Michael Kitces: 5 Trends Financial Advisors Should Know

If there’s a conversation about baseball, the New York Yankees are quick to be mentioned. When the topic is financial planning, similar logic applies to Michael Kitces—a name that’s quick to bubble to the surface.

Self-titled as “Chief Financial Planning Nerd,” Kitces has built a loyal following among financial advisors for being a one-stop shop for financial planning knowledge.

His website operates like a library for financial planning, holding information on nearly every aspect of the discipline.

Advisor business models, compensation structures, client acquisition, succession planning—Kitces has extensive knowledge, which is why advisors often seek out his opinion.

His work has gone a long way in making advisors better and more successful. This is why he was a natural selection to be a keynote speaker at the recent Morningstar Investment Conference, where he covered five key trends currently influencing the advice industry.

These trends included:

1. Technology: “Technology doesn’t disrupt financial advisors directly—the change happens when we take the technology and use it in our own practices,” stated Kitces. He added that technology allows advisors to automate tasks, enabling them to focus on other high-priority items.
2. The Great Convergence: Most advisors have moved toward the same business model as regulatory changes have ensured there is less conflicted compensation.
3. Crisis of Differentiation: It’s difficult for advisors to explain how they’re different from their peers. Kitces said, “This is why it’s getting so hard to get new clients today. They can’t tell us apart. They can’t figure out who is who.”
4. The Search for New Models: Advisors are all fighting for the same clients. And it’s resulting in an increase in merger activity.
5. The Client Experience: Creating value for clients is paramount. And it’s even more critical that clients recognize the value advisors create for them. Kitces recommends specializing your practice on a specific client type.

Kitces concluded by asking advisors one simple question:

“What are you going to spend the next 10 years being the best at, so that when someone searches a problem online, you become the answer?”

Morningstar Wealth Chief Investment Officer Philip Straehl had the opportunity to sit down with Kitces on June 27 in Chicago for a more in-depth exploration of these major themes shaping the future of financial advice.

The conversation covered aspects of how financial advisors are differentiating, the role of technology, an industry shifting from products to advice, direct indexing, and the increasing importance of specialization to stand out in a competitive market.

An edited version of that conversation follows.

Philip Straehl: Your keynote presentation covered five key trends in the financial planning industry. Which trend do you feel will be the most impactful over the next five years?

Michael Kitces: Differentiation. There is a huge need for it, and it will be interesting to see the way the industry starts to change as we solve for that. Essentially, what happens when more advisors start pursuing specializations, niches, and various ways to focus in on their ideal client profile? If you look at the industry at large, more than 70% of advisors say they differentiate through above-average client service. But that math doesn’t work—70% of advisors can’t be above-average.

When I look at a marketplace today, we’ve had this collective shift from selling products to providing advice. I joke that advisors stock the shelves with the knowledge between their ears. That’s the shelf I sell now, not my company’s product shelf. My value proposition is built around advice, not product distribution.

And the industry is catching up. There are 100,000 CFPs [Certified Financial Planners], and the number is growing, gaining momentum. The CFP Board had its largest class of new CFPs over the past 12 months. It’s their 51st year, and they’re setting a new record, which to me indicates they are on the uptick of the S-curve of adoption.

So, advice has been mainstreamed, and it’s only gaining more momentum. What you see in the new industry participants coming in is remarkable: Merrill Lynch is basically a giant RIA. Vanguard has 700 advisors in their RIA division. Schwab and Fidelity have giant RIAs. When did we ever think the unified fiduciary front would be Merrill Lynch, Schwab, Fidelity, and Vanguard? But that’s literally how the deck chairs are being rearranged now.

And so that creates all sorts of pressures around how you really differentiate. The specialization model exists in pretty much every other profession out there. The generalist makes less than the specialist in medicine, law, and accounting.

Straehl: Are there any great examples you’ve seen of that recently with specialization? I think it was probably over five years ago I heard you on a podcast where you were talking about an advisor that specialized in bass fishermen.

Kitces: It’s still my favorite example—that advisor is still doing that; it’s awesome. But the short answer is it’s almost anything. A very basic rule of thumb is that any financial advisor can have a wildly successful practice with 50 great clients. Most of us stack up higher because we take on some nonideal clients and then feel guilty about letting them go. But the simple math is like 50 great clients is ample, and many can do it with even less than that.

And so, when you have a small number of great clients almost anything works as long as they have enough financial wherewithal to pay you for advice. People specialize in various professions—doctors, lawyers, architects, bass fishermen, right? You need something where enough money goes around that you can get paid for advice. Some advisors specialize in particular problems or transitions; newlyweds and divorcees are examples of situations where there’s life and money in motion.

