Episode 5: Michael Kitces (pt 1)

Patrick Brewer: 02:13 Yep.

Michael Kitces: 04:10 Like, if I just do 3% a year, it'll take me 33 years to work through 100% of my clients with turnover. And that sort of fits right? Like we basically, if we get a client, we tend to work with them for life or at least a multi-decade time period.

So, what that means is, if my client's got a half a million dollars of assets, I'm going to charge them $5,000 dollars a year and my average client is gonna stay with me for 33 years at a 3% attrition rate. That means the average client that I bring in is going to pay me over time, $167,000 dollars in cumulative fees. Now, to be fair, it's actually probably even a bigger number than that because we're charging AUM, markets tend to grow over time, usually they grow by more than what clients are spending, otherwise they go broke too soon. So that's actually probably even a low number.

Patrick Brewer: 04:58 Agreed.

Michael Kitces: 04:59 But let's kindly round it up to $200,000 dollars of cumulative fees. So, first thing that usually sets is like, "Okay, taking my clients for $200,000 dollars is like a lot of money. So I better provide some hell of good services over the next 30 years to justify the fact that I'm going to get paid $200,000 dollars cumulatively."

So, that's what we all try to do as businesses, right? We want to deliver enough value to justify the fees that we're charging. But what that means, from the business perspective, is like getting a client might be $200,000 dollars of revenue, but I don't get to keep all $200,000 dollars, right?

Patrick Brewer: 04:59 Yep.

Michael Kitces: 05:34 Because a whole lot of this is cost to deliver my services. Right now I need an office space and technology and staff and all the things that go with that, which is why we get down to advisory firms that might only have 20 or 30% profit margins. So, if I pick the middle of the road there and I say, "I'm going to get a 25% profit margin off this client." What it still means is that, cumulatively, over the next 33 years of my average client tenure, I'm going to drive $200,000 dollars of revenue and I'm going to keep about $50,000 dollars of that, or 25% of it, as my profit margin to me.

And so now the question really becomes what would you pay for a client who will generate $50,000 dollars of lifetime client value for you, over the next 30 years? Yup. So, this becomes the magic balancing point for any business. Like what would you pay, in cash, as an acquisition cost to get $50,000 dollars of cumulative lifetime value? Now this sort of leads you into interesting directions. Like the first answer would basically be, look, if I can spend $49,000 dollars to get a $50,000 dollar lifetime client value, like I'm literally minting money for myself. Now, to be fair, I have to pay the $49,000 dollars now to get the client. The $50,000 dollars is going to come over time. We can, and probably should, discount a bit for time value of money. So you don't really go all the way to like $49,000 dollar spend for $50,000 dollar client.

But what it quickly takes you to is like I could easily spend five or $10,000 dollars per client and happily mint money in the long run, because I'm spending $10,000 dollars to get someone that generates $50,000 dollars of lifetime client value profit, which even on a time-value money discounted basis, still means the faster I could spend $10,000 dollars per client, the more money I'm making in the long run.

Patrick Brewer: 07:37 Yeah. And it doesn't even count the salary that you're going to be paying yourself, potentially, from that client and those clients who are similar, over that timeframe, you just literally profit, yep for sure.

Michael Kitces: 07:43 Right, we're just dropping this [crosstalk 00:07:45] the bottom line as profit margin. So if you work into business as well as on the business, because you're a solo and you know you're taking home 60, 80% of revenue between what you get in the business and from the business. Now, all of a sudden, your lifetime client value-

Patrick Brewer: 08:01 They pay you even more.

Michael Kitces: 08:02 Is $150,000 dollars in some combination of your salary in the business and your profits from the business. So you could pay $100,000 dollars per client and you will make money in the long. Now the interesting phenomenon that starts cropping up from this, like remember, we're still talking about a half billion dollar client. So, I will make money in the long run, to spend $10,000 dollars upfront, to get a $50,000 dollar lifetime client value. The problem is I only get $5,000 dollars a year in cash, from the client for their fees. So, wonderfully profitable in the long run, but I go broke upfront spending 10 grand in client to get only 10 grand of fees in the first two years, and I have to pay expenses on top of that. So you get this challenge where like this is wonderfully profitable over 30 years. Unfortunately, if I do it too actively, I'm going to go broke in the first three years or one year or six months or two months, spending the cash up front trying to make it up over time.

