Michael Kitces: The Model Has to Change Again

Our guest on this week's podcast is Michael Kitces. Michael is a partner and the director of wealth management for Pinnacle Advisory Group, a Columbia, Maryland-based wealth management firm that advises on about $1.8 billion of assets. In addition, he is a co-founder of the XY Planning Network. As the host of the Financial Advisor Success podcast and the publisher of the popular financial planning industry blog Nerd's Eye View, Michael has established himself as one of the most prolific and insightful commentators on the financial advice business. A fixture on the speaking circuit and in the media, Michael often addresses key trends and innovations in the way advisors serve their clients; our interview with him focused on the future of the financial advice business.

Show Notes and References

Background and Professional Development
Michael’s formative years: “The only thing I really think I figured out by the end of college was … that I didn’t want to do psychology, theater, or medicine” (0:59-2:51)

• Michael’s bio
• Pinnacle Advisory Group
• XY Planning Network
• Financial Advisor Success podcast
• Nerd’s Eye View blog

Dad’s old life insurance policy: How a wedding gift led Michael down a path to a career in the financial services industry (2:52-4:21)

• Michael’s background and entry-path into finance

“He was just a really different guy than everybody else”: Michael’s recounts his breakthrough realization that he wanted to be a financial planner (4:22-6:07) ·

• Certified financial planner designation

How Michael used his pre-med training to overcome a crisis of confidence that he didn’t know what he was doing: “I probably shouldn’t be giving them advice; I’m going to hurt someone” (6:08-7:31)

• Hippocratic oath

Going deep to differentiate: “I’m going to get really good at these annuity benefit riders” (7:32-8:45)

• Leveraging a Mini-Specialization to Gain Experience and Get More Client Referrals” by Michael Kitces (Aug. 16, 2018; Nerd’s Eye View blog)
• Variable universal life insurance—a short explainer
• The Advisor’s Guide to Annuities (5th Edition) by Michael E. Kitces and John L. Olsen

Behavioral Finance in Practice
Where behavioral finance falls short: Practicality (8:46-11:40)

• Recency bias: A brief explainer

Persuasion: Using psychology and coaching to help clients overcome their biases (11:41-13:01)

• “Why Evolutionary Psychology May Be Better Than Behavioral Finance Research to Understand Financial Behaviors” by Dr. Derek Tharp, lead researcher for Kitces.com (Jan. 16, 2019; Nerd’s Eye View blog)
• Influence: Science and Practice (5th Edition) by Robert Cialdini
• Advice that Sticks by Dr. Moira Somers

“Most of us just don’t want to say that about ourselves”: Clients don’t hire us to save them from themselves, but to get on a better path and save time (13:02-16:37)

• “Do Clients Really Value Getting Help Managing Their Behavior Gap?”; transcript of episode 5 of “Kitces and Carl” video series

“Zoom the camera out a little bit”: The key to helping clients through difficult times is being available, clearly communicating, and setting context (16:38-18:18)

“There’s very little research at all about what you’re actually supposed to do about this stuff” (18:19-19:56)

Financial Advice: Evolution and Great Leaps
“Disturbingly like clockwork”: Technology’s role in propelling financial-advice from stock-brokering to the mutual-fund era to asset-allocation models (19:57-22:14)

• “How May Day Remade Wall Street” by Jason Zweig (May 1, 2015; Wall Street Journal; Total Return Blog)
• “So Easy a Baby Could Do It” E-trade commercial

Computers disrupted the stock-broker model and the internet disrupted the mutual-fund model. Michael on why he thinks software will disrupt the fee-based asset-allocation model (22:15-24:06)

An S&P 500 index fund just for you: “Technology is going to allow us to completely disintermediate not just mutual funds but most of the ETF complex as well” (24:07-25:36)

• “Indexing 2.0: How Declining Transaction Costs and Robo-Indexing Could Disintermediate Index Mutual Funds and ETFs” by Michael Kitces (May 28, 2014; Nerd’s Eye View blog)
• “Global Fund Flows Report” by Morningstar

The Future of Advice
“If we can do that with medicine and we can do this with clothing, we can do this with at least large portion of financial advice as well”: Michael on delivering advice virtually (25:37-30:25)

