The Future of Advice with Michael Kitces

Sean Walters: Hello, everyone. Welcome to The Exceptional Advisor podcast. I’m your host, Sean Walters. This is put on by the Investments and Wealth Institute. We try to feature ideas, trends, and thought leadership facing the advice profession. Today’s guest is Michael Kitces. Welcome, Michael.

Michael Kitces: Hello Sean, it’s good to join you. Appreciate the opportunity.

Sean Walters: As most of you listening know, Michael is one of the most recognized voices in the industry. He and I have a long history together — like, 20 years now. I was managing director back at the Financial Planning Association. We worked on conferences together. He was integral in starting the NexGen community, which I had as part of my group as well. When I came to the Institute, he taught in the Certified Private Wealth Advisor certification and Retirement Management Advisor certification. Lots and lots of conferences. So we’ve stayed close throughout, Michael, and it’s been a pleasure to watch you grow and all of your businesses grow and thrive. So thank you for joining us.

Michael Kitces: Thank you, likewise. It’s great to see CPWA and RMA continue to grow, having been with them when they were very, very new and very, very small. I know you’ve got that whole CIMA thing as well, but I suspect we’ll talk here — a lot of this discussion now is where does the value sit in the future, and how much is investments and how much is wealth and how much is retirement and all these other domains that we do work in as advisors.

Sean Walters: I know how it is when you and I get together — usually I have a well-scripted podcast script, but for you and me, I only have really three topics. And I’m going to position them for us as this or that. But I suspect the conversation will be a bit of this and that.

Michael Kitces: I usually like to parse my answers that way.

Sean Walters: Exactly. On the one hand, on the other hand. You’re a great economist that way.

Michael Kitces: Don’t say a price and a date in the same sentence. I’ve learned how it works.

Sean Walters: So we’ll talk about investments or wealth, solo or team, utopian or dystopian. That’s what we’ll close with.

Investments or Wealth: Where Advisor Specialization Is Heading

Sean Walters: So first up, investments or wealth. That’s kind of our name as an organization — we serve both sides of it. I’m curious your take on, in terms of bodies of knowledge, which one is important and why, and maybe any other thoughts you have on it.

Michael Kitces: I still really am in the camp that I think both bodies of knowledge are important, but that they are more separating relative to the role of what you do or don’t do as a financial advisor. I mean, if we go all the way back — I’m 26 years in now — you pick the funds, you make the portfolio, you meet with the client, you get the client, you service the client. Everything was all in one, and ideally you’re trying to get higher-dollar clients over time. So wealth and investments and planning and advice and business development and servicing — everything was in one big jumble that it meant to be a “financial advisor.”

And to me, there are a few things that have shifted structurally and strategically in the landscape over the past ten, twenty years. The first is, as firms have grown, investments have increasingly centralized, which means from a day-to-day life and service delivery perspective, even if part of my value proposition as an advisor representing my firm to my clients is that we do “investments,” it doesn’t necessarily mean I personally roll up my sleeves, put my hands on the keyboard, and manage your portfolio one typed trade at a time. This is increasingly not only the realm of technology, with rebalancing and model management software, but something that, frankly, a lot of our firms have found is very conducive to centralized and scalable growth. I can have one trader for lots of advisors, or a standard set of model portfolios. Big firms often have centralized house management and house models. Independent firms are increasingly building out their own investment teams.

So what that means, at least relative to our audience and discussion, Sean, is that as the end advisor, there was a very “investments and wealth” in literally what we did in our day-to-day lives in our businesses. And that increasingly is becoming a function where maybe the firm does investments and wealth, but I, as the advisor, probably just do one or the other. Some of us are investment nerds — we love to roll up our sleeves and get into the investment things, so we get the investment designations. We might have a more internal-facing role to the portfolio than an external-facing role to the client at this point, but we do the investment things that we want to do and pursue the specialized knowledge that’s there. Or I become more client-facing and more wealth-oriented in the advice that I’m delivering, in which case now I’m pursuing knowledge and education in the direction of wealth more so than investments.

