XY Planning Network, the organization of fee-only advisors serving Gen X and Gen Y clients, held its annual conference last week in St. Louis. Michael Kitces, co-founder of the organization, recently chatted with WealthManagement.com about the industry’s latest technologies, the biggest growth areas for advisors, and the most oversold ideas in the wealth management space.
WealthManagement.com: XYPN’s fintech competition showcased tech companies that provided tools for student loan repayments, health insurance, client discovery and engagement services, prospecting and onboarding and legacy and estate planning. Which of those solutions is most in-demand for advisors?
Michael Kitces: Frankly, none of them, as it exists today, which I think is actually an interesting statement about where the advisor landscape is. I think a lot of what we're seeing in advisor technology innovation now is filling in rather large gaps in the advisor landscape.
For most of our history as financial advisors, we sold insurance and investment products. We're really good with tools to fit that process and we're really light on the rest, which is why you see issues like student loans, a $1.5 trillion problem. As an advice issue, giving advice on a $1.5 trillion debt problem is a very rewarding opportunity.
Historically, most advisors didn't sell health insurance. It's the second biggest line-item expense for the average consumer and probably one of the top ones shaping people's life decisions. We ask clients, why have you not started your own business? They need health insurance. Why are you not retiring? They’re waiting until 65 because they need health insurance from Medicare.
If you really want to give holistic advice, you need to gather a lot of information. Most people don't like filling out questionnaires, especially not by hand, so you see two data gathering tools and a third one to facilitate onboarding.
What you're seeing is that technology is finally moving to solve the gaps. Some of them are entirely new categories; we're still making this transition.
WM: Should financial advisors be inserting themselves into areas like health insurance and student loans?
MK: They’re areas of pain, complexity and substantial financial stakes, where consumers need help. Is there a value to providing advice in those areas and getting paid for it? Absolutely. We see that happening with our advisors, and now we’re seeing technology solutions for it.
If your business model is to manage a pot of money, no, you really don't need to spend any time on those issues. You get a mismatch in the AUM business model simply because the people who qualify for an AUM model have generally self-selected out of having those problems, or at least have diminished the materiality of the problems. Even more, if you’re an advisor on an AUM basis you don’t get paid to solve these problems. It can be a lot of extra work, and you’re not getting paid anything extra for it.
WM: Even so, student loans and health insurance can be really complex issues. Is it worth it for a fee-only advisor to take on that risk?
MK: The risk and its financial impact is what creates reward. It’s really risky to take a sharp metal object and cut someone open, but that’s part of why surgeons have a whole lot of training and get paid really well. Advice opportunities that are high risk are what makes them rewarding. Not very many people can get to the point of doing them competently.
Should advisors casually delve into complex areas of advice? Absolutely not. You’re just asking to get sued. Even a really good family doctor doesn’t just periodically pull out the scalpel to take a look around inside, but that doesn’t mean it’s a bad route for doctors who are trained surgeons. It’s actually a very lucrative route to take, as surgeons get paid more than general practitioners.
In our advisor world are these risky areas? Yes. So you better bother to get the training and expertise to know what the heck you’re talking about first. And if you’re now one of the only advisors in the country that has the training and expertise to help people solve a $1.5 trillion problem, is that a business opportunity? Heck yes.
WM: When an advisor has a unique offering, what does he or she need to do to better communicate value to a client?
MK: I think we’re all still collectively figuring it out. In the past, value propositions were around the insurance and investment products we sold. When I started in the industry, no one ever explained to me how to demonstrate the value proposition of the advice knowledge in my head. I was trained really well, though, to discuss the features and benefits of variable universal life.
We were not taught to sell ourselves. We were taught to sell our company’s products—it’s still a sales skill, but you’re selling a different thing.
I see the value of selling advice going in two directions. No. 1 is a framework like Mitch Anthony’s around explaining the value of financial planning in the context of the advice relationship and what you get from it. It’s discussing the actual value of an advice relationship.
The second alternative, which is the primary advice we give all of our XYPN members is: If you want to figure out how to explain the value of advice, get really, really specific about who you want to serve and explain the value of advice for them in their terms, in their world, of what’s relevant for them.
The blocking point for most of us is we can’t effectively articulate who we serve. We cast a net that’s too wide and say we can serve everybody. And the only way you could serve everybody is if you knew everything about everything and no one actually believes that. So then our advice propositions just aren’t believable. That’s part of why we have trouble conveying the value of financial advice.
When we showed the benchmarking survey, the growth patterns for advisors that start out earlier with niches are growing faster.
WM: What’s the most oversold idea in wealth management?
MK: Goals-based financial planning. It’s popping up everywhere, including with a lot of very large firms.
But if I dial the clock back 10 years, before we started talking about goals-based financial planning, you have the traditional approach of saving money for retirement, college and a house, spread across three different account types.
With goals-based planning, I take the old method and come up with the exact same solution in every possible way. We’re selling goals-based planning as this great breakthrough innovation that revolutionizes how client portfolios are invested and then when you look at what people actually do, it’s literally the exact same thing it always was.
WM: What’s the highest value idea in wealth management right now?
MK: If 300,000 financial advisors are going to succeed, the way they’ll succeed is by not doing the highest value thing in financial planning, because we can’t all do the same thing. There aren’t enough clients and too many advisors to compete against when we all do the same thing.
We’re going to see a continued shift towards more niches and more specializations because when we all converge on the same thing—we struggle for differentiation. That’s the answer to the differentiation problem, with a corollary; it also happens to be particularly good at the value proposition.
When you start differentiating from other advisors it’s easier to command higher prices because you can’t be comparison-shopped. When you do something different than everybody else, it’s easier to market and differentiate when you’re doing things that are different from everybody else. It also becomes much easier to market, because you can market in ways that are meaningful for the people you’re trying to illustrate the value prop.
This interview has been condensed for clarity.