Depending on the advice you’re after, you hire a personal trainer, or a lawyer, or a therapist. When you want financial advice—and you don’t want a product—you need to find a financial “advicer.” That’s the term Michael Kitces coined and his attempt to separate—and clearly define—fiduciary planners from “financial advisors” (a name too closely tied to commission-driven product salespeople.)
Reese Harper’s guest on this episode of the Elementality podcast is Michael Kitces, XY Planning Network co-founder, iconic industry thought-leader, and popular blogger. Michael and Reese examine how a seismic shift in the financial services ecosystem is transforming the industry as we move from being product-centric to being advice-centric.
Podcast Transcript
Michael Kitces:
If I take an established independent RIA that does “wealth management” like investment management plus financial planning for some fairly affluent folks to make holistic offering and they’ll say, “Well, we’ve got investment process, but we’ll give you all this financial planning advice. This is where a lot of our value is,” so we try to paint this picture often that we do this holistic thing, it’s like, “Cool. Show me your P&L. Show me where the money goes? How much are you spending on all the investment software that supports your investment offering.”
Michael Kitces:
And if I drill that down on a per advisor basis for an established advisory firm, I will often see some costs in the neighborhood of $7,000 to $10,000 per advisor, trading software, rebalancing software, the Orion, Black Diamond, Tamaracs of the world that they’re $40 an account charges often can add up to as much as $7,000 to $10,000 per advisor. I say, “Cool. Show me the financial planning software.” “Oh, yeah, $100 a month.”
Abby Morton:
Welcome to Elementality. I’m Abby Morton, CFP and producer of our podcast here at Elements. I love being a financial planner, but I know it’s a challenging profession as well. That’s why the number one goal of our show is to help you prosper as an advisor as you better connect with your clients. We know your time is very valuable. Plan on a good return when you spend it here with us.
Reese Harper:
Welcome to Elementality, everybody. I’m your host, Reese Harper, here with a special guest heading into the weekend, excited for Michael Kitces to make his official debut on Elementality. Michael, welcome to the program.
Michael Kitces:
Thank you, Reese. Good to be here. Congratulations on getting the podcast going.
Reese Harper:
Yeah, dude. Podcast number two for me and this is a lot more fun speaking to my people, instead of talking to dentists every day, but I love dentist. They’re still a good friends, but it’s been nice to be able to open up and interact with people who have been through the same pain I have.
Michael Kitces:
Obviously, I’m always a fan of just nerding out for a bit on the industry and talking to our fellow advisor community. So appreciate the opportunity.
Reese Harper:
Well, thanks, man. The first question I wanted to ask you is a broad one, but this is the most fun type of question for me. What’s on your mind right now as it relates to the industry?
Michael Kitces:
Oh, man, what’s on my mind now as it relates to the industry? So the place I’m spending a lot of time right now is just looking at and thinking through what I’m now starting to call this industry shift from advisor to advisor. So we’ve called ourselves financial advisors in the business for better part about 40 something years. Most of that time, business model-wise and even just legal registration and entity regulation-wise, we were financial product salespeople. Literally said registered representative in our business card, that means you’re representing a product distributor. That’s what you’re a representative of when you’re a registered representative because that’s what a broker dealer is.
Michael Kitces:
Just not trying to bash it, literally the legal regulatory function of a broker dealer is it’s an intermediary to facilitate the sale of securities products or we were affiliated with insurance agents and who are you agents of? A company that manufactures products and our job was to sell and distribute them. And we did that and we did that in a being increasingly positive ways where we took more advice-centric approaches. We saw the rise of financial planning. It leads to better recommendations, better product implementations, tends to just drive more sales where it’s a consultative selling approach that exists in a lot of industries.
Michael Kitces:
We’ve certainly had a fantastic run at it, but I think we’re at this transition point where the rise of technology is just making it easier and easier for people to buy the product without us, right? And pretty much any investment thing that you can buy from us as advisors, you can buy on etrade.com or something similar. And that’s a really new phenomenon. You don’t have to go that far back in industry history. You literally couldn’t get a mutual fund if you didn’t find a financial advisor to sell it to you.
Reese Harper:
These were intermediary.
Michael Kitces:
[crosstalk 00:04:37] 20 something years ago.
Reese Harper:
And now you’ve even got insurance companies on Instagram distributing product in a way that is disrupting even insurance product distribution.
