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.