Straehl: You talked about technology as an enabling function. What role do you think technology should play in an advisor’s practice today?

Kitces: The rise of software is an obvious adoption trend. Software that manages portfolio models at the client and account level, aggregated across a household or an advisor’s practice at the firm level, is becoming increasingly common. This includes various levels of separate managed accounts, uniform managed accounts, model marketplaces, and rebalancing software. Each of these has a slightly different use case and terminology, but they all functionally achieve the same thing. It took until we reached this stage of technology for a professional manager to manage a chunk of money for multiple clients without pooling it into one bucket. This was essentially what the mutual fund did, which was the only model available from the 1920s until the 2000s. Over the past 20 years, technology has advanced to the point where we can use the same software to manage mutual funds on a disaggregated basis—one client at a time, one account at a time—grouped by clients, household, advisor, firm, etc.

Ultimately, this technology opened pathways that just didn’t exist before and could not have existed without it.

Straehl: Staying on the technology theme: What are your thoughts on AI? How will it impact the financial advice business?

Kitces: Fundamentally, I’m very bullish on technology of all sorts for advisors and the ways that it lifts productivity and reshapes what we do as advisors. But that said, I’m very skeptical of AI, which is probably too harsh because that’s like being a skeptic of computers. We’re all products of our own life experiences, and my broader AI skepticism is having started out my career during the tech boom and having seen many other mini-innovation cycles along the way.

(Kitces elaborated that the start of his career coincided with the dot-com bubble. From the dot-com bubble market trough, it took 13 years to reach new market highs. He hinted that the excitement around AI shares similarity traits with that period in terms of euphoria.)

The key point I’d make is that we often overextrapolate the capabilities of new technologies. Over time, this tendency fades, and we focus on more practical use cases of what these technologies can actually do. I do think there are some cool ones that will crop up, like meeting notes and related functions postmeeting, which are clearly a prime example of where AI has been effective. AI can generate meeting notes in an instant and then create the follow-up task in a CRM to open a Roth IRA (as just one example) and assign it to the right people.

This is a super cool use case and has a very material impact for advisors in terms of efficiency. According to our data, the average advisor spends one hour of prep and follow-up for every hour of meeting time with clients. So, trimming that down is a major productivity enhancer.

Straehl: Pivoting from technology, I heard you talk about a research breakthrough around the introduction of flexibility into the financial planning process. I was hoping you could unpack that idea. What does that mean? How does introducing flexibility help advisors?

Kitces: This is still a challenge. We are starting to develop some tools around this, but I don’t think we’re entirely there yet. There are a few layers to this.

The first is that financial planning is premised on the idea, “Tell me your goals, and I’ll solve for the most efficient way to get there.” If the advisor is good, they can solve for it. But an issue is that many people don’t know what their financial goals even are. They’ve never spent time thinking about it and can’t articulate them. They often pluck goals out of thin air that they’ve seen in the media or heard in their personal world, such as “age 65 and a million dollars.” These goals are usually tied to the age of 65 being the Medicare age, and a million dollars seems like a round number.

The second challenge around flexibility is that there are significant gaps in the tools available to address it. A particular version of this issue crops up when we get into retirement. We spend an immense amount of time discussing the optimal techniques to draw down portfolios to avoid running out of money, yet in practice, almost no advisors implement these techniques precisely as researched. Miraculously, 99.9% of advisors have never had a single client run out of money. The reason is that when things are not going well, people change their behavior. We basically have no tools to model how human behavior will change.

The idea of who has what kind of spending volatility tolerance and how to design a retirement portfolio for them represents a significant gap in our marketplace. No one seems to be experiencing catastrophic failures with the status quo, so it might not be entirely broken. However, I think there are some gaps. The fundamental issue that worries me is that our current system systematically underspends clients in retirement. Frankly, we have a pretty healthy industry bias toward this outcome because we get paid more when clients fail to spend their wealth down. I don’t think any advisor intentionally prevents their clients from enjoying their money so that the advisor can bill more, but there is a subtle incentive that contributes to this issue.

Straehl: Moving from flexibility into the personalization dimension, at a high level, what’s the value of personalization versus off-the-shelf? Obviously, any financial plan is personal to some extent, but what are your thoughts on the value of personalization?

Kitces: I get torn on some aspects of this topic. At the most basic level, every advisor has a personal relationship with their clients. It’s already personalized. It already exists that way. So, all these discussions like, “Your technology will help you have personalization at scale,” are a nonstarter for me.

Personalization is what this business is predicated on. The primary thing I try to do as a financial advisor is find ways to standardize and systematize, because otherwise, I overwhelm myself with the sheer level of personalization that’s needed for each unique client with unique preferences, circumstances, and financial plans.