Michael Kitces:
You’re right. We started with it on online brokerage. Then we saw robo advisors. You’re seeing it now creeped into the life insurance realm with Ladder Life, Haven Life, Lemonade, a bunch of those. We’re even seeing on the state planning side with companies like Trust & Will. If you know what you want and you want to go buy it, you use to have to get that from an advisor. There literally was no other way. And we’re being cut out of that process. For anybody that knows what they want to buy and just needs someone to take their order, it’s now some website that takes their order.
Michael Kitces:
And when you get into the rest which are people who maybe don’t know what they want, don’t know what they need, don’t know that they need it needs some advice, they still don’t bother going to an advisor unless they actually wants advice. Otherwise, you just sit in your house not having what you didn’t know you should have [inaudible 00:05:37] none the wiser. By the time you seek out an advisor in that world and you’re choosing not to go to a product platform to buy a product, you want advice. And when people want advice, they tend to actually start looking for people whose business is advice, who give advice where you pay the person for advice, right?
Michael Kitces:
I don’t go to my butcher for nutritional guidance. I go when I want a really nice cut of meat. If I ask my butcher, what I should eat, they’re going to tell me red meat. We all get when I go to Gap and they say the pants look good on me, they work on commission, you know how this works. When we really, really want advice, we go different places, right? We hire fashion consultants, we hire nutritionists. And when I don’t just want to buy the product, I actually want the advice, I started trying to find what I’m now taking to calling financial advisors. And the reason why this is such a big deal, not just from the perspective of consumer demands although it impacts that and markets we reached, although we do get to reach more, and even business models, although it’s changing some of the business model, it literally changes the whole ecosystem of what we do as advisors, right?
Michael Kitces:
To me, the quintessential example is if I take an established independent RIA that does “wealth management” like investment management plus financial planning for some fairly affluent folks to make holistic offering and they’ll say, “Well, we’ve got investment process, but we’ll give you all this financial planning advice. This is where a lot of our value is,” so we try to paint this picture often that we do this holistic thing, it’s like, “Cool. Show me your P&L. Show me where the money goes? How much are you spending on all the investment software that supports your investment offering.”
Michael Kitces:
And if I drill that down on a per advisor basis for an established advisory firm, I will often see some costs in the neighborhood of $7,000 to $10,000 per advisor, trading software, rebalancing software, the Orion, Black Diamond, Tamaracs of the world that they’re $40 an account charges often can add up to as much as $7,000 to $10,000 per advisor. I say, “Cool. Show me the financial planning software.” “Oh, yeah, $100 a month.” So you spend $9,000 on investment tools and $1,000 on planning tools, that tells me a lot about where you’re really putting the priority.
Michael Kitces:
And I’m not saying that to knock anyone who’s listening whose P&L may be a little bit reflective of this as well. What to me, what it really highlights is there’s a gap that’s starting to come. Because when we really begin to shift from product centric businesses to a device centric businesses, I would essentially expect that equation to flip. And when I look out there and say anybody ready to offer those investment platforms is $1,000 or $2,000 a year instead, most of them are in a lot of trouble. They got way too much infrastructure and costs to be able to set their tools for $2,000 a year.
Michael Kitces:
When I say, “What is an $8,000 a year financial planning software look like?” because if I charged hundreds of thousands of dollars a year in financial advice fees, I should be quite comfortable to pay that because this is going to drive my value proposition. Maybe the technology will leverage me in the same way. Orion, Black Diamond and Tamarack leverage a lot of firms that have an investment management process. I can’t even find $8,000 planning software. And I know a lot of people are saying, “Yeah, planning software is not that great. I wouldn’t pay $8,000 for it,” I agree. I wouldn’t necessarily pay $8,000 for a lot of what I see out there right now either.
Michael Kitces:
But if this is where the model is going, someone’s got an opportunity in the next five to 10 years to build $8,000 planning software and I can’t wait to see how cool that is. Got a few thoughts what’s going to look like. It’s going to look pretty different than what it does today and I think we’re going to see a lot of opportunity with it. And so just how that ripples across the whole system, you buy different software, you spend differently, you need different platforms, broker dealers and even RIA custodians become less central. You need more back office support to scale advice businesses. We’ll see giant paraplanner businesses that don’t exist today to provide all that back office support.
Michael Kitces:
There’s so much that changes and I think the industry overall, we’ve gotten so used to calling ourselves advisors that I think a lot of very large firms drank a little bit of their own Kool-Aid that they think we’re in the advice business even though they’re really in the product business. And when you really get into the real advice business, a whole bunch of stuff changes, and I don’t think most of the industry is ready for it.
