for advice around all the rest of the stuff that’s going on in their lives and maybe want help with their portfolios too, in some cases. And like that was the founding purpose around [00:38:00] X, Y, P and planning network championing subscription models was the recurring revenue part matters.
It aligns our interests to invest into the relationship with clients. Which clients have noticed and appreciate because we get astronomically high retention rates. The demand piece to me got unlocked when we suddenly made it possible for consumers to have enough income to pay for an advisor, but not enough assets available to give it to consumers.
To them as a way to pay them. And so now like when we look in X, Y, P N across 1800 advisors, we, we do our annual benchmarking studies, the five year average compound growth rate of new clients at X, Y, P N is 29 percent aggregated across 1800 advisors. I mean, it’s, it’s tens of thousands of clients that X, Y, P N is adding every year.
You look at Schwab’s benchmarking study on like RAs in the aggregate, almost all of whom are AUM based. And the average [00:39:00] annual compound growth rate of clients is like 5%, five and a half. Revenue growth is a little bit higher because, you know, we’re tied to assets and assets grow. But to me, like the purest sense, if you want to understand where demand dynamics are, look at client’s growth rates, not assets and revenue growth rates.
And the client growth like X, Y, P, N in subscription models is compounding out. Uh, six times the growth rate of the industry at large, which to me just says relative to your, your question, like, yes, there’s like giant reams and swaths of advisors, uh, excuse me, of consumers that have just been looking for someone that they can pay for fricking advice and not have to do a whole bunch of other things or buy a whole bunch of stuff that they weren’t necessarily looking to buy.
And that market now has gotten unlocked. And it’s kind of off, off to the races with so many members growing because of that demand opportunity that, that got [00:40:00] unlocked. So, you know, we see advisors four or five years in with X, Y, P N getting it off to 150 to 250, 000 of revenue, which for a lot of advisors in like traditional brokerage world, that was like 10 plus years to get to your first 20, 25 million of assets.
To generate a similar revenue in, in a traditional AUM model. So the, the demand, the demand is there. Now I’ll come back to your original comment the moment, like there’s still a threshold of like minimum fee below, which it just gets really hard to scale an advisory firm. And, and you, that number as we’re finding in our research is somewhere around 3, 000 of revenue per client. And in a ongoing relationship style model, if you’re gonna have a completely different business model, you could do it differently, but like some number of ongoing meetings, some number of ongoing emails and calls and conversations, some level of the client has a question. You got to do some analyzing, like just that, [00:41:00] that model in the aggregate, uh, has a certain amount of hours.
It takes every year to do the work for clients, which means there’s only so many clients that you can serve. And when you work backwards through the math, You end out with, it’s really hard to scale these things lower than about 3, 000 of revenue per per clients, right? In the, in the simplest sense, if you’re going to manage a hundred of those clients, you’ll have 300, 000 of revenue.
If you run a viable advisory firm, you don’t want to spend more than 35 to 40 percent of your revenue on. Advisors servicing the clients and then you have overhead and then you get some profits. So if you’re at 300, 000 of revenue and you’re trying to spend no more than 35 to 40 percent of revenue on advisor compensation, you’re basically capped at spending no more than about 100, on an advisor.
Reese Harper: Yeah.
Michael Kitces: And that’s, you can do that if they get really experienced, they’re probably going to look for more and leave. And so if you want [00:42:00] to retain them, you probably have to get a little bit higher than that. But just when you back into the math of how many clients can advise or manage, how much revenue can advise or manage, what do they want to get paid to do this job?
And what can you afford to pay them and not blow up your P& L? You start getting to a number in the general neighborhood of 3, 000 of revenue per client, which is why in the AUM world, so many firms Their first minimum is often like 250, 000. It’s, it’s right around that same, that same minimum revenue. And now we’re kind of seeing advisors on subscription models start popping up with a lot of 200, 250 a month tiers when they get to the point where they want to scale beyond themselves and they have to start hiring staff and realize like, there’s just a certain amount of revenue that I need to generate.
In order to make this work.
Reese Harper: Yeah. Well, if that, do you have an opinion on in a related question is do you have an opinion on the percentage of gross income that you think it is [00:43:00] reasonable for someone to spend on advice? Like, is there like a rule of thumb here? That’s or yeah.
Michael Kitces: Income from a consumer to spend on advice. Um, so we, we did a version of this analysis with some of our, um, advisor productivity research a few years ago and found if you just look in practice at. What advisors are charging and the income levels of their clients self reported, but we have a pretty good space of, of, uh, client, uh, of advisor data to estimate it.