• “How Video Conferencing Can Put the Face-to-Face (Back) into Distance Financial Planning Client Relationships” by Michael Kitces (July 27, 2015; Nerd’s Eye View blog)

“(Saying) ‘Oh no one’s ever going to want to work with an advisor virtually; it’s all in person’ … is like clothing stores insisting that Amazon was no threat to them 20 years ago” (30:26-32:56)

• “The Future of Financial Planning in the Digital Age,” a presentation by Michael Kitces to FPA Georgia (May 24, 2017)
• “Is Digital Search About to Replace Referrals for Finding a Good Financial Advisor” by Michael Kitces (June 3, 2013; Nerd’s Eye View blog)

Technology leaps like robo-advice are less of a threat to the financial advisor than to the the back- and middle-office that supports them (32:57-33:54)

• “The Advisory Firm Jobs That Robots Really Do Threaten” by Michael Kitces (May 10, 2018; Nerd’s Eye View blog)

The great inversion: In the future, advisors will charge for financial-planning services and give away investment management for free (vs. today where the opposite often holds true) (33:55-35:36)

• “Pricing Models for Financial Adviosrs and the Power of 'Free' Financial Planning” by Michael Kitces (Aug. 10, 2015; Nerd’s Eye View blog)

Best Practices for Delivering and Paying for Advice
“We still have a huge industry gap”: Not even 30% of financial advisors have achieved a baseline financial-planning designation—the CFP mark (35:37-39:20)

• “3 Reasons Why the Financial Advisor Market Size Isn’t Actually Shrinking” by Michael Kitces (Nov. 15, 2018; Nerd’s Eye View blog)
• “The Long Tail, the Big Head, and the Dangerous Middle of Financial Advisory Firms” by Michael Kitces (Aug. 27, 2018; Nerd’s Eye View blog)
• FINRA Series 6 exam
• FINRA Series 63 exam
• FINRA Series 7 exam
• FINRA Series 65 exam

A question of when, not if, more exacting financial-advice standards will arrive: “The U.S. has become a laggard on fiduciary and competency standards” (39:21-43:21)

• Australia’s Financial Adviser Standards and Ethics Authority (FASEA)
• The Fiduciary Standard
• “Is Financial Planning an Industry or a Profession?” by Michael Kitces (Dec. 15, 2016; Nerd’s Eye View blog)

We can’t do financial advice for young people? Michael on why that’s ridiculous and how flat-fee or subscription-based advice will come to fill that void (43:22-46:51)

• “How the Financial Planning Process Differs for Young Clients: Not Simpler, but Different Complexities” by Michael Kitces (Apr. 17, 2019; Nerd’s Eye View blog)
• “Introducing AdvicePay and the Automation of Billing Financial Planning Fees (without Custody)” by Michael Kitces (Jan. 22, 2018; Nerd’s Eye View blog)
• “The New 1% Advisory Fee: 1% of Income, Instead of 1% of Assets” by Michael Kitces (Feb. 11, 2019; Nerd’s Eye View blog)

“I don’t … see anything wrong with the AUM model”: Why charging a percentage of assets-under-advisement makes sense for some clients, but will become less common in the future (46:52-48:56)

• “How to Profitably Price Fee-for-Service Financial Planning” by Alan Moore, co-founder XY Planning Network (May 21, 2018; Nerd’s Eye View blog)

When it does and doesn’t makes sense to pay for financial advice by the hour (48:57:51:47)

• “The Opportunities in Providing Hourly As-Needed Financial Advice for the Middle Market with Sheryl Garrett” by Michael Kitces (Jan. 23, 2018; Financial Advisor Success podcast)

About the Podcast: The Long View is a podcast from Morningstar. Each week, hosts Christine Benz and Jeff Ptak conduct an in-depth discussion with a thought leader from the world of investing or personal finance. The podcast is produced by George Castady and Scott Halver.

About the Hosts: Christine Benz and Jeff Ptak have been analysts and commentators on investments and the investment industry for many years. Christine is Morningstar's director of personal finance and senior columnist for Morningstar.com. Jeff is head of global manager research in Morningstar Research Services, overseeing Morningstar's team of 120 manager research analysts in the U.S. and overseas.

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