At the recent Morningstar Investment Conference, renowned blogger and speaker Michael Kitces led an insightful session on the evolving state of financial advice. Kitces, head of planning strategy at Buckingham Wealth Partners, shared his perspective on how technology and other trends are reshaping the investment industry.
Here, as reported by ThinkAdvisor, are the five industry trends reshaping financial advice:
The Impact of Technology
Kitces highlighted the transformative power of technology in the financial advice industry. He reminisced about the days when stockbrokers could earn $200 per trade, a rate set by regulators until May 1, 1975, when stock commissions were deregulated. This shift led to the rise of innovators like Charles Schwab, who used technology to disrupt the financial advice space.
The 1990s saw significant growth in the mutual fund business, partly due to Schwab's no-load mutual fund supermarket, which allowed investors to build portfolios without relying on advisors. Today, the focus is on artificial intelligence and robo-advisors, evolving from turnkey asset management programs and asset allocation software. Kitces emphasized that technology itself does not disrupt practices; rather, it's the strategic use of technology that enhances efficiency and value for clients.
The Great Convergence
Kitces discussed the industry's evolution from stockbrokers to advisors and the accompanying increase in regulation. As the market for selling stocks dwindled, advisors faced revenue challenges, leading to the introduction of the 12b-1 fee on mutual funds. This shift continued in the 1990s with the move from transaction-based fees to wrap fees, illustrating how regulatory changes often follow industry convergence.
Crisis of Differentiation
Kitces pointed out the struggle advisors face in differentiating themselves. A survey by the Financial Planning Association revealed that 76% of advisors cited their ability to understand client needs as a key attribute. However, when many advisors claim the same specialties, it becomes challenging for clients to distinguish between them. Kitces noted that the pool of clients suitable for an assets under management (AUM) relationship is relatively small, highlighting the need for advisors to find unique ways to stand out.
The Search for New Models
With a finite number of clients with substantial assets, Kitces explored alternative advisory models beyond AUM. One innovative approach is charging a fee based on a percentage of a client's income rather than AUM, making ongoing advice accessible to clients without significant investable assets. Kitces mentioned firms that charge between $5,000 and $12,000 per month for high-income clients, with 2% of income being a typical fee.
The Build-a-Bear Experience
Kitces recommended "The Experience Economy" by Joseph Pine and James Gilmore to illustrate the value of creating memorable client experiences. He compared this to the Build-A-Bear Workshop, where parents pay a premium for the experience of creating a custom teddy bear with their children. Kitces suggested that advisors could offer a similar "Build-A-Bear" experience by involving clients in the process of building their financial plans, adding value through personalization and engagement.
These trends, according to Kitces, are shaping the future of financial advice. Advisors who embrace technology, differentiate themselves, explore new models, and focus on client experiences will be well-positioned for success in the evolving landscape.
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