Reese Harper:
So I want to respond to this.
Michael Kitces:
There’s lots of opportunity.
Reese Harper:
Yeah, dude. You’re speaking on a really … I think it’s next week, there’s a little advice tech conference that I’m excited to go to with Adam Holt and I’m speaking on this topic, just a 10-minute little demo of our product that we’ve been working on at Elements. And it’s been so interesting to me, when you build software, you have this thing called an ideal client profile or ideal customer profile. You got to pick, as you know, who your real target is. Well, my target is right now, the small independent RIA that is doing planning, usually on a subscription basis, because they really are valuing this future that you’re painting.
Reese Harper:
When we go and talk about planning, we tell this client, we’re all saying, “We do holistic planning. It’s all this great thing,” and then they show up a lot of the time and what they get and what we want to deliver, what we assume we’re going to deliver is not always the same. It’s not always as sexy as it sounded. And I think a lot of that has to do with the fact that we are spending $10,000, $15,000, $20,000 a year on investment software and we’re spending hardly anything on the planning side. We know it’s the future. Some firms are having a lot of success with this, but it is like …
Reese Harper:
I think you’re just right on in terms of the trend and I’m interested in watching not just like what we ended up doing. We’re just one of many that is going to start coming up, but planning software that really prioritizes all the jobs that the client wants to get done and a great client experience, a great user experience. It’s very expensive to build. It’s funny, my point in telling the story was I’ll sit down with a prospect and I’ll say, “Yeah, for your book, we’re going to be $20,000 for your book,” and someone just laughs at me. One person just laughs and says, “No way.”
Reese Harper:
Yesterday, I actually had, is it GTFO? It’s, “Get the F out.” I had that one yesterday like, “No way in hell I’m going to do that.” And right after that, I had someone signed an agreement, right? And what I’m seeing is that some people’s value proposition is just squarely on this client experience. It’s going to be amazing getting more volume of work, done more jobs to be done, a better client UX, a better advice-centric model. And some people are literally telling me, “Well, dude. I pay,” they tell me this, they’ll say, “I pay $100 a month for RightCapital,” or, “Well, I pay $200 a month for eMoney,” or, “I pay $800 a year for Money Guide Pro. Why would I ever pay five times what I’m paying right now for your system?” And I think that that’s where we’re at as an industry right now, is we’re still [crosstalk 00:13:19]-
Michael Kitces:
Well, if you were charging $300,000 a year in financial planning fees, I suspect you feel different. You’re not like … I’m not trying to knock or bash anyone who is in, but just that is part of the ship that’s coming, right? We see a subset of firms out there that are literally already doing hundreds of thousands of dollars in financial planning fees and when we see them through advice bags. We process the payments. They are out there. There are firms that do seven figures a year in standalone financial planning advice fees and they prioritize very differently. The tools they buy the tools, they don’t buy, what kind of software solution they’re looking for as well as even just what the advice covers.
Michael Kitces:
If you just actually go back and look at the quintessential CFP board topic lists, the main knowledge domains, these are not all the things that consumers care about in finances. These are all the things that we had stuff to sell to financial advisors. We cover risk management because we sold insurance. We cover estate planning, because we used to sell insurance for ILITs for state tax purposes. We cover retirement planning because we manage retirement accounts. We cover education planning because we sell 529 plans. We don’t talk at all about debt because we don’t sell it. There’s nothing on mortgages because that’s a product we don’t sell. There’s nothing in credit scores. There’s virtually nothing on cashflow and budgeting, even though cash in/cash out is the lifeblood of any household because it’s not one of the products that we sold and got paid for.
Reese Harper:
You’re right, but once advice becomes the thing that people are paying for, you’re going to see people innovate in all kinds of ways around what they talk about, the subjects they’re interested in. I’m super stoked to see that future because up until now, the products have dictated the knowledge that we’ve gained as advisors, the training we’ve gotten from our parent companies, right? It’s affected the entire public’s knowledge of financial planning has been influenced by the product distribution that we’ve done as an industry.
Michael Kitces:
The frustrating thing for me sometimes is we don’t even always realize it as advisors sometimes, just how much our platforms end up shaping our world of what we focus on and what we don’t focus on based on what they do and don’t make available to us and allow us to use or tell us we can’t use right now. I started a life insurance company. If you did it long enough and you were successful enough at selling products, you were allowed to also get your CFP and learn how to give [inaudible 00:16:02].
