Page 28 - Investment Advisor June 2023

Cover Story

“The interesting
phenomenon is that, while

technology actually did
disrupt the financial
advisor business model, it
didn’t actually disrupt the
financial advisor. We’re

still here. We just evolved.”

—Michael Kitces

The State of Financial Advice & Technology it didn’t actually disrupt the financial advisor,” Kitces said.
During a recent webinar, Michael Kitces, head of planning “We’re still here. We just evolved.” New technologies are hav-
strategy at Buckingham Wealth Partners, discussed industry ing a similar effect on the sector, but the best advisors continue
trends reshaping financial advice today. At the center of all to make the transition successfully.
this change, he says, is technology, which is once again driving the Great Convergence: The growth of tech is “leading to
significant changes in the business model of financial advisors. a great convergence of industry channels,” Kitces said, not-
But, he pointed out, technology disrupting financial advi- ing that traditional advisors aren’t really being threatened by
sor business models is not a new phenomenon. Rather, it’s robo-advisors.
something that, like the fear of robo-advisors a few years ago, “We’re buying the technology to make our own systems and
has happened repeatedly over the past several decades, forcing processes more efficient to design and implement standardized
advisors to either adapt and move up the value chain or risk portfolios … so that we can then add more value on top,” he said.
being left behind. It’s similar to when brokerages started pushing to change the
He predicted these trends will accelerate as Gen Xers and rules so they could charge regular fees to clients and not just
millennials become the primary market for financial plan- charge them for trading, he noted.
ning services and the main demographic of financial planners There used to be very few hybrid advisors/broker-dealers,
themselves. Here are four industry trends that Kitces said are but today, “almost 90% of all advisors at the top broker-dealers
reshaping financial advice and are pushing advisors to increas- are dual-registered brokers/RIAs,” Kitces said.
ingly focus on improving the client experience: A Crisis of differentiation: Kitces pointed to a study in which
new technology: Technology has played a key role in the advisors were asked how they differentiate their service offer-
success of Charles Schwab, Kitces said, noting the entrepre- ing from rivals. Seventy-six percent of advisors said the way
neur from Northern California, near Silicon Valley, “decided they differentiate is their “ability to understand their clients’
that he would start using these newfangled things that have needs and objectives,” he said. “Is anybody wondering who the
come out called computers to see if he could use technology to 24% of advisors are who don’t understand their clients’ needs
disrupt the human financial advisor of the era.” and objectives?”
In the process, Schwab pioneered the discount stock broker- After all, he said, that is “actually a legal requirement [to]
age industry in the 1970s. know your client … to not get sued [so] we can’t differentiate
During the late 1970s and early 1980s, there was a “gigantic on this. Everyone’s legally obligated to do it.” Meanwhile, 72%
boom of tech startups whose sole mission was to use comput- of advisors said they differentiated based on above-average
ers to disrupt the human financial advisor of the era, and the client service, Kitces said, adding, “It’s literally mathematically
computers won,” Kitces said. “The cost to execute a stock impossible for 72% of us to be above average, and this is what
trade ultimately fell by 90% in 20 years. This is why all the I mean by this crisis of differentiation.”
stockbrokers went away — they were actually disrupted by the The challenge is that “a lot of these things that we try to
rise of technology.” differentiate on are not really things that we meaningfully can
“The interesting phenomenon is that, while technology differentiate on,” he said. “They’re either legal requirements
actually did disrupt the financial advisor business model, [or] they’re table stakes just to play the game. I mean, who’s

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