And so, when you look at the advisory business from that direction, I finally ... suddenly, it actually becomes clear why we do so much of what we do. Like so much of financial advising, today in business development, is all about client referrals, networking, build relationships with centers of influence. And we do that because it brings down the hard dollar client acquisition cost. In essence, it turns it into a soft dollar acquisition cost. You see, like my firm is awesome because I only spend two percent of my revenue on marketing, and I got all these new clients in, but then we start having the conversation like how many hours did you spend networking [crosstalk 00:09:43]

Patrick Brewer: 09:42 How much time time, yeah.

Michael Kitces: 09:43 Where we're like, "Probably 20 or 30 hours." "Okay, great. And then how much time did you spend in like doing lunch meetings with the people you met at the networking meetings to try to build some relationships?" "Like, well God, I do at least one or two of those meetings a week." So like, "Great, so it's like 200 hours of lunch meetings and networking meetings. Then, how much time did you spend meeting non-qualified prospects, just try to find your way to the qualified prospects?" It's like, "Well that's probably another 50 or a hundred dollars." We find, for a lot of advisors, even relatively mature practices might spend 20 or 30% of their time, in the year, just doing in person marketing activities, and if you price your time like a professional, two or $300 dollars an hour, what you actually find is that a lot of advisors still are actually spending five or $10,000 dollars for every client. It's just, they don't get that client because they spend ...

Patrick Brewer: 09:43 Money.

Michael Kitces: 10:31 $5,000 dollars of cash on them or they spent like $20,000 dollars of cash to get four clients. It's because they spent a hundred hours at networking activity, which, at $200 dollars an hour, was $20,000 dollars worth of time in order to get their four clients and have an average client acquisition cost of $5,000 dollars.

Patrick Brewer: 10:53 So, what do you think is best? Do you think that they should be spending that time or should they be spending money? Should it be a combination of both? Like what do you feel is most appropriate and does that answer change based on the size of the firm and the level of resources that the advisor has at their disposal?

Michael Kitces: 11:08 Well, so now that ... once you just start thinking about it and this way, I find the whole mindset starts to shift because now what you're really coming down to, first of all, the question becomes, "Well, what is your client acquisition cost?" Right? So we start with, take how much money you spend on marketing, divide it by the number of new clients you got.

Now again, because so many of us do this with referral activities, networking, all this other stuff. If you really want to be fair to this, you have to also then, add in your time. So, how many hours a week do I spend at networking, marketing efforts, going to meetings, building relationships with COIs, trying to drive referrals. Like all that other soft time based stuff that we do as well. Assign a time value to that. So you know, two, three, $400 dollars an hour, however it is that you price your time, as an advisor professional. Multiply the hours by the dollar per hour and divide by the number of clients, and you can get back to, at least, what is your true client acquisition cost? You know, and maybe you'll find it's $1,000 dollars a client or two grand or three grand or four grand or five grand.

Not surprisingly, although not universally, the more affluent the client, the higher the client acquisition cost tends to be, right? Just it takes more time to nurture big clients and big prospects than small ones. That's part of how the math equalizes itself. So, once you start thinking about your time and your aggregate dollars, now you can actually just sit down and make a business decision. "Okay. The average client has a client acquisition cost, in my practice, of about $3,000 dollars. You know, that's some combination of my time, my marketing spend dollars, my staff, and all the rest." So, now you can actually have a good business owner thinking discussion of, "Am I ... is this the best way to get clients, and could I come up with anything that might bring a client for less than $3,000 dollars of some combination of my cash and my time?"

So, maybe you want to hire someone to delegate some marketing tasks, right? Like, if I can take 20 hours a year of marketing stuff I do on my time and outsource it to someone else, and my time is $200 dollars a time but their time is $100 dollars an hour instead, then all of a sudden I save $1,000 dollars on my marketing costs and that brings my client acquisition costs down by a couple of hundred bucks for all the clients that I brought in.

Patrick Brewer: 13:30 Yep, creating leverage.