What it essentially comes down to is that truly personalizing portfolios does not scale advisors; it descales them. It descales the client conversation. When I have a model portfolio and 11 meetings this week, I’m going to have the same portfolio conversation 11 times. I know what’s doing well, I know what’s not doing well. I’ve already done my research; I know what my talking points are going to be. I lose that efficiency when every client portfolio is “personalized” differently.

So, I think there are real challenges. It’s not insurmountable, but it means, ironically, I need a lot more tools and tech to expedite these client conversations. If I have to spend half an hour prepping before every meeting, it’s going to significantly impact my efficiency.

Straehl: Direct indexing in some ways is a technology-driven application of personalization. You have an article on this topic where you talk about personalized direct indexing. How do you think about personalization or customization in that context?

Kitces: I’m fascinated with direct indexing, but I also look at it through the different use cases.

Starting with the simple use case: Direct indexing for the purpose of tax-loss harvesting. This works well from a scaling perspective because I can use the same models, positions, and offerings I was using in the past. My investment story doesn’t change. I can talk about tax benefits, and I don’t have to change my investment conversation. That seems pretty straightforward to me.

But the other end of the spectrum is when I customize for a particular client circumstance. For example, if you work at Google and own a lot of Google stock, an advisor might build an S&P 500 portfolio for the client minus Google stock. Maybe you even exclude the tech sector because Google’s a close enough proxy. The investment theory for doing this makes sense. But the caveat is that the portfolio begins to track the index less, which complicates things from an advisor’s perspective. If advisors start doing this for all clients—Googlers, Facebookers, Exxon workers, IBM—it starts to get messier because each client’s portfolio shows up a little differently. And now, the prep time for meetings starts to increase.

The next layer of this, to me, is what I call “personalized portfolios,” which I frame as personalization not around client circumstances but around client preferences. So, call it “ESG or values-based investing,” in that domain. If a client dislikes guns and tobacco stocks, they may request a portfolio without those. They may also want to see their capital supporting specific causes, allocating more toward those. This, to me, is an interesting double-edged sword from the advisor’s perspective, needing to manage portfolio investment results and expectations.

On one hand, this approach drastically descales me because every client now has a different portfolio built around their unique preferences. No two clients will have the same preferences because humans are wonderfully unique and varied.

On the other hand, I think there are advisors who dive deeper and specialize in this approach, making it their niche so it remains systematized and consistent for all of their clients in that niche. They might say, “We help investors align their capital with causes and values important to them, expressed directly in their portfolio to build a successful retirement.”

Straehl: Your keynote highlighted the importance of creating meaningful experiences, using Build-A-Bear’s model of customer engagement through hands-on participation. Do you believe that direct indexing could similarly foster deeper connections between investors and their portfolios?

Kitces: I would say “TBD,” but I’m not optimistic. There might be something to that. But I don’t see many investors who buy things they don’t believe in to begin with.

Straehl: Closing the loop on the experiences question: What are sources of greater attachment through experiences?

Kitces: When I think about what experiences look like, they’re not about the money. They’re about what the money represents. Let me give you an example.

One area where advisors struggle is the first step of financial planning: gathering all the client’s financial data so it can be plugged into the software for analysis. For many potential clients, this is where the process breaks down. Many people are financially disorganized; they literally can’t fill out an advisor’s data sheet. Then, we lack the necessary data, we bug them for it, they feel bad, and often we never get the data, causing the relationship to fall apart and the client to leave.

So, when I consider what this looks like from an experiential standpoint, imagine sitting down with a new client. You say, “Look, part of our financial planning process involves getting a full understanding of your financial picture to help you achieve your goals.” What we’ve found with many clients is that they’re not sure where all their money is in the first place. It’s kind of embarrassing, but it’s true for many.

It could be an old 401(k) plan you haven’t thought about in a while, old bank accounts from childhood, or maybe a 529 plan opened in the state where a child was born but then moved away. Perhaps there’s a box at home filled with envelopes that nobody looks at but holds important documents.

So, part of what we do for our clients is help them get financially organized. For the next meeting, here’s how it works: I’ll ask you to bring in that box wherever it may be. We’ll go through it together, bit by bit. I’ll show you what documents to keep and what can be discarded so you don’t have to deal with it in the future. We’ll introduce a simple file folder system, color-coded with labels, that will help you stay organized moving forward. It’s straightforward, effective, and you’ll love it. It might take an hour or two, but you’ll leave feeling more financially organized than ever before in your life.

That’s what I envision when I think about creating an experience. It’s nothing elaborate, but it has an enormous impact.

Straehl: We’ll stop here, this was fantastic. All great insights, thank you for the time!

Kitces: You’re welcome. I hope it’s food for thought.