five industry trends reshaping financial advice

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Michael E. KitcesMSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL

Partner. Director of Research, Pinnacle Advisory Group

Publisher. The Kitces Report, www.kitces.com

Blogger. Nerd’s Eye View, www.kitces.com/blog

Twitterer. @MichaelKitces, www.twitter.com/MichaelKitces

Five Industry TrendsReshaping Financial Advice11.13.2019 | Money Management Institute

Handouts/Additional Materials at: kitces.com/MMI19

Handouts/Materials: kitces.com/MMI19

Five Industry Trends

• The Luddites

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• Cotton Production – Before & After


Technology

The Client ExperienceThe Search For New MODELS

Crisis Of DifferentiationThe Great Convergence


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“Financial Advisor” of the 1970s/80s: STOCKBROKER!


Source: “A Century of Stock Market Liquidity & Trading Costs” by Charles Jones


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• “Financial Advisor” of the 1990s – MUTUAL FUNDS!



• The online Mutual Fund Supermarket!

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• “Financial Advisor” of the 2000s –ASSET ALLOCATION!

Source: “Moss Adams & Investment News Industry Benchmarking Surveys”



• But now technology is commoditizing it again!

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• What Is The Value You’ll Add On Top?

Technology & Financial Advice

Trading

Rebalancing

Tax Loss Harvesting

Facilitating Saving

Trading

Rebalancing

Tax Loss Harvesting

Facilitating Saving

Exploring Goals

Financial Planning

Behavior Change


Technology



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• Once upon a time, commissions were for products, and fees were for advice



• The Great Convergence is triggering regulationSEC Temporary Rule:‘Certain Broker-DealersDeemed Not To BeInvestment Advisers’

India Bans UpfrontCommissions on

Mutual Funds(2009)

Future of FinancialAdvice (FOFA) ReformsProposed in Australia

(2012)

FOFA Finalized,CommissionsBanned(2013)

Canada’s CRM2Imposes NewTransparency Rules(2016)

DoL FiduciaryRule Re-Proposed

First DoLFiduciary Proposal

Birth of theHybrid RIA

(2008)

FPA WinsSEC Lawsuit

(2007)

DoL Fiduciary RuleVacated in Court(2017)

Australia’s HayneCommission ExtendsFiduciary Rules(2018)

1999 2000 2005 2010 2015

Retail DistributionReview (RDR) in UKBans Commissions(2014)

South Africa BansCommissions forFinancial Advisors

DoL FiduciaryRule Finalized(2016)

SEC Proposes Regulation Best Interest(2018)

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• Regulatory change is not a cause, it’s an effect!– …of the Great Convergence!

• The Fiduciary is a global phenomenon– …and the trend is towards less conflicted compensation

• But when we all converge towards the same business model, guided by the same regulation…


Technology



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• The emerging Crisis of Differentiation

Source: FPA's Research & Practice Institute. "Defining and Communicating Your Value 2016: Trends in Practice Management Whitepaper"



• We’re all going after the same (few) clients…

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• But there just aren’t many baby boomer delegators with money!

Source: “Spectrem Group, Market Insights Report 2016”



• But not everyone is a delegator!

Source: “Forrester Research”

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• How many baby boomer delegators are there…?– If 1/3rd of households are delegators…


Technology



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• The search for new business models

Net WorthRetainer Fee

Pays 1%of Income

Hourly FeeMonthly Subscription Fee

Annual Retainer FeeNet Worth + Income Fee

Cannot AffordFinancial Advice

Pays 2.5%of Income

Hourly FeeMonthly Subscription Fee

Annual Retainer FeeNet Worth + Income Fee


Technology



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• The Experience Economy


• The Financial Planning “Experience”


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How To Survive(And Thrive)Serving the

Advisor of the Future



• The Passive ETF Mirage

Finan

cial Advisor

Strategy Adoption

100%

80%

60%

40%

20%

0%2014 2015 2016 2017

Passive Partially Active Active

AdvisorAdoptionOf PassiveIs Declining!

Source: FPA 2017 Trends In Investing Survey

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Annual Expense

2.5%

2.0%

1.5%

1.0%

0.5%

0%


• Advisors Disintermediating Mutual Fund Managers

TraditionalMutual Fund

Mutual FundManager Fee

FinancialAdvisor’s

CommissionTrail

Financial Advisors asInvestment Manager

FinancialAdvisor’sManager

Fee

UnderlyingETF Costs

Client saves0.9%/yearIn total cost!


FinancialAdvisor


• Financial Advisors: From Distributor To GatekeeperAdvisor as Product Distributor

AssetManagers

FinancialAdvisor Client

1%1%1%1%

Advisor Providing Investment Advice (Product Gatekeeper)

Client

1%

AssetManagers

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• Re-Writing Industry Channel Segmentation

Fee-For-ServiceFinancial Planning

Channels: RIA, Hybrid RIAProducts: TAMPs, SMAs

InvestmentManager

Channels: RIA, B/D Rep-As-PMProducts: ETFs, Individual Stocks/Bonds, some actively managed mutual funds

Needs-BasedSelling

Channels: Broker-Dealer, Insurance B/DProducts: Mutual Funds, SMAs

AssetGatherer

Channels: RIA, Broker-DealerProducts: TAMPs, SMAs, Mutual FundWraps, Individual Funds

Financial Planning-Centric Investment-Centric

CLIENT APPROACH

VALU

E PROPOSITION

Ad

vice

-Ce

ntr

icP

rod

uct

-Ce

ntr

ic



• The Cross-Roads Of Wholesaler Value-Add

InvestmentProduct Expert

PracticeManagement

Expert

PortfolioDesign Expert

If you want to addvalue, you have to know

more (than us)

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@michaelkitces

Questions?Handouts & additional materials:

www.kitces.com/MMI19

Contact: [email protected]

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