Michael Kitces is the chief financial planning nerd for the Nerd’s Eye View blog at Kitces.com. In addition, he is the head of planning strategy at Buckingham Strategic Wealth, and the co-founder of XY Planning Network, AdvicePay, New Planner Recruiting and fpPathfinder. In 2010, Kitces received a Heart of Financial Planning award from the Financial Planning Association, for his dedication and work towards advancing the profession.
Russ Prince: Please explain what Kitces.com is all about.
Michael Kitces: Our mission at Kitces.com is making financial "advicers" better, and more successful. In practice, that means we provide education and training to the advisor community in both the technical knowledge of financial planning such as tax, estate, retirement and other strategies to make advisors better, and career development and practice management guidance about how to make them more successful—whatever “successful” means to them, depending on whether they’re an employee or an owner, an independent or a captive.
Notably, though, we frame the community we serve as “financial advicers” and not financial advisors. The shift in wording is done with intent. Because the reality is that the overwhelming majority of “financial advisors” work for insurance companies and broker-dealers, and carry licenses to sell their companies’ insurance and investment products; they’re not actually licensed to be in the business of advice itself. As ironically, while the financial services industry is highly regulated, the industry regulates primarily by what advisors sell or implement, and not what they call themselves and how they market themselves… such that the majority of people who say they’re “financial advisors” literally and legally aren’t in the business of advising!
As we share in our “Financial Advicer Manifesto,” our focus on financial advicers is meant to define the subset of financial advisors who are actually in the business of advice—not products, who maintain the independence to give objective advice to clients, who invest into their own training and education to be competent advice-givers, and who make themselves accountable to their clients for the quality of their advice by operating as fiduciaries. By our estimate, this is barely one-third of all financial advisors today, though we very much see it as a growing segment as products are increasingly available through technology, and the value proposition increasingly shifts to advice itself, and one that we’re excited to elevate to expand the reach of quality financial advice.
Prince: What are the biggest problems advisors are facing today?
Kitces: The two biggest challenges we see amongst financial advisors today are how to grow their advice businesses, and how to scale their advice offerings to clients.
Growth has always been a challenge for financial advisors. The competition for new clients is fierce, especially so for the growing number of independent financial advisors who are now the majority of all financial advisors who don’t necessarily have big-name firms with national brands that they can rely upon. The good news is that these growth pressures on advisors—trying to figure out how to differentiate and stand out in a crowded marketplace and without a national advertising budget—is leading a growing number of firms to focus on niches and specializations, creating deeper and more customized services for a target clientele that they can then truly serve better than the average advisor.
It’s a shift from two advisors whom each said “we’ll work with any business owner who can meet our asset minimums,” to a world where one advisor creates a hyper-specialization for ultra-high-net-worth business owners trying to exit their business successfully, and a second who creates a hyper-specialization for family-owned businesses that want to engage in internal succession plans and not exit their business at all…who can then cross-refer business owner clients to each other’s specialty. Which is a win for the financial advisor in differentiation, and a win for the client who is the beneficiary of a more specialized solution for their unique needs.
At the same time, scaling an advice business with the ensuing growth is still difficult, especially with the ongoing transition from financial advisors to financial advicers. Because the financial advisor business historically scaled around the products that financial advisors offered our systems and processes were built to help clients efficiently buy insurance and investment products, or to manage their investment portfolios.
As the business continues its shift from a product focus to a true advice focus, scaling advice itself—the expertise that the advisor shares with their clients, and supporting the follow-through and implementation of that advice beyond products—is more complex because advice is inherently more specific to the individual client and thus less conducive to systematizing and automating as the business scales.
This is leading to an emerging ‘war’ for experienced advisor talent for growing firms that need more experienced advisors to serve clients, a renewed focus on developing the next generation of talent which is beneficial in the long run but slow in the short run, new turnkey advice and planning platforms being built to support the back offices of scaling advicers, and new waves of technology focused on “advice engagement” to help scale the advisor-client experience in a way that is more meaningful for the end client.
Prince: In five years, what will the advisory business look like?
Kitces: Over the past 50 years, financial advisors have gone through three broad epochs In the 1960s and 1970s, the financial advisor was a stockbroker who literally brokered the sale of individual stocks or an insurance agent selling whole and universal life insurance. In the 1980s and 1990s, the business model shifted to mutual funds, advisors renamed themselves “financial advisors,” and received paid commissions to sell mutual funds or products wrapped around mutual funds such as variable annuities and variable universal life insurance. In the 2000s and 2010s, the business model shifted again to the “wealth management” model, where advisors charge a percentage of the assets under their management and provide more holistic advice for affluent clients around that portfolio.
Each of these epochs lasted approximately 20 years—the length of a generation, over which one set of advisors and clients retire and move on, and a new generation of advisors and clients enter the industry with different expectations of what a “financial advisor” should do to add value in an increasingly technology-driven world. In the next five years, we’ll witness the early stages of the new fourth epoch of financial advisors—which again, we’ve dubbed the emergence of the financial advicer—that will entail new business models built around more holistic fee models based on subscriptions, income and net worth, not just focused on an investment portfolio, new advice value propositions that increasingly go beyond the portfolio to more niche- and specialization-oriented value proportions for particular segments of clients with complex needs, new advice and planning platforms to help advisors scale those businesses from outsourced back- and middle-office service providers, to new technology systems, and a newly enriched value proposition that continues to add value to clients on top of what advisors did in the past that technology will increasingly automate.
As has occurred in each of these epoch transitions, the shift to the new value proposition of financial advice will disrupt a lot of existing incumbents and lead to the rapid growth of new entrants, open doors to serving new types of clientele, and providing new and better value propositions, and ultimately lead to a more enriched advice benefit for the end client. As ultimately, the financial services industry itself is an incredibly competitive marketplace, and while upstart technology firms such as robo-advisors haven’t had much success in disrupting the industry, competitive forces within the industry itself will lead new advisors and platforms to leverage technology themselves to disrupt their competition, in an effort to win the business of their clients with a better value proposition.
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