Michael Kitces: 13:30 And like, now my client acquisition cost is getting cheaper. What we find in practice, and we're actually starting to do some adviser research to try to validate and demonstrate this, what we actually find is most advisors are so ... we're so untargeted in what we do, right? We just do lots of networking meetings with lots of people, trying to build lots of relationships in the hopes that some of these people will like us enough that they'll do business with us or send us a referral. And we're really efficient about it. And that, what I'm seeing from a lot of firms is, the firms that actually decide rather than doing this inefficient time version of client acquisition cost, I'm actually going to spend some cash on it, often end out with lower client acquisition costs because, frankly, in the modern world particularly in like a digital marketing world, you could do some crazy hyper-targeted stuff and get really efficient in your marketing and bring your client acquisition costs down.

But the constraint, as you kind of raised, like there's a resource constraint, right? When I look at most advisory firms from this perspective, what I really see are most advisory firms are severely cash constrained. They don't have the money to do targeted efficient marketing strategies where they spend dollars to target. So we end up doing in-efficient but non-cash client acquisition strategies. Like let's go to lots of networking meetings and talk to people and do all that stuff because we're trying to figure out how to get clients without spending the cash up front, because we may not have the cash. But, the one nice thing about an advisory business early on, you may not have a lot of cash but you have a lot of time because you don't have a lot of clients yet. So, you've got some time.

And then the pain point, that starts to come for some businesses, is then you grow for awhile. You actually do get more clients. You don't have so much time anymore, and suddenly, you hit this crossroads in the business where I have to decide, A, just am I going to shift my marketing because it's all based on my time and I don't have so much so much time anymore. But I'd encourage advisors to actually think about it from a more pure business perspective. Look, my average client acquisition cost was $3,000 dollars because, on average, it took me 15 hours, right? I spent 150 hours, last year, on marketing stuff. I got 10 clients, so it's 15 hours per client, $200 dollars per an hour means I'm spending $3,000 dollars a year, in time value, on a client. If I spent some cash, could I do it for less? If I reinvested some of my cash flow profits, I will free up my time, or just be able to get clients when I don't have any more time, and I might actually do it at a lower client acquisition cost.

For most advisors it feels painful. Like, "Oh my God, I have to start spending money on marketing, I've never spent on marketing before. This is so much more expensive." Actually, it's often cheaper. Like not to pump up dollar spend marketing and diminish networking activity. You know, there are a lot of bad paid marketing strategies and a lot of really good networkers out there, but most advisors, they find, once you assign a time value to all the time you spend, you discover your client acquisition cost is thousands and thousands of dollars, and there are, as a business owner, other ways to make resource decisions with some combination of your cash and your time, that might actually get clients at a lower cost and grow and scale your business faster.

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What I've found is that advisers, they understand the time investment to develop relationships and get clients, and they're willing to put the time on the line, go to networking meetings, get coffee, understand that it's a nonlinear cycle whereby somebody purchases financial services from them. But a lot of them think that marketing, whether it's traditional forms of marketing or digital marketing, is something that happens overnight where you just get leads and those leads show up at their door with a bag of money, and they're not willing to realize that it's a snowball that rolls down the hill and, eventually, picks up more snow, gets more momentum. So why do you think there's that disconnect there in the advice business? Or do you disagree and have you seen advisors maybe take a different perspective?

Michael Kitces: 18:16 I, largely, agree. Like, marketing strategies, done well, tend to build brands and strong brands reduce client acquisition costs because people just buy because of the brand. And that's part of why it pays to invest in brands. I mean in the aggregate, like why does someone spend $5.2 million dollars on the Superbowl commercial when most businesses aren't exactly going to be like, "Hey, I ran an awesome super bowl commercial. Are you ready to give me your life savings now?" It doesn't work that way, but it does build your brand and it does build a positive impression of your brand. And if you're large enough as a company, you can actually spend a lot of money just building your brand so that people trust it and are familiar with it and are comfortable with it. And the reason why they do it, just from the pure business perspective, is it ultimately reduces client acquisition costs.

