Although there continue to be many opportunities for advisors, the sector faces multiple challenges that include an ongoing crisis of differentiation, as well as the continued convergence of the broker-dealer and RIA channels that’s led to increased regulation, according to Michael Kitces, XY Planning Network co-founder and partner/director of research for Columbia, Maryland-based RIA Pinnacle Advisory Group.
“Who built their business on the premise that their single greatest differentiator is that they have a more convenient ZIP code than any other” advisor? he asked rhetorically on Wednesday during an education session at the Schwab Impact conference at the San Diego Convention Center in which he sat down to chat with Lisa Salvi, vice president of Business Consulting and Education at Schwab Advisor Services.
“The hard truth is that’s actually the differentiator for most of us” because the first thing that consumers looking for an advisor enter in a Google search when looking for one is their ZIP codes to find one nearby, he said during the presentation, called “Opportunities and Challenges in the Landscape for Financial Advice: A Nerd’s Eye View.”
At the same time, RIAs are facing increased competition from broker-dealers providing some of the same services. “That’s why we see so many firms now suddenly struggling with their growth rates,” Kitces said.
It used to be fine to classify oneself as a “generalist” in the advisor space when you were the only one located within 5-10 miles of a prospect, but that’s “not good enough anymore,” he argued. Firms now need to find new ways to differentiate themselves, he said, explaining that means “having some kind of much more specialized and focused value proposition for a particular type of clientele.” He gave the example of a focus on optometrists.
Kitces also once again discussed “the great convergence” in the last few years in which the lines between what broker-dealers and RIAs do have blurred. This started when the Securities and Exchange Commission deregulated brokerage industry commissions in 1975, he noted. Shortly after that, Charles Schwab created a startup using computers to “try to disrupt” what stockbrokers were doing, Kitces pointed out, adding Schwab later disrupted the mutual fund market with his OneSource program.
“We go through these cycles about every 20 years, where there’s a technology breakthrough and [that] starts pushing down the old model and then we create new models on top of it,” Kitces said.
The blurring of the lines between broker-dealers and RIAs is “why we’re seeing all this fiduciary rulemaking,” he said, noting: “Regulators don’t generally cause change. They react to change. Regulators tend to solve the last crisis — not the next one.”
It’s nice that consumers have more options when they’re looking for financial advice and “I’m all in on the advice movement,” Kitces said. But he explained: “The problem is we’re doing the advice movement in the convergence of channels that were not all built to do advice. And now we’ve got regulatory friction and there’s all this sorting out across the channels.”
Kitces pointed to the suit that XY Planning Network filed against the SEC in September in the Southern District of New York in which XYPN argued that under the SEC’s so-called “best-interest” rule, “a broker-dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings.” That new rule means broker-dealers “may maintain harmful conflicts of interests while being able to market themselves as trusted advisers acting in their client’s best interests,” it argued.
Kitces also discussed the impact that robo-advisors have had on the industry. Kitces never saw them as a “threat to real advisors,” he recalled. “If you’re self-directed,” robo-advisors provided a “very useful tool” — advisor portfolio rebalancing software that’s “really pretty” and available on the internet, so now some people can manage their own models and “don’t need an advisor to do it,” he noted.
Yet very few RIAs have lost a significant number of clients to robo-advisors, and the clients that have fled from them have tended to be those who weren’t taking advantage of their advisors’ full range of financial planning services, he said.
Also discussed was the still-very-much-alive assets under management-based fee model. Kitces noted during the Q&A that he still didn’t hear a whole lot of complaints about the AUM model. “It’s the oldest financial services model,” one that goes back hundreds of years, he said, adding the “demise of the AUM model is overblown.” But he called it a “niche model for a niche of high-net-worth” clients, and “there’s a giant remainder of the marketplace that’s like this enormous blue ocean of people” who want to pay for advice and new fee-for-service business models make sense for them, he said.
Salvi recalled at the start of the session how somebody was packing to attend last year’s Schwab Impact and said, “I wish I was Michael Kitces, so I could just pack a whole bunch of blue shirts.” In response, Kitces noted how convenient it was to “never have to think about” what you’re going to wear — just grab those blue shirts and a black suit and “off you go.”