Reese Harper:
Northwestern Mutual have the 17,000 reps that were there, five people were allowed to at one point charge planning fees, right? It’s a different era.
Michael Kitces:
Yeah, but it said financial advisor on my business card from day one. And so just those gaps to me, the reason why all this matters is our lives aren’t getting any simpler, right? Just for the average consumer, the average American, our lives aren’t getting any simpler. If you ask someone, “Do you feel your life is financially simpler now than it was 10 years ago?” basically no one says yes. What that stokes is a need for advice that only continues to grow. There was all this fear when robo advisors showed up, “Robo advisor is going to kill the financial advisor value proposition,” then what do you see years later and you look at the industry benchmarking statistics, firms are up growth is up.
Michael Kitces:
The average advisory fee is higher now than it was in 2012, almost 10 years ago when robo advisors first showed up because we’re doing more advice and we’re actually finding it so valuable. We can charge more for it, literally the opposite of fee compression.
Reese Harper:
And all of the robo advisors had to pivot and say, “Okay, fine, we’ll offer a supported option.”
Michael Kitces:
There’s human CFPs because it turns out people need some advice. And if you don’t and you just want to take an order and buy something, that’s great. You can do that. There’s a lot of platforms to do that, but our lives aren’t getting any financially simpler and so that need for advice, that need for financial advice is just growing. And to me, just the real shift that’s happening is the growth of retainer and subscription models. Look, the hourly model has been around for 20 plus years. Sheryl Garrett really, I guess, didn’t literally pioneer it. [inaudible 00:18:18] advisors charge hourly, but she put it on the map. She drove its growth.
Michael Kitces:
The airplane network only ever grew so big and most advisors in gear, it only ever grew so big because there’s a fundamental challenge to selling advice on an hourly basis. The average client only engages you for a few hours at a time, two, three, four hours an engagement and you want to bill out 1,200 hours a year, you need literally hundreds of clients when most of us to find a good year by whether we had 10 new clients or 15. And hourly models require that monthly and sometimes even more than that on a monthly basis.
Reese Harper:
It becomes really uncomfortable.
Michael Kitces:
To sustain the volume. So the growth of recurring revenue opportunities, whether you do it annually, quarterly or monthly, it makes that fee-for-service model more akin to an AUM model and that is a recurring revenue model where you can get steady revenue over time, service clients, have enough revenue to hire people to help service, the clients to retain the clients which is what is the most fundamental factor for building scale in an advice firm. All that becomes possible when the business model is recurring and that in and of itself was a technology solve, right? We had to get the payment systems in place to be able to bill automatically on a recurring revenue basis to make it work because no one was going to run a monthly subscription model by having clients mail them checks every month. You get buried in the check cashing and reconciliation [crosstalk 00:19:50]-
Reese Harper:
I still get some advisors asking for that like, “How do I bill for it? Do I send them a check every month like or a bill?” I’m like, “Dude, they’re not going to pay that.”
Michael Kitces:
You automate it. That was why we build AdvicePay was to automate that and it turns out once you automate it, retention rates look. Good client adoption is strong. You can automate the process, so-
Reese Harper:
Isn’t that much different than the AUM model? It brings a whole different customer into the market that wasn’t even there before. Dentist advisors, what I was surprised about is about seven years ago, our average customer age was probably in their late 40s, early 50s, so still a younger demographic, I was at like, seven … Well, I would say we’re probably 90% of my revenue was coming from my AUM fees and 10% was coming from my planning fees. Now we’ve grown, you 3 to 4x, hundreds of millions of dollars more, but we’re at almost 40% now planning fees and still one and a half points on AUM, but with recurring model, we’re able to get down the market.
Reese Harper:
Our average customer age has gone down to about 40, right? It’s high 30s now. Because we’re capturing people in their mid-30s that are paying really premium subscription fees to get access to an advisor earlier than they could get one historically.
Michael Kitces:
[crosstalk 00:21:20] they got rejected because they just literally didn’t have a [crosstalk 00:21:23], “Hey, I don’t have any money yet, but I’d like to pay you.” “Oh, sorry. We have an asset minimum.”
Reese Harper:
Heck, no. It-
Michael Kitces:
[crosstalk 00:21:30] portfolio. “We have a half million dollar minimum.” “Cool. Can I just pay you five grand with no portfolio?” “No, no, you have to have a portfolio.” We would literally turn away people who are just wanting to pay.