And I think that model does actually hold in the advisor realm. We maybe don't do super bowl commercial level brands, but you talk to an advisory firm that's the leading firm in town and has been doing it for 15, 20, 30 years and like is the Go-to firm in town, and gets a lot of the big clients in town, like that's why it works. They weren't the firm that just had clients show up at low costs in year one, because no one knew who the heck they were. But after five and 10 and 15 years of building their brand and getting established, their brand is known and the brand brings down the client acquisition costs, and makes this more palatable. So I think the challenge for a lot of firms is sort of twofold. Like yeah, the bigger your brands, the better, easier this tends to go, and the marketing actually helps build the brand. But if you're getting started early on, yeah, sometimes the results come a little slower and are a little harder, right?

The practical translation, like if you're a new firm, it might cost you three or $4,000 dollars of client acquisition costs to get a client. If you're a well established firm with a great brand, you might find that, because of all those years of brand investment and brand equity, now it only costs you one or $2,000 dollars of marketing dollars to get a client, because your brand is supplementing the cost to acquire clients. But it's important just even to think about it that way because you start framing your business decisions and your marketing decisions differently when you think about it in these terms of dollars and cents and client acquisition cost numbers.

But I think the biggest challenge, as you sort of highlighted, is for a lot of advisers, just we're not used to spending dollars on this stuff. So the minute we start spending dollars, when weren't valuing our time, it feels sort of like, "Oh my God, I spent $1,000 dollars on that marketing strategy, which was, you know, $990 dollars more than Starbucks coffees I usually spend on, on marketing strategies. Like I spent $1,000 dollars and I didn't get a client. This sucks. Marketing's terrible. Like $1,000 dollars was a lot of cash." And it is a lot of cash, but like, let's go back to your time. You were spending $3,000 dollars on client acquisition costs already, in your really time consuming inefficient networking strategy thing. So, first and foremost, like let's start by at least spending $3,000 dollars and seeing if you can get the same one client with cash that you do with your time.

Patrick Brewer: 21:30 Agreed.

Michael Kitces: 21:30 You know, if you spend $4,000 dollars and you get two clients, that feels like a horrifically high spend if you've never done it before. But you actually just cut your client acquisition cost by a third because four grand for two clients is $2,000 dollars and you were spending $3,000 dollars in your time. And so I don't want to diminish the resource decision that you have. I've only got so much cash, so I can't do all this cash spending on client growth if I don't have enough cash, I might have to do some of it with my sweat equity and time. But start by thinking about it in terms of what is my all-in client acquisition cost both dollars and time. So that, at least, if you're going to do a marketing spend, you're giving it a fair shake. You know, you're not going from zero spending to all this cash spending on marketing, you're just going from a time based marketing spend to a cash based marketing spend.

Now let's put both strategies in parallel with similar client, with similar spends, and see which one produces two clients and which one produces three or four, and now you're getting an efficiency difference.

Patrick Brewer: 22:34 Yeah. And the other thing is there's actually some good data to figure out how much advisors are willing to spend to acquire a client just given the demand for inorganic growth. So, I mean if you look at that same $500,000 dollar account, an advisor might be willing to pay whatever, two to four, 2.4 to three-x revenue is for that $500,000 dollar account, and that's the client acquisition costs. And then they just have to sync time and energy.

Michael Kitces: 22:58 Yep, or to drill it down even more, we tend to talk about firms in terms of multiples of revenue from paying two times revenue, three times revenue. You know, having been involved in some of this adviser M&A realm, you know, the truth from the buyer's end is you generally don't really actually buy the revenue, you buy the profits. So, going rates for small businesses are often like six to nine times free cash flow. If you're a very small firm, you might only get four to six. Sizable firms tend to get six to nine times cashflow.

So if you're running a traditional advisory firm that has a 25% profit margin, which is fairly average these days, if you pay eight times of 25% profit margin, you end out at two times revenue. And that's where the two-x revenue comes from. What it really means is the firm is simply saying, right? Like a average client duration might be 20 or 30 years, but I've got to apply a time-value of money discounting factor to it. If I apply my time-value money discounting factor to it, I end out with something like eight times profits is a reasonable present value basis estimation.