What we’re finding is the advisors who are charging those subscription fees The fees end out being about two to two and a half percent of their client’s income. That just seems to be where the consumer willingness is is showing up and I mean it it kind of makes sense I mean if you think about it, uh You know like think of your annual Income for anyone who’s out there or listening [00:44:00] think of your annual income that you make take one percent of that number for most people one percent of income Is a splurge I can’t literally do it all the time, because there are 365 days a year, and if I spend 1 percent of my income every day, I spend more than all my income.
Like, that can be a weekend splurge, that can be a special outing, like, I can, I can, I can do that pretty quickly. Now double it. You’re at 2 percent of your income. By the time you get here, you’re usually at, I need to talk to my significant other before I do this. Like, we might do this as a special thing, but like, we are passed by.
Individual autonomy to make this call. It’s like, this is, this is kind of a big chunk of money. Uh, and it scales remarkably well, regardless of what income is. That’s why I’m kind of talking percentages like [00:45:00] a, you know, the way a hundred thousand dollar household thinks about a 2, 000 purchase is not that different from the way a half million dollar household thinks about a 10, 000 purchase.
Reese Harper: Yeah, and you can see how, like, you can see how, I mean, if we take like, let’s take a hundred thousand dollars of income, you know, it, it becomes difficult for a $3,000. It becomes uncomfortable for a $3,000 fee, right? To be like
Michael Kitces: correct. It’s.
Reese Harper: a month for me, making 120 grand like. And if you look at like, you know, what percentage right of, um, the population even makes a hundred thousand or more, you know, you’re like 15 to 20 percent maybe of the population even makes a hundred thousand or more, but
Michael Kitces: Yeah, which is, which is slightly better than the percentage of the population that has, you know, several hundred thousand dollars liquid and available to move outside of your [00:46:00] investment accounts. You know, we’ve done some market sizing on that. I think you get to like seven to 10 percent of households.
So yes, like it’s more, which is, I think why we’re seeing so much growth on the, on the subscription. And, but it’s like, no question. It’s still, it’s still limited because it’s the end of the day. Like it’s a, it’s a human advice Service just if you want to pay for a service, the dollars have to come somewhere to do it.
So if you look at other places like the medical industry, you get clinics that are largely funded through charitable donations. And that becomes the way you financially underwrite the service because the doctors still have to get paid. You may make a little bit less in a clinic than you would in, you know, private practice surgery and different people have different income goals about where they are on the spectrum, but there’s still some income level that we want to get to for our own lifestyles or that we need to get to, to, to cover our needs.
Or that is too much to give [00:47:00] up. If it’s too much below the market weight for my profession compared to what I could get in any other job that’s out there, right? We only, we only tolerate so much of, uh, uh, so much of a range around this. So, you know, we do get more expansion from this and look, there’s a advisory firm we talked to, uh, a ways back, uh, that, uh, down in South America and Brazil, uh, they’re working with a much lower standard of living folks there.
And they were running a firm where their, their average fee was 5 percent of client revenue, uh, of client income.
Reese Harper: wow.
Michael Kitces: were, and they were growing very rapidly. They were providing a really meaningful advice service for people that really needed some advice, help, and navigation. And it was not hard to show them how a couple of good financial decisions would save 5 percent of their income.
Reese Harper: Yeah. It’s nuts. Well, it’s, you’ve done a really good job of staying on this beat of expanding access of like focusing on. [00:48:00] Answers to hard questions, and I really, I really appreciated that and really enjoyed it. I think the question still remains like, as an industry that is sort of claiming, right? We’re claiming to have some solutions, at least to help consumers move in a positive direction.
It seems like the, the, the, we’re missing a few parts of advice, um, to get to help people to move from 50 K to 90 K to one 20 to one 50. Like it’s a, does our industry have a responsibility around occupational advice around career advice around. Can we help? Can, can this, does this matter? Um, it seems to me like mobility of an increasing income has a higher correlation to financial wellbeing than what you do with once you get it.
Right. And, and so [00:49:00] I’m curious if you’ve thought or wondered about. Advice coming out of our industry related to helping people make more money, make career shifts, make adjustments, focus on education. Like, where do you see that happening? You know, I’m sure it is.
Michael Kitces: Yeah. I mean, I’ve, I’ve long been an advocate around. You just the impact advice can have for people in their working years by helping them navigate better, uh, better salaries, negotiate their salaries, better find better job opportunities, create the personal emergency fund and transition dollars that are necessary to be able to leave your old job when the new one can’t start for two weeks.
Right. I mean, like when we talk about this world where, well, I mean, what’s the stat like. Uh, an excruciating number of households would be like, would be devastated by a 500 emergency. What, what I hear when I, when I hear statistics like that is, so basically the [00:50:00] overwhelming majority of households could not afford to be out of work for two weeks, transitioning to a new job that might pay them 50 percent more, or even just 20 percent more, it’d be super meaningful because they can’t, literally can’t manage the two week transition and heaven forbid, that it would require them to live somewhere different than they currently live.