Reese Harper:
I’m seeing it now, people are rejecting … People are saying, “I don’t want a change. I bump into what probably three of the five prospects, independent RIAs I meet are saying, “I’m just scared of this. I don’t know that I want to do it.” I think what they’re telling me is, if I’m reading between the lines, is they’re comfortable in the model that they’re in. They don’t want to have to do a lot more either for this younger person that’s willing to pay them. It’s not as profitable, I think, to some degree. Even a subscription, we have to do a lot of stuff, it’s harder.
Michael Kitces:
I think there are a few important things that you highlight in that. Doing these more fee-for-service models, it is not literally more work and harder and that when we look even within XYPN, when we look at the benchmarking studies of firm profitability, we don’t see lower profit margins for the advice-centric firms, but when your entire firm infrastructure, the tools, the software, and everything else is built for an AUM client and you try to jam a non-AUM planning center client in there, oh, goodness, yes, that is less profitable. Our infrastructure is more portfolio-centric often than we realize and you notice that the first time someone comes in says, “Well, I want this other different advice thing,” you’re like, “Oh, man, that’s going to take a lot of time, right?”
Michael Kitces:
If that was all you did an ongoing basis, your plans would be templated, your tools would be templated, your workflows would automatically pull in client data, dump it in your planning software or export it out to your plan, automatically move into your client portal to show things on an ongoing basis because you would have to and so and so you would. And when you do it, it works just fine. There are at least enough tools out there to do all the things in the value chain, but when your primary tool is investment management platform, when your primary spend on software is for trading tools and performance reporting, your client portal doesn’t report on planning, it reports on investment results, your meeting agendas are built around that. Your meeting flows and prep processes are all built around that, you just literally don’t have the infrastructure in place to do planning.
Michael Kitces:
The irony is for a planning-centric firm doing one-off investment clients is actually just as painful as being an investment firm doing one-off-
Reese Harper:
They’re different services. They really are.
Michael Kitces:
They really are. Because when you do them at scale, you really buy different tech and you put different tools and systems and workflows and processes in place.
Abby Morton:
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Reese Harper:
A simple way of framing this, I just put a deck together is investment management value proposition on one side, financial planning value proposition on the other. Of course, you could lump insurance value proposition on the investment management, product versus planning or investments versus planning. But what I see is some firms really still truly are winning business on an investment management heavy value prop and they’re still winning business there, right? Active management, tactical. There’s firms growing still there.
Michael Kitces:
And that’s the second part of your comment around firms that you talk to and they don’t want it changed. They’re comfortable where they are. Even as someone, I wrote the first article about why monthly subscriptions was going to be the model of the future. I wrote it in 2013. And then I got a bunch of people who said, “I want to do that,” and we said, “Cool, let’s make it happen,” and we made extra planning upward to do it in AdvicePay to facilitate and all that. We put that out there eight years ago saying, “This is what’s coming and this is where it’s going, but even throughout that, I’ve been someone that has pounded the table to say, “The AUM model is not going anywhere and I think one of the fundamental fallacies that we have trapped ourselves in the industry is this idea that it’s AUM or subscription fees or flat fees. It’s AUM or fee-for-service.”
Michael Kitces:
And it’s not an or, it’s an and because when you drill down to it like, “Look, AUM is a fantastic model for people who have piles of money and want to delegate it and would like to get a lot of value-add services that go with what you should expect, if you’ve got a big pile of money and you’re delegating it.” It’s a great model. There’s a ton of money in the money business. People who want to delegate is a mental psychographic that isn’t going anywhere. It’s part of human nature. Certain people are oriented that way. The money is there and it’s got to land somewhere. There’s nothing wrong with that model. It’s not going anywhere, but it’s basically a niche. It’s a niche model for delegators with piles of money who tend to be retirees because you have to be a certain number of years to accumulate enough dollars to do it.
Michael Kitces:
So we end out with this niche of firms that happens to be the mainstream because it’s the only thing a lot of us do, but we end up with this niche of firms that do retirement planning, financial planning-centric work for retirees that have a pile of assets, who also wanted to be managed. They bundle all the retirement of financial planning services into it. They charge a percentage of assets under management fee which works fine because they’ve got A to M and it’s great and there’s nothing wrong with it and it’s not going anywhere. But it’s like a giant portion of the public who doesn’t have piles of money, who doesn’t want to delegate it, who isn’t looking for investment help and who says like, “I would happily pay an advice fee if someone would just bill me and give me the darn advice.”