But you still come back to the same things. Like my my half billion dollar client gives me $5,000 dollars a year of revenue. If I've got a 25% profit margin, then I'm essentially doing $1,250 dollars of profits. And so, if I eight-x the free cashflow, my lifetime client value is $10,000 dollars, which also just happens to be two times the revenue. So even if you look at that from the M&A perspective, like if a firm will buy that half million dollar client, for cash of $10,000 dollars, what would you spend to get the client? Like if you can spend nine and hand it off immediately for 10, you are minting money. Like go take out the biggest biggest loan you possibly can, back up the wheelbarrow of cash, pile on the clients at $9,000 dollars each, hand them off to someone at $10,000 dollars each, and you are instantly manufacturing a 11% turnover profits. And heck, if you can do it at $8,000 dollars of client acquisition, your manufacturing even more money.

If you can do it at $5,000 dollars of client acquisition, you are doubling your money, even though you're spending 100% of revenue, of first year's revenue on marketing because the lifetime client value is so much higher. And you can see that in everything from the longterm profitability of firms into what advisory firms pay for acquisition. And so again, I know like a lot of firms can't do this simply because they're cash constraint, and that's okay. And that's a fair thing to recognize, and just ... that's a real world business constraint. Like not everybody starts their advisory firm with enough cash in the bank to do, we'll call them, cash based marketing strategies for compelling client acquisition costs. They're stuck mostly spending their time and their sweat equity. But if you have access to resources, or just you want to think about how you're utilizing resources, this is how you should be thinking about it.

And if you start thinking about your business in these terms, you may find a very different ... your worldview starts to emerge around where you spend your money and how you allocate resources.

Patrick Brewer: 26:04 So, what are your thoughts, as the industry starts to develop, right? I feel like we've got the professional advisor, who wants to be an advisor and they're either on their own, building a practice, or they're part of a small team, let's say up to a billion, two billion in assets. That's when, obviously, the business starts to become more of a business. And it can become that way, obviously, before you get to that point. But do you feel that some of these firms, that are in the independent space, that have, let's say, 10, 20, 30 billion in assets, are they eventually going to be able to leverage marketing and the scale that's created, through online channels, to bid out advisors at a smaller scale? Or do think it [crosstalk 00:26:43]

Michael Kitces: 26:44 They are. It's actually happening already. So we did an article about this a couple of years ago on the blog, I think I actually called it something like the marketing inequality of large advisory firms. There's all this discussion over the years of like wanting to aggregate advisory firms together, merging, acquiring, all about like, "Can we acquire economies of scale," where you're like, "Can we get big enough that the cost to deliver everything goes down because we can amortize the overhead over more people." And the irony actually, when you look at advisory firm benchmarking studies of firms that are like from $150,000 of revenue all the way up to $15 million dollars of revenue. The average overhead costs of advisory firms is almost exactly the same, up and down the line. And the cost for financial advisors is almost exactly the same, up and down the line. So, essentially, a nice way of saying there are no economies of scale in advisory firms, at least up to several billion dollars of assets under management, which is more than most advisors will literally build in a lifetime

Patrick Brewer: 27:51 For sure.

Michael Kitces: 27:52 You still don't see any economies of scale, in overhead and costs to deliver, an advisory firm. But, there's a big but. The but that's emerging is large advisory firms are beginning to scale their client acquisition costs. And so, the interesting phenomenon that's starting to happen is you're seeing the largest advisory firms have an uptick in growth. So, normally what happens with firms is they get larger. The larger the firm, the slower the growth tends to be. And it's a phenomenon I call the tyranny of the denominator. So like, if I'm just a few years out and I got $10 million dollars, under management, and I want to grow by 10% this year, I need a million dollar client, or you know, two $500s, and I'm there, right? I only got to get from 10 to 11. If I'm a hundred million dollar advisor, and I want the same 10% growth, I need $10 million dollars.