Reese Harper: Yeah.
Michael Kitces: couldn’t afford to move. And to me, like, there’s all sorts of constraints around job mobility that we could, as advised, like, we could impact with career advice and help people find better jobs and professions for them, that we could impact with salary negotiation advice, just make sure you actually get paid what you’re worth in the market.
That maps on the financial planning of emergency funds and transition funds and not taking on such a ginormous mortgage that you won’t be able to move if your house goes slightly underwater. So now you can’t take the great, the great job opportunity that would completely transform your family’s life because you can’t move across the country because your house is underwater, [00:51:00] underwater mortgage, not literally.
Uh, so yes, like I think there’s huge opportunities that come from advice in that domain. I do think there are a lot of questions around. How we pay for it, who, who pays for that, how does that work? You know, is that a, is that a, you know, is that a charitably funded clinic model? Is that a pro bono style model?
You know, we see a growing number of advisors doing various versions of, uh, uh, barbell strategies. So, you know, I, I’m going to have, you know, if you think of like a, uh, you know, a weightlifting bar, like a barbell. I’m going to have clients at two ends of the barbell. I’m going to have a small subset of clients that pay me really well to provide a really valuable advice for them so much so that I can make all my income goals for the year from a relatively limited number of clients that don’t take a huge amount of time.[00:52:00]
Because I’m billing them a very high rate for the value of my time and my knowledge and expertise. And now that I’ve covered my income goals in a limited portion of time, I’m going to take all the rest of my time and like, forget this whole, you know, I’m going to come up with a lower price model. Like I’m just going to go serve people for free.
I literally don’t need the money anymore because I’m running a practice. That’s so sound from the subset of people that are really willing to pay full value for my advice that I can do this over here and give it away, give away the other end of the barbell. Entirely for free. So I, I see some models emerging like that, right?
If you look at, like, law has a very embedded, pro bono expectation as a part of the hours that we spend indirectly. Part of the reason why my lawyer bills me the high rates that Bill my lawyer does, is I am supporting the pro bono effort of the firm and the number of hours that the firm spends on pro bono activity.
And that’s just kind of built into their professional model. So I, I can see barbell style. [00:53:00] Um, a model emerging, maybe someday there’s a clinic style model that has some external. Charitable funding, you know, I see advisors starting to experiment with various versions of 1 to many group models. You know, can we make the economics work better if we do this in a client cohort of 4 or 6 or 8 people who kind of have a common need and common stage that they’re working through?
Um, I actually think there’s a lot of potential in the group model, but I think most people in the industry. underestimate how radically different group models are from individual models. And we don’t realize that the way we, the way we give advice is so attuned to individual clients, individual circumstances that we’re, we’re just, we’re not built.
We’re not wired for group models. So we struggle, we struggle with them.
Reese Harper: mean, Elements has seen a lot of people have an interest in a group model and it’s more, it’s more difficult, more radically transformative to their operations [00:54:00] than they realize. Right. And, uh, I was just, I just pulled a sample of, uh, 200 people out of the Elements database that were age 30, just to measure savings or like liquidity.
Right. Uh, by, uh, income level. And I’m,
Michael Kitces: it?
Reese Harper: I’m,
Michael Kitces: You got to buy a sample of who hires financial advisors in the first place. So like, does that make it better or is it still bad? Even as clients of advisors?
Reese Harper: like, there’s just a high correlation to income and liquidity. Right. And, and it’s, I think that it just puts a, like, if I, if I pulled 200, 000 incomes out or an average of close to 200, I wouldn’t be surprised. Like I just looked right now that the average person making 200, 000 at the age of 30 has almost a year’s worth of.
Liquidity on average with the, you know, some of people being like way high, skewing that. But on the median’s probably more like, you know,
Michael Kitces: Yeah, one.[00:55:00]
Reese Harper: half a year, if I go down to 75 or 80,000, if I go down to 60,000, like what you’re saying is it’s hard for someone to have enough liquidity to make that mobility leap.
And the advice they’re getting sometimes is like, pay off all the debt, pay off the house, like deliver pizzas and then you’ll be able to like be financially free. Um, I’m not, I’m a, I like Dave Ramsey, but like sometimes advice like that causes someone with a lower income to not be upwardly mobile, to not, like it’s, it might be okay to leave that credit card, uh, in place if it means being able to have six months of liquidity to have the wherewithal to double your salary with the proper negotiation or the proper career development or education.
Seems like there’s, um, you know, an, um, an opportunity there for us to expand the scope of what we think advice is for people that don’t have as much liquidity. Anyway, I wanted to get [00:56:00] your reaction to that
Michael Kitces: Yeah, I mean, look, relative to audiences like Ramsey, I mean, I’m, I’m, I’m not a fan of a lot of what he puts out there. Uh, as, as, as I think the case for many advisors, but I also look out with the frame of, you know, Dave has a particular, you know, debt is bad. No debt message. And when I look at who is drawn to that message, it is disproportionately people who have had debt problems and had bad experiences with debt and are going, I need to figure out how to get control of this and do something about it.