Michael Kitces:
It doesn’t come at the expense of the firms that run AUM and focus on retirees. It makes the pie bigger. There’s actually not that many people we can serve with an AUM-only model that only works for delegators with piles of money. When you bring in other models, you get to just serve more people. So instead of only going after the same couple million households that we all fight after in the industry because there’s really only a couple of million who have enough money, not in a 401k plan that they’re willing to delegate and you open up to anybody who’s willing to pay an advice fee for ongoing relationship. Suddenly, just the total market that advisors can serve grows by millions and millions and millions and millions of households.
Michael Kitces:
And it becomes a wide open opportunity, but it doesn’t come at the expense of the AUM model. And so if you’re an advisor that’s in AUM and you got a good service offering, good clients, they’re sticking with you because we know retention rates are phenomenally high in advisory firms, you’re not going anywhere, the model works fine, even [inaudible 00:29:03] shows the average AUM fee is up over the past 10 years, but it’s a crowded marketplace and there’s only so many that can win and particularly the firms that we see that that want to grow or want to go in different directions.
Michael Kitces:
You can continue to fight in the crowded bloody red ocean, but there is this giant untapped blue one over here that now advisors are starting to move towards and they’re finding there’s real consumer demands there.
Reese Harper:
And Mike, two points, I just love hearing your insight because it really helps me … I love hearing you because it validates market research that I’m doing and you’re one of the few people in the country who can actually validate market research with your own time, so it’s great I thought we would be capping our fees at dentist advisors on the AUM. I thought we would go subscription. And then right now, our AUM offsets the subscription, right? I thought we’d be pushed to a fee cap. What I’m finding is there’s not actually pressure for an AUM fee cap, but people like us adding services. So I can say, “Look, once you get this much of AUM, then I’m going to do X and then Y and then Z and then I’ll walk your dog at this point if you really want me to.
Michael Kitces:
The math starts adding up, right? I think we’ve all done a version of this implicitly, right? The standard practice management advice for more than 20 years is you build a practice with a wide range of clients. You segment them into A and B and C clients and you do a little less for your C clients, but in particular, you do a little or a lot more for your A clients because just like, “Oh, my gosh, look at those fees. It just makes sense for everybody.” Give them more value, give them more service, smother them with service or whatever other value adds you want to put in there.
Michael Kitces:
People are happy with that which is why at the end of the day, the AUM model is not blowing up. The caps are not showing up. There is not much consumer pressure and demand for it. You just have to acknowledge you may value add your way up over time. And most advisory firms [inaudible 00:31:25] doing that naturally, their clients grow over time, right? Because markets go up and they save. Your stature as an advisor builds. Your branding marketing builds. You start attracting more affluent clients and most advisors move up market over time, average client with second 10 years has got a lot more money than the average client the first 10 years.
Michael Kitces:
And so as we just drift up market with the natural growth and evolution of our firms, we get more affluent clients, we do more stuff for them and it’s working fine. The retention rates are great across the board. The AUM model is not in any way, shape, or form nearly as broken as people make it out to be. And again, I say it as the one who literally wrote the book on monthly retainer model. [crosstalk 00:32:08].
Reese Harper:
If you look, the other side of your point was the younger, this blue ocean of the smaller part of the market, which I feel like is … I hired my brother. Well, it’s my niece’s husband. So I don’t know if that’s like what that is to me, but I hired this really bright young kid who’s a finance grad to help us, get Elements off the ground as a sales development rep. And he got the app, he puts it on his phone. Right now it’s mobile only because we’re worried about getting client engagement, client data as the primary goal, right? He puts this mobile app on his phone. He looks at it after a week and he says, “Well, I could do financial planning if it’s this. Is this what planning is?” He’s like, “I can make a personal financial statement. I can analyze liquidity. I can measure savings rates. I can measure spending patterns. I can look at these KPIs.”
Reese Harper:
He’s like, “Well, I’ll just go start doing this with my family and friends and I’ll charge them $200 a month and I’ll just use the software and I’ll start my own business.” And he had never really even thought of financial planning before, right? Just gets in and he’s like, “Blue ocean. I’ve got a bunch of friends right now, they want this. They don’t want me to charge them 1.5% on nothing.”