So if my average client is this half millionaire, I need 20 of them. So I've gone from ... I need one or two clients next year to get 10% growth, to I need a new half millionaire every other week, all year long to sustain. Now, if I, then, get larger and I'm a billion dollar firm, if I'm a billion dollar firm, now, if I want my 10% growth, I need $100 million dollars. If my average client is a half a million dollars, I need 200 clients, which means I need three to four clients a week, every single week of the year. And so, we've gone from a client or two a year to two or three clients a month to three to four clients a week as the denominator gets bigger, and because it's really, really hard, like all of a sudden, the volume you need gets crazy difficult for most firms. The growth rates tend to fall.

They get slower and slower. Like they may still be adding more assets. You know, the billion dollar firm that adds $50 million dollars is like, "Holy crap, it took us years to get our first $50 million dollars, we did that in one year now. Like we're getting huge, this is really cool." But your growth rate fell to only five percent, 50 out of a billion. So, the larger firms get, the smaller their growth rates tend to be. Except, what's emerging now is there's this inflection point as advisory firms grow above about 3 billion of AUM. This is just the line that we're seeing in the benchmarking studies. When firms grow above $3 billion dollars of AUM, their growth rates start increasing again. And their growth rates are increasing again on a much, much larger denominator. So, you see firms that start picking back up and getting 10 or 15% growth again. Except now, you're a $3 billion firm, so getting 15% growth on that is, you brought in $500 million dollars of new client flows in a year.

Patrick Brewer: 30:54 Have they disentangled that from inorganic growth? Because I feel like a lot of the larger, or even mid-sized RAs, they may say that they're growing organically, but it could just be tuck-in advisers because their marketing is really spent on other advisors.

Michael Kitces: 31:08 They have. The data gets ... to be fair, the data gets a little bit muddy. Not everybody reports their inorganic growth clearly, although the reality is inorganic growth, itself, really occurs up and down the spectrum. Firms just tend to acquire other firms, that are about 10 to 30% of their size.

Patrick Brewer: 31:26 For sure.

Michael Kitces: 31:27 It's sort of a fairly comfortable acquisitions. Like one to $200 million dollar firms like to acquire 10 to $30 million dollar advisers. Billion dollar firms like to acquire one or $200 million dollar firms. Five billion dollar firms want to acquire one billion dollar firms. So there's actually fairly stable inorganic growth contributions up and down the line.

But what you still see is, once the firms start getting above about three billion dollars of AUM, the growth rates start picking up in what appears to be just over and above.

Patrick Brewer: 31:59 What do you think is driving?

Michael Kitces: 32:00 What's happening on the organic side? What's happening as they finally get large enough, it's like, "You know what? We can have a marketing director and a marketing staff of three to five, and spend a couple hundred thousand dollars on marketing, which is, man ..." obviously, if I'm at three billion dollars and I'm charging one percent, I've got a $30 million revenue company. So if I'm going to spend just three percent of my revenue on marketing, it's almost a million dollars of cash. So I can hire multiple full time staff members and then put a half a million dollars into advertising because, if I can get clients at $5,000 dollars per client acquisition cost, I bring in a hundred of them, and if they're a half million each, that's $50 million dollars right there.

Patrick Brewer: 32:44 Yeah.

Michael Kitces: 32:45 And if I can do it at four, $3,000 dollars of client acquisition costs, because I get a little bit more efficient about this, suddenly, I bring in a hundred to $150 million dollars of new assets. And if I can really figure out how to get efficient and scale my marketing, which is what some of these firms end up doing, the more dollars they plow in, the bigger they get. And the faster the growth happens. If you want the penultimate example of this, it's Ken Fisher.

Patrick Brewer: 33:10 Oh yeah, yeah. It's just the digital marketing agency.

Michael Kitces: 33:11 I mean there's closing in, now, on $100 billion dollars under management. And Ken Fisher's firm is a marketing machine. It's a marketing spend machine. They spend money on direct marketing, they spend money on digital marketing, TV ads, like the whole-

Patrick Brewer: 33:28 Everything.

Michael Kitces: 33:28 Nine yards up and down. So if you've ever wondered how does a single a advisor make $100 billion dollar firm? You spend on marketing because the math works incredibly well, and the better you get at it, the more you scale it, the lower your client acquisition costs, the more it feeds on itself, right?

Patrick Brewer: 33:28 Yeah.

