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Kitces: The 5 Trends Shaking Up the Advisor World

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What You Need to Know

  • Technology is once again forcing advisors to figure out new ways to offer clients more value, Michael Kitces says.
  • There is, meanwhile, an ongoing convergence between the advisory and broker-dealer channels.
  • Other trends include the search for new business models.

As technology continues to drive significant changes in the financial services sector, advisors must learn to “evolve” in order to survive and thrive, Michael Kitces, head of planning strategy at Buckingham Wealth Partners and executive chairman and co-founder of XY Planning Network, said Wednesday at the Fearless Investing Summit in Palm Springs, California.

“Two hundred years ago, one of the best-paying jobs in the world was making socks,” he said during the keynote “Five Industry Trends Reshaping Financial Advice.”

“I kid you not,” he said, noting that in the early 1800s, most people were subsistence-level farmers — as in, “I just hope we get enough potatoes to survive the winter.”

Relatively few people were able to learn a profession, so making clothes for the noblemen who had all the money was a relatively good job, he noted. That was until there was a “technology breakthrough” a few years later and these skilled, trained professionals wound up being replaced by kids using looms, he added.

Thanks to the Industrial Revolution, we went from a world in which 90% of the population were farmers to one where only 3% are now farmers, he said.

“I think we’re in a version of one of these technology-driven industrial revolutions within our world of financial advice,” he told attendees and those viewing the presentation virtually. That is “the driver of what I call the ‘five trends that are reshaping our world as financial advisors,’” he said.

Those five trends are:

1. Technology is again requiring advisors to offer clients more value.

Advisors must always figure out a way to add value to their clients to stay a step ahead of technology, according to Kitces.

“All of it starts with the technology,” he said, noting that Charles Schwab founded his company in 1975 as a “tech startup to disrupt the human financial advisor.” Ameritrade followed shortly after that and then E-Trade, Kitces said. The late 1970s to early 1980s was a “giant technology boom” with discount brokers out to put human financial advisors out of business.

The cost to execute a stock trade decreased 90% in 20 years, driving traditional stockbrokers out of business. “Computers obliterated the financial advisor business model” so advisors had to add value with more services,” he said. Yet advisors are still here because they reinvented themselves, he noted.

Once technology enabled just about anybody to buy mutual funds on their own, advisors changed their business models again, offering value through diversified portfolios and other services clients couldn’t find anywhere else, he said.

Then came rebalancing software that enabled advisors to do the same thing that only turnkey asset management programs did before. And then came the robo-advisors, he noted.

“We are at the crossroads again,” he said, noting consumers now have access to rebalancing software also.

2. The ‘great convergence’ of industry channels.

For decades, investment advisors and broker-dealers were in two entirely separate channels. “Until the 1970s,” when mutual funds became popular and new products and services were needed for brokerage firms to be regularly paid by their clients, Kitces noted.

Over the course of about 40 years, due to “technology pressure,” the channels ended up converging.

That is why there has been such a big “fiduciary debate” over the past 10 years or so and why there are more regulations in the industry now, he noted.

With the rise of the “hybrid” business model in recent years, “today, almost 90% of all advisors and independent broker-dealers are dually registered as a broker and an investment advisor.”

 3. There is a crisis of differentiation among financial advisors.

Advisors need a better, clearer way to differentiate themselves, according to Kitces.

“The number one way by far that advisors differentiate themselves is their ability to understand their clients’ needs and objectives,” he said, pointing to third-party data showing 76% of advisors gave that answer in a survey.

“This is not really how you differentiate yourself. This is how you get not sued. It’s literally a legal regulatory requirement” for advisors, he said.

The number two way that most advisors differentiated themselves was by saying they’re offering above-average client services, he said, noting 72% of those polled said that, so “the math doesn’t work.”

4. The search for new business models.

Under the AUM business model, everybody in the sector has been targeting baby boomer retirees for the past several years because that tends to be where all the assets are, Kitces noted.

Most advisors are, therefore, competing for the same clients and there are only so many assets, he said.

Among investors, there are delegators, who tend to be the best clients, and the self-directed clients who only contact an advisor if they are really bad at it, he noted.

Then there are the “validators,” the biggest group of potential clients, who just want to “validate” they’re on the right track with their own planning and only want to “buy a couple of hours of your time,” he noted.

The AUM business model only works with the delegators, according to Kitces. Because there are about 7 million U.S. households with baby boomer delegators and about 300,000 U.S. advisors, each advisor can only get about 23 of those investors as clients, he said.

“It’s getting crowded” as more brokers leave their channel and enter the AUM business model, he said, adding these factors are what is driving the shift to the fee-for-service business model.

5. The ever-growing focus on the client experience.

The internet significantly hurt travel agents, Kitces said. Many of them ended up going out of business. But many of them survived by successfully shifting their focus away from booking travel arrangements only to offering clients complete travel experiences.

Advisors must “evolve” the same way in order to survive, he said.