Michael Kitces:
And so when you then overlay that back to the industry, what you get is a lot of established firms with established clientele. At the end of the day, there’s really not much impetus to change. There’s really not much reason to change. At worst, you’re thinking about this because you’re hearing all the discussion around like the death of AUM, the death of 1% fee. I didn’t say it’s not actually that dying, you’re probably going to be fine. If you’re young, you’ve got a 20-year time horizon. The 2040s are a little bit fuzzy to me. Maybe we’re all robots by then, but at least if we’re looking over the next 10 or 15 years, I don’t see the AUM model going anywhere in any material way.
Michael Kitces:
So if you’re there and you’re comfortable and you’re fine, your time horizon lines up and your clients are retaining because you’re giving good service for ones you’ve got and you’re reinvesting into your top clients, you’re giving a little more your A client, you’re doing the things that it takes to serve them well, there’s no much pressure on you to change. When we look at just, “Where are we seeing growth in adoption around the model?” It’s different pockets. It’s larger firms that have very long time horizons. We’re actually trying to figure out, “What is my clientele look 20, 30, 40 years from now?”
Reese Harper:
Yeah, they’re trying to look at it.
Michael Kitces:
Bring my average clientele age down and diversify my client mix is legit for them, right? If you got a 10 to 15-year time horizon until you retire, you don’t actually really need to diversify it that much at the end of the day. It’s going to be hell lot profitable and it’s still going to be valuable. If you got a 30 to 40-year time horizon as an enterprise, your client mix and client demographics matters more. A long-term firm, we want to get to a younger demographic and expand. There are the firms that start forming deeper niches and specializations and just realize like, “I got this great expertise and people want it. They’re willing to pay me for it, but they don’t have piles of money to give me in order to access this advice.”
Michael Kitces:
Generally, that’s a lot of niches around, I’ll just call like people of working age because tend not to have pools of liquid assets, or if they do, it’s tied up in a 401k plan that we may not be able to manage. So young and midcareer professionals in almost any kind of white collar industry that has a good-sized salary where they can pay thousands of dollars in advice fees, but you have to have advice fee model. You have to have a fee-for-service model. You can’t do AUM with them because there’s no A to M. It’s just not on the table. So if you’ve got that kind of expertise or specialization, we see people cropping up in the market on that end.
Michael Kitces:
And the third segment that we really see a lot of momentum with this at the end of the day is really just advisors in their late 20s to early 40s who have been in the business for a while, they’ve gotten established, they know what they’re doing, they’ve started building their own brand and credibility, their personal network starts coming to them, right? If you’re in your late 20s to early 40s, your friends and family, not your family, but your friends in your natural network tend to be people around your own age and they come with problems and people around your own age and they don’t have a pile of money, but they know you and they respect you. And they’ve seen you’re doing this for five, 10, 15, 20 years and they would love to work with you and you can’t in your current model because you can only work with them if they have a certain pile of assets or they want to buy certain products that your company has for sale.
Michael Kitces:
And so this was even much of the genesis of XY Planning Network that worked as well was just particularly our first wave of members who joined were just advisor and said, “Look, I’m a 30 something advisor and I just want to work with under 30 somethings. All my friends ask me for financial advice and they would happily pay me for advice and my firm says I’m not allowed to work with them and charge them a fee. I just want to work with the people that I know who are literally coming to me and asking me for advice and would willingly pay me for it and so I’m going to go do that.” It wasn’t even that they were saying, “Hey, I think there’s a model out there and I’m going to go find people who want it.”
Michael Kitces:
It was like people who are saying, “I want to pay you for advice. Take my money and give me advice.” And this realization like, “Oh, if we actually just build a different model, we totally can do that,” and then we get into all the after effects of like, “Oh, but if I do this for a whole bunch of clients, I really start needing some different tools and technology and platform and the rest to support and scale it because this stuff that’s built for the investment side of the industry is really not actually the best fit for pure advice businesses.”
Reese Harper:
Well, I’m so stoked about this just because this has been … My deepest passion is just seeing the pie get bigger for more of America. I love seeing that 29-year-old, that 35-year-old who traditionally went to Northwestern Mutual and got sold $500 a month in whole life. I love seeing him get a fiduciary that he can access or she can access for a really reasonable cost and then know that they’re going to get shepherded to avoid big mistakes throughout their life. It’s just like a beautiful thing to see people at an earlier age getting support and assistance, instead of that first person they’re hiring being the accountant which is again, a product in most cases, a tax return filer, that was the first advisor.
