Industry thought leader Michael Kitces released new survey research on Monday showing the revenue “sweet spot” at small advisories relies more on fewer practitioners leveraging delegation than adding people.
“Teams have many benefits, but when it comes to revenue generation, there can be diminishing returns,” Kitces told an audience of advisors at the Future Proof Citywide conference in Miami.
Kitces, the chief financial planning nerd of Kitces.com and head of planning strategy at Focus Partners Wealth, showed the audience the qualitative results of a regular survey he conducts on advisor productivity. The broad findings showed advisors with an “ensemble” team generally see three times the revenue of those who act alone.
When breaking team structure down further, however, when teams reach the size of three to six or more, revenue can plateau or decline the larger the team gets.
The best-performing structure by revenue, both per member and by advisor, was a “one+two” model with one advisor and two staff members. While results varied, Kitces said larger teams bring two “taxes” to revenue: a management tax and a shared client tax.
Regarding management, Kitces noted on the sidelines of the conference that the more people are on a team, the more communication needs to happen between members, which can be time-consuming. In addition, senior advisors must spend more time on people management and less on working with clients.
“Instead of freeing up time, now they are working on performance reviews and one-on-one meetings and managing people, which is often not why they became advisors in the first place,” Kitces said.
Kitces’ research showed that the ‘minimum’ floor for an ongoing client relationship per advisor was about $3,000.
Another result of larger teams is that advisors start to share clients. Kitces acknowledges there are many, often good, reasons to do so. Those can range from bringing up and training younger advisors to freeing up vacation time.
“I don’t mean to fault those at all—those are completely valid business decisions,” he said. “But let’s at least acknowledge that we are giving up revenue to share those clients.”
He said the industry’s current mindset that more advisors create value for a business may be off when it comes to results.
“A lot of firms keep throwing more people at their senior advisors because they are trying to squeeze more productivity out of the advisor and maybe don’t realize that it’s not actually creating the positive trade-offs they intended,” he said. “I don’t have negative things to say about four- or five-person teams beyond the fact that we don’t really see the lift to productivity, so if you’re doing it, I hope you’re doing it for a good reason and intentionally.”
Kitces added that the industry’s shift over the decades from commission-based revenue to fee-based or subscription models has led to steadier business for advisors. In many cases, they are making enough that they don’t feel the need to grow, and they may hire for other reasons that don’t maximize the firm’s value.
“It has never been more profitable to be a solo advisor (with one or two support members),” he said. “If you want to build a business and scale up, you can do that too, but most of us don’t actually get into this business to scale an enterprise. We get into this business to serve people.”