Michael Kitces: 33:48 If you can ever figure out the magic marketing thing where you can get your client acquisition costs down to one or $2,000 dollars on the client, that generates five, now, you literally just ... you can reinvest 100% of the profits of the client every year, to make the next new client. And now, a compounding effect starts occurring, right? It's like I get a client, I spend all of their profits to get the next client. The next year, I got two clients, I spend all the profits on two clients to get two more, now I've got four. I spend all the money on four clients, I get four more. now I've got eight, right? And we know how this compounding thing works.

Patrick Brewer: 33:48 Oh yeah, it just keeps growing and growing.

Michael Kitces: 34:22 You do this for a couple of years, and all of a sudden after about 10 to 15 years, crazy big growth numbers start showing up, as the compounding takes hold. In essence, I think that's what you see in Ken Fisher's firm, in particular. They got their client acquisition costs low enough that all the dollars, reinvested, just started producing-

Patrick Brewer: 34:45 More dollars.

Michael Kitces: 34:45 Explosive upside compounding growth. That's how a one solo advisor gets a $100 billion dollar firm.

Patrick Brewer: 34:52 And my advice to a lot of the younger advisors, that are building their own practices, like you can't be afraid to spend money for the first 10 clients, but once you get into the niche and you've actually established yourself with some thought leadership, maybe you've got a speaking Gig, maybe you've got a connection at HR, at a company, something like that. You can leverage and build out that Web to reduce your acquisition costs. And then when you have more money, you can better leverage it based on all of the relationships that you've already built and the clients that you've already gotten.

But I think the issue is a lot of people sit on the sidelines to get those 10 clients, and it takes them forever and they end up burning through time and capital faster, in the long run, or more capital in the long run because they're not willing to accelerate their spend in the beginning.

Michael Kitces: 35:33 Yup. And there is really, that compounding effect where, as we said earlier, if you can ever get the point where your client acquisition costs comes down to your annual profit margin, you literally just take all the profits you made from the client you just got, to get the next one. And then one becomes two and two become four and four become eight and eight becomes 16, you do that for a couple of years and, all of a sudden, you've got a bajillion dollar practice. You know, most firms will struggle to get their client acquisition costs down to the profit margin of their firm because it's a competitive space-

Patrick Brewer: 35:33 Tough.

Michael Kitces: 36:10 And lots of people are competing for these clients. But that doesn't mean you can't do it, again, right? Like I can spend five to $10,000 dollars per client. I can spend more than the first year's revenue and still be profitable in the long run. Now it just becomes either a cash constraint, how much money do you have to spend or can you get to spend or are you willing to spend, and what can you do to bring that client acquisition cost down, so that, for your limited resources, you not only just ... you get more clients and better results because who doesn't want more clients and better results, if you're focused on growth, but because now, the compounding starts to happen faster, right? The faster I can grow and and the more profits I can generate, the more profits I can reinvest to do more clients, with lower client acquisition costs, accelerates the growth further, and you get that, that caustic flywheel analogy, like the flywheel start spinning.

And you can spin it faster and faster. The starting point, though, for everyone, like if there's one thing that you take away from this podcast discussion is just, do you know what your client acquisition cost is? Like you should sit down and add up, you know, any marketing staff you've got, any money you spend on marketing things, right? Client events, advertising, appreciation events, dinners and networking meetings, right? Just all that stuff you spend on marketing activity. And then how many hours do you spend on marketing activity, which, most advisors I find, don't really track very well but it's usually a decent proxy. Like think about how much you do in an average week, over the past few weeks sort of take an average. And you should be able to come up with a rough estimate. Like, "I spend an hour or two, or three to five or seven to 10 hours a week."

You know, multiply by about 50 weeks because you take a little vacation. And figure out how many hours you spend in a year, multiply that by two to $400 dollars an hour because that's the value of your time that you should be charging, as a professional advisor. Divide by your number of new clients, and understand what your client acquisition cost is. And you may not necessarily change anything right way, you may not even have the cash available to change anything right away. But if you sit down and look at that number, relative to what clients pay you, what your profits are, and what your retention rate is, over time, you will start to look and think about your business differently, about how you invest and grow it.

Patrick Brewer: 38:30 Yup.