Reese Harper:
With this new model of subscription, we can make that first person be an actual holistic counselor with a good understanding of all areas of finance, shepherd people into selecting the right advisor group, help them understand the right decisions to make, build the right amounts of liquidity, have good financial behaviors, all these positive things and the only thing that’s stopping that from happening is just a little bit of technology to access a payment that’s not tied to a product. And it’s like we’re so close and I think we’re going to see America go from 9 or 10 million households getting serviced to 20-30 million households.
Michael Kitces:
And one of the biggest, I guess I was going to say ironies to it, it’s really not ironic when you put in the industry context, the view in the industry for the past 10 years is if you’re going to do this, you basically just age demographic scale work with Millennials. And the Millennials just “do everything with text.” If I got to bring advice to Millennials as the future, I’m screwed. What you actually see now showing up if you look at a lot of the consumer research that’s starting to come forth, it turns out the generation most willing to pay a human advisor for advice is more Millennials. They’re most interested. Gen Xers don’t want to because I’m a Gen Xer. We’re jaded as hell. We’re painfully skeptical of that. We’re terrible clients to win over. If you get us, we’re super loyal and great, but we’re terribly difficult to get, to win over because we’re super skeptical of everything.
Michael Kitces:
And Baby Boomers have no interest in paying for advice because they got it for free for 40 years attached to a product or a portfolio. So if you go to a Boomer and say, “How do you feel about paying for advice?” “I haven’t paid for advice my entire life. Why would I start now? I got here. I’m doing okay. System one not broken for me. Why would I write a check for advice?” So the generation that’s proving most willing to pay for advice, technology notwithstanding, is the Millennial generation because I think they’re actually perhaps most in tuned what technology can do and where technology stops, right? “Track my information. Monitor my information. Give me some feedback on my information. Help me buy a thing.”
Michael Kitces:
Sure, I do all that with the click of a button, but technology does not help me determine what fulfills my life and gives me purpose and gets me on a better track and holds me accountable to make those changes and do all the things that it takes to get to a better place. It’s the same reason that there is a YouTube video for every possible piece of exercise equipment you can imagine on this Earth, but personal trainers have a great business right now.
Reese Harper:
Exactly. It’s great, man. Well, it’s always fun to get connected and reconvene. I love hearing from you. I’m just grateful for all the work you put in and it’s a passion for you and it’s clear and you’re doing a lot of great things out there. I hope you feel appreciated from us and from your audience. I know it’s a lot of work to just put in. Probably nine years ago, you started talking about this type of model and it’s finally starting to get a little bit of traction. It moves slow as you said.
Michael Kitces:
The industry moves slow. When you live in a world where the average firm has 95 to 97% retention rates, which means the average client turns over once every 20 to 30 years, things are never going to move fast. It literally takes 20 years for an average advisor’s client base to turn over. These things play out over 20 year cycles. I think we’re still in the early stages of it, but getting to what we’re talking about the beginning. That’s why I’m very upbeat around the opportunities in the in this decade of the 2020s, but also just the sheer amount of change that’s going to happen as we really go from being advisors to advisors and all the stuff that starts to change, not just with our business models and our service to clients, but just all the tech and infrastructure and platforms and ecosystem that’s built around us, because as we’ve noted, you actually need different things to scale on device from then you need to scale an investment or a product firm. I think the whole industry is just starting to notice advisors are a different business.
Reese Harper:
Well, thanks, Michael. We’ll get connected again soon. And thanks so much, man.
Michael Kitces:
Awesome. My pleasure, Reese. Thank you.
Abby Morton:
Next time on Elementality.
Reese Harper:
Investment management used to be the kind of primary value proposition. Now all this technology is disintermediated that space, brought the value proposition down slightly for the role of an investment manager. You’re not doing as many things now, as you used to be able to do, so the value is a little bit lower. So what is the immediate consequence of that? Well, something else has to rise in value as investment management starts to get compressed. And what was that? That’s financial planning, financial coaching, all the other financial jobs to be done that need to be accomplished because investments were only one of the jobs and financial planning has 100 different types of jobs.
Abby Morton:
You can learn more about the Elements Financial Planning System at getelements.com/meet and schedule a time to speak with one of our friendly financial planning experts. Elementality’s executive creators are Reese Harper and Chad Jardine. Elementality is produced by Abby Morton and directed by Jordan Haynes. Have a good one.