The times, they are a-changin', Bob Dylan once sang. The same could be said about the financial advisory business as 2017 concludes, says Michael Kitces, partner and director of wealth management for Columbia, Maryland-based Pinnacle Advisory Group.
Kitces' blog, Nerd's Eye View, is a widely followed educational resource for financial advisors, attracting some 200,000 unique visitors per month. On it, Kitces tackles the complexities of running an advisory business in his signature dense, deep-dive style, with topics ranging from tax planning to trust-building and everything in between.
He is also co-founder of the XY Planning Network, an industry organization deisgned to support and connect hundreds of fee-only advisors who work primarily with Gen X and Gen Y clients.
Kitces will be speaking at the upcoming 2018 Inside ETFs conference. ETF.com sat down with Kitces to talk about the trends he sees changing the advisory business, as well as how advisors can adapt to survive.
ETF.com: How have Gen X [birth year mid/late 1960s to 1980] and Gen Y [birth year 1980 to late 1990s/2000 (also known as millennials)] clients been underserved or overlooked by the traditional money management model, even as these generations become a bigger part of the market with each passing year?
Michael Kitces: The industry has become so fixated on one particular kind of business—which decreasingly has been about managing money and instead charging for assets under management—that we've unwittingly concentrated into a business model that excludes the overwhelming majority of Gen X and Gen Y. They have financial questions, too, and they want to pay for financial advice. But they can't pay for it by handing over a portfolio to manage, because they just don’t have one yet.
At the XY Planning Network (XYPN), we champion a different business model: financial planning for an ongoing, monthly subscription fee. That opens up a huge market of consumers who want to—and can—pay for financial advice, once it fits their own situation. It also resonates with a large number of financial advisors—particularly those in their 20s, 30s and 40s—who want to serve their peers and couldn’t do so before, constrained to a model that didn’t work for young people.
ETF.com: What is it about a subscription model that works so well for Gen X and Gen Y investors?
Kitces: There's a simple math to it. Lots of people live paycheck to paycheck, but still want financial advice. So saying [to them], “You should pay me $1,200 for a plan this year” is burdensome. Paying $100 on an ongoing basis is just more bite-sized and manageable. It's easier to handle within your household cash flow.
ETF.com: Do you think advisors who choose not to move to a subscription model will eventually be left out?
Kitces: I wouldn't necessarily say that. There's still immense wealth in portfolios that engage the AUM model, and even when the people who have them pass away, they're likely to give it to someone else. I don’t think that goes anywhere.
But probably only 15-25% of the population has liquid financial assets in the dollar amounts needed to sustain a financial advisor, which means all roughly 300,000 of we financial advisors are competing for the same 15%.
Part of why we’re seeing so much growth in XYPN is that most of our advisors have no competition. They're not competing against 299,999 other advisors for the same clients—the doctor who makes great income who really wants to pay for a financial advisor. But because they have $250,000 in student loan debt instead of a $250,000 portfolio, no one will talk to him [but us].