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Industry Spotlight > Advisors

Kitces: 5 Industry Trends Reshaping Financial Advice

By Roger Wohlner

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At the recent Morningstar Investment Conference, held for the first time at Chicago’s Navy Pier, popular blogger and speaker Michael Kitces led an informative session on the state of financial advice and how technology and other trends are reshaping the investment industry.

Kitces, head of planning strategy at Buckingham Wealth Partners, described a situation in which you go to the doctor and find out that you have a rare and serious medical condition. If it were him, he would then research who is an expert in treating this condition and perhaps the experience of other patients. He asked the audience for ideas, and nobody mentioned asking a friend for a referral. 

This reliance on gathering information online has relevance for advisors as they think about their practices, Kitces said. What are their specializations? Do they focus on niche areas of planning and investing? Where will firms show up in searches that prospective clients might do for a certain type of advisor?

The key question he asked the gathered advisors is what they are going to spend the next 10 years being best at. For Kitces, that means being an obvious choice when people search for an answer to a particular financial problem.

“I truly believe we’re on the cusp of one of the greatest opportunities in our industry moving forward,” he said. “Just as we went through with breakthroughs in the 1970s and the 1990s, we’re at that next turning point where technology allows us to create value for our clients.”

Here, according to Kitces, are five industry trends reshaping financial advice:

1. Technology

In 1970, Kitces noted, a stockbroker could get paid up to $200 to execute a trade for a client. These rates were set by regulators.

This structure had been in place for decades, and Wall Street was happy with it. On May 1, 1975, stock commissions were deregulated and were allowed to float, and a month later, an entrepreneur near Silicon Valley founded a startup to see if he could use technology to disrupt the financial advice space. His name was Charles Schwab.

Fast forward to the 1990s, which saw a 10-times-plus growth rate in the mutual fund business. One factor was Schwab’s no-load mutual fund supermarket, as investors didn’t need to use advisors — who had been paid 100% via mutual fund loads — in order to build a portfolio. This was another example of technology disrupting the financial advisor business.

Today, Kitces said, the talk is all about artificial intelligence and robo-advisors, but this emerged from the tech evolution of turnkey asset management programs and led to the rise of asset allocation and rebalancing software. Advisors now can use technology to select a model portfolio from a dropdown list and then assign it to the appropriate client.

Kitces explored two key issues with technology. The first is that technology doesn’t disrupt your practice; the change happens when advisors use the latest technology to run their advisory business more efficiently. The technology allows advisors to automate many tasks and use their time to add more value to their clients.

The second point is that major technology developments tend to occur over predictable timeframes. From the rise of computers in the 1970s to the internet’s ascension in the 1990s and to AI and algorithms gaining strength in the 2010s, it’s not a coincidence that the breakthroughs come every 20 years. It’s the length of time it takes for one generation of advisors and consumers to give way to the next.

2. The Great Convergence

The convergence of the industry from stockbrokers to advisors, Kitces said, has come with a level of added regulation. With a reduced market to sell stocks to clients on a regular basis, advisors faced revenue challenges. Lobbying efforts within the industry led to the introduction of the 12b-1 fee on mutual funds to help compensate advisors.

This happened again in the 1990s, he detailed, when the industry let the Securities and Exchange Commission know that it didn’t want to charge per transaction but rather assess a single fee that wrapped around the clients’ accounts.

Such current examples as the various iterations of the Labor Department’s fiduciary rule demonstrate that regulatory change is not a cause but rather an effect of the industry convergence, Kices said.

3. Crisis of Differentiation

Another way that the industry convergence is apparent, Kitces said, is how advisors try to differentiate themselves when meeting with prospective clients. He cited a Financial Planning Association survey in which 76% of the advisors responding highlighted their ability to understand client needs and objectives as one of their key attributes. In addition, when many advisors indicate that they specialize in the same areas in a questionnaire, it becomes difficult for prospective clients to differentiate between advisors they may be considering.

The pool of prospective clients who are a good fit for an assets under management relationship is a relatively small piece of the investor pool, he noted. The reality is that not all advisory firms work under the AUM model, so many advisors have a much larger roster of clients who are self-directed or who have more situational priorities regarding advice.

4. The Search for New Models

Kitces discussed the search for advisory firm models beyond assets under management.

One reason the industry is seeing growth in alternative advice approaches, he noted, is that the universe of delegators with substantial assets is finite. One option is charging 1% or more of the client’s income versus 1% based on AUM. This opens up clients who may not have the investable assets to justify an AUM fee but whose income puts them in a position that they need ongoing advice. 

In many cases, these clients are paying upward of 2% of their income as an ongoing fee.

Kitces has seen firms that work with very high-income clients that charge between $5,000 and $12,000 per month. Some clients, he offered, won’t think that fees are worth it unless they are high, while others will have a different perspective. He indicated that about 2% of income tends to be the sweet spot.

5. The Build-a-Bear Experience

Kitces, who highly recommended “The Experience Economy,” by Joseph Pine and James Gilmore, used a visit to a Build-A-Bear Workshop to illustrate the client experience.

Parents take their children to build a teddy bear that costs over eight times what that same bear would go for in a typical retailer. The value is the experience that the adults and children have in creating the bear from scratch. 

Kitces discussed offering clients a Build-A-Bear-type experience in helping clients build their own plan.

Roger Wohlner

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