Some Thoughts About Structuring a Small Investment Advice Business.

My colleague Max and I are the “children” of Tim Ferris’s Four-Hour Work Week.

I think it is less because both of us are very structural people. We recently had our half-year retreat, and a part of the program is for all of us to connect with our Emergenatics profile. I’m probably the person with the most structural orientation but I got to know Max doesn’t have such a strong structural preference nowadays.

But the first time I heard that Max prefers to work with only X number of clients, “This makes so much sense. This isn’t a surprise at all.” was what went through my mind.

One of the key takeaways from the Four-Hour Work Week is that there is probably a “magic equation” that helps explain how much optimization you can achieve between the trade-offs.

And there will be trade-offs:

1. If you manage to bring onboard more, you might earn more upfront fees or commissions, which will be good money-wise.
2. You would have to service the existing client base.
3. Both #1 and #2 require effort to a different degree. That will take time and effort away for other things.
4. If you spend so much time trying to onboard newer clients, do you add enough value for your existing ones?

There is a sweet spot to a number of clients, remuneration, and living a comfortable life.

An article by Emile Hallez gives us an idea that more and more advisers are also trying to figure out this trade-off:

1. Jeremy Walter reached his goal of 75 households, with an AUM of $45 million. This means an average AUM of $600,000. We do not know the ongoing fees charged but on 1% it will be $450,000 yearly or $225,000 yearly if it is 0.50%.
2. Ashlee and her husband serve 100 households, with an AUM of $90 million under Gunder Wealth Management. They think their limit is 120 households and they don’t have account minimums for their clients. The math: $900,000 yearly if the fee is 1% or $450,000 if the fee is 0.50%.
3. Will Brennan currently manages 15 but has a cap of 30 clients under Park Hill Financial Planning & Investment Management. His clients tend to invest $1 million to $5 million.
4. Michael Izbotsky of From Planning to Living capped his number to 50 clients. Since starting in 2018, he has managed $4 mil for 40 households. He charges a flat fee for financial planning for those who don’t meet an asset minimum for 3 designated check-ins with clients per year, as well as meetings for unexpected events that may arise.

Each have their own maximum number of households/clients, and niche client base. Not all is $1 to $5 million. Even for someone with a small AUM, it is more reasonable to ask “What is the sweet spot in the number of clients/households that I can serve?”

How Should We Look at Capping Number of Clients Serve

The four advisers featured in the article gave interesting things about operating this way:

1. Limiting the number of clients isn’t the right business path for everyone.
2. Capping is more intentional than setting it as a default setting that does not change regardless of the situation.
3. Not all the fees need to be AUM-based.
4. Capping means potentially turn away good prospects, but allows you to be selective.
5. “I’m able to give each and every client the same golden standard of service, rather than bringing on 75 clients or households and maybe giving them 75 percent to 80 percent of the top-notch service,” he said. “I want to be able to give them the most attention that I can.”
6. Not taking on new clients can also be a marketing tactic, which [Kyith] view in a negative way.

In his 2018 blog article, Michael Kitces shared that an adviser can’t realistically have meaningful relationships with more than 100 clients.  Those who work with affluent families and are paid on average $5,000 each by 50 clients would get $250,000 in gross revenue and could take home $200,000 in pay.

Unless you are damn stubborn or steadfast to a certain magical equation, we need to be realistic during business building that things may not turn out the way we plan. You may eventually realize the people you want to work with are especially sceptical to advise, very competitive, and genuinely not very good to work with as clients.

There is Always Going to be a Point of “Enough”.

At some point, Jeremy Walter realizes that taking on one more client may mean taking attention away from his family.

You would recognize this is not new, even if you are in the advisory business.

If you continue to climb and step into a regional role, you would be dealing with calls with your colleagues during Singapore hours, then dealing with Europe in the afternoon, and then dealing with the US at night.

While time is a big factor to consider, scaling up or maintaining a set of clients by delivering value to them requires attention.

Friend of Investment Moats, Kitcat from centsofindependence , discover more about some of the shortcomings of a Barista FI lifestyle. Delivering value as a tuition teacher can be challenging to balance with enough income and also enough time to live the kind of life she wants.

You may consider tuition the perfect job because you can adjust the income and the time you want to commit, but some of you may wonder if a trip to Japan is better if you don’t have to take a few lessons while on the trip.

Her barista FI experience amplified what she want less of and how to achieve it.

We all may need to be overwork, to overcommit to our work enough to realize one day what we want less or whether we truthfully want to pursue more.

What Would My “Magic Equation” Be If I Were to Take on Clients?

Even if I don’t have an urge to, thinking structurally through this problem helps in our growth.

It is important for us to know why I would want to have some sort of advisory business in the first place. To put food on the table? To prove to others that I can grow something significant enough to fit my ego?

If I have enough income stream such that I don’t need to depend on this, then providing advice is to:

1. Deliver value for a problem that a niche group of people cannot solve easily.
2. Be equitable for the time I spend providing service.

Some of the stuff that I will need to think about is:

1. What is the recurring value, and the ad-hoc value that can be delivered?
2. How much of the content prep work can be done upfront and how much that is needed on an ongoing basis?
3. How does the service calendar look like?
4. Do I even need a referral system?
5. How do I have to change the content that I write on Investment Moats?
6. What are the ongoing costs and how much would they amount to annually?
7. What is the maximum number of clients at a time so that I won’t be overwhelmed and still live a good life?

Utimately, what we need to balance may be a five-legged stool like the pentagon below:

I am in a good position to incubate much of the evergreen stuff upfront and on an ongoing basis if I keep the number of people manageable. The ongoing cost will be a mixture of business costs such as accounting, software-as-a-service, meeting locations.

The numbers may look like the following:

• An ongoing fixed cost of $15,000 a year. Purely business-related not personal cost.
• An annual flat fee of $5,000 a year regardless of investable assets.
• This means also that I will have to constrain regarding the type of investment strategies, or securities to adopt.
• To make it worth while, I should work with people with a certain degree of significant assets. To keep cost to 0.25% annually, it is recommended for you to have $2 million in investable assets. You won’t invest through me, but if it is less, I think it might not be worth your while.
• I can see someone with $1 million in investable assets seeing value, though.
• The minimum number of clients is thus 3 with 7 to 15 preferred.
• I think it make sense to try and graduate a couple of clients every three years either to a lower tier, with lower cost for them and bring on a couple every three years. Three years is enough time for those who are new to investing to learn about living with their investments, learning about the “big rocks.”. They have the option to lower their costs while still getting some value.

Everyone has a magic equation and those who are in the education or services line would have a unique take on this.

Personally, I think the challenge of thinking about the people you serve is a real problem if you are balancing some semi-retirement lifestyle. I wonder if we can call this Barista FIRE if our definition of being a barista is to be mentally less stressful.

I would have to feel more motivated about this service aside from the money in order for this to be more sustainable in the long term.

Do share with me any magical equation of solopreneurship or freelance work that has work well for you. If you are struggling with this, do share where are the struggles as well.

If you have some thoughts regarding my numbers, do share with me as well.

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