And so, you know, if, if you are predisposed by whatever means to, uh, uh, have temptation problems with debt that inflicts difficulty on yourself, then yeah, I actually have a lot of sympathy for taste message. Like, Yeah, just make it go away. Like remove the temptation from your life and the problems that it introduces.
I wouldn’t tell every single person I meet off the street that advice [00:57:00] necessarily, because I think there are prudent ways to use debt as you’re highlighting, but if I’ve got an audience that is disproportionately wired for debt problems, I have some sympathy for that, right? Like D O Dave does not necessarily get.
A representative sample of Americans or a random slice because there’s a self selection bias in In, in who listens. You know, I, I, I mean, I then see that at the other end of the spectrum of, you know, the publications are like, you know, uh, Bob saved, saved $2 million by Age 33. Learn how he did it. And it’s like, you know, I ate really frugal.
You know, I like, I, I ba, I brownbag my lunch. And I was really frugal about my decisions and I didn’t make any responsible barges with my car and I have total control of my debt. And so it’s been really effective with my 275, 000 salary. You save almost all of it. I’m like, so it’s the 275, 000 salary.
That’s the key. You’re like, you’re, you’re preaching this like long list of [00:58:00] frugality. It’s like, and by the way, I also happen to have 98th percentile earnings in the U S. Like maybe that’s how you got to. 2 million by your thirties,
Reese Harper: Yeah.
Michael Kitces: because you did all these other for, I mean, like, yay for you, you made 275, 000 and you didn’t blow it on consumption.
Like that part does matter, but yes, you know, I, there’s a lot of, we talk a lot about the spending side and a lot about the, the investment side. And I, to me just way too little about the income earning side. And the unique planning issues that crop up. If you actually want to pay attention there.
Reese Harper: Yeah. All right, dude. Well, we’ve taken, uh, uh, uh, we’ve taken so many great questions. I think this shows your breadth and range and just the interest you have around. So many topics that help, uh, both advisors and consumers. Appreciate all your, your, just your energy. And, uh, we’ll let you have the last word on the way out the door here.
Anything you want to leave with people?[00:59:00]
Michael Kitces: Oh man. Uh, weird to where to leave away arranging discussion like this. Uh, you know, I, I’ll kind of take it back to where we were at the beginning that, you know what I mean? Just, there’s this crossroads that comes when we grow to a certain size or it’s like, okay. I’m kind of doing okay on income. Now I got a decent critical mass of clients.
It’s going kind of well, I don’t really want to stop because apparently I’m supposed to keep going and growing. Cause everybody tells me, and it kind of feels good. Like we are advisors tend to be very, very goal oriented. So it’s nice to keep setting goals and hitting them and then reset our goalposts and do it again.
Um, but to me, there’s a real opportunity to pause and try to get clarity around what you really trying to build and what you’re trying to solve for. You know, if you want to solve for income, like, yes, I can keep hiring and growing and growing, but I can also stay a really effective lifestyle practice and just add clients above the average [01:00:00] and remove clients below the average and grow my income indefinitely without ever needing to hire and just getting better and better margins.
But if I’m doing it because I got a goal to help people, then sometimes I keep adding because I want to help people. It’s like, well, that’s cool. Are you trying to help people who can afford your services? In which case you can start staffing up. Or you’re trying to help people who can’t afford your services, in which case, maybe the goal is not higher, higher, higher, it’s bar move the barbell out in a more extreme way and get even more valuable clients.
So you can earn all your income with fewer clients. So you can go help a whole bunch of people for free or experiment with a group model or whatever, whatever other thing it is that you want to do. You know, some of us I find are just wired for reach and impact. So we’re going to keep hiring and we’re going to keep expanding the reach.
Uh, and more power to you if that’s how that’s what you want to pursue. But just, there’s a lot of, there’s a lot of advisors that are playing other people’s success game instead of their own. And when we don’t get [01:01:00] clear about which part’s really meaningful for us, either we start building the wrong thing, or even when we’re driven to help people, we don’t, we don’t help them in the right, most effective ways.
Like we, we scale the wrong thing in pursuit of not being clear about how we want to actually get to the thing we’re trying to help.
Reese Harper: Yeah, it’s great advice, man. Thank you so much for that summary and, um, appreciate all your help to the industry, to clients and to the, the network of advisors and, you know, blog readers you support. Thanks again. And, uh, look forward to having another chat, man.
Michael Kitces: Absolutely. Thank you.
Reese Harper: Thanks.