So at the firm level it’s an and, but to me at the advisor level it’s increasingly becoming an or — because you just can’t do everything, and it turns out it’s not even terribly efficient for the firm to have you try to do everything when many of these things can be centralized, systematized, and better scaled to better deliver with technology.

Career Tracks in Modern Advisory Firms — and the Talent Shortage

Sean Walters: So one question as a follow-up on that thought. You serve a lot of younger advisors that are getting started, looking at career paths and how they best fit into the advice patchwork quilt. We’ve seen our Certified Investment Management Analyst, CIMA, candidates get younger and younger — closer to that CFA candidate age. So maybe there’s two questions there. One: is there a role for young professionals who maybe don’t want to be in front of human clients, who want to sit in their home office and work on their laptop and evaluate managers? Is there still a role for them to play in the profession of the future? And my second question: is it CFA or CIMA in that regard? So go for it.

Michael Kitces: I do very much think there is a non-client-facing role to play, and I would actually argue there is more of one in the advice profession today than where it was — I’ll generically pick on, call it 20 or 30 years ago, the ’90s, 2000s. Much of this is a function of how the business model has changed, and it’s important not to lose sight of that.

If I go back 20 or 30 years, most advisors were mostly commission-based. I sold insurance, I sold mutual funds, maybe I still got paid to execute stock trades. Commissions pursuant to transactions was the model. And what that means for an advisory firm is basically there’s only two types of roles that tend to exist in transactional, commission-based firms: the people that go get the revenue, and admin to support the people who go get the revenue. There’s really nothing in between. You were a producer or you were the admin to a producer, because no one in the firm is making money unless the producer is out there producing. And if your revenue goes to zero every January 1st until you get out there and see clients and get business done, you don’t carry a lot of overhead. You don’t carry a lot of staff salaries — or you have the advisory firm equivalent of Black Friday, where you have to work ten months of the year to pay your staff salary so that the last two months of the year, you’re finally profitable. It just doesn’t work. So teams were tiny, if there was any team at all. Support from a firm was a purely admin function, and even that tried to be minimized.

As we shifted to an AUM model, and now a subscription fee model — broadly speaking, recurring revenue — at some point as an advisor or firm owner, you wake up on January 1st and you’ve got 10 million, 20 million, 50 million, 100 million, a billion, several billion, whatever the number is as it grows. You’ve got some base of assets and some sizable chunk of revenue already booked on January 1st. All you have to do is, air quotes, “give the client great advice and great service” so that they stick around and continue to engage. And once you hit that point, a whole bunch of things start to change in really material, structural ways for the firm.

Service advisor and associate advisor roles appear, because there’s a real job with actual revenue attached to it — to give great advice and service to clients and do great planning for them — that has literally nothing to do with business development. Servicing the revenue is profitable; getting more clients grows the business, and we often do that as well. But in essence, service and sales split, which means a whole bunch of service advisor and specialized roles evolve. Then as those people need to be scaled up, centralized planning departments start to appear. You get directors of financial planning and a financial planning team. The same thing happens on the investment end: why would every advisor do their own trades when we can centralize the trading team — or better yet, centralize the investment research to have a standard set of models that all clients have, with a reasonable range of choices so we can still align to their goals and needs?

So the advisory firm of 20 years ago was producer, admin, producer, admin, producer, admin, and a manager to make sure the producers were producing. That was it. And a modern firm today, as it grows and scales, has advisory teams, teams of teams, increasingly centralized ops, increasingly centralized planning, increasingly centralized investments. What that creates is a whole slew of specialized career tracks, which means you can be an advisor who loves serving but doesn’t want to do business development. Or you can be a planning or investment specialist who doesn’t even want to see clients. And all of those jobs exist in a way that they didn’t, because that’s what happens when you go from transactional revenue, where dollars start over every January 1st, to a recurring revenue model where there’s dollars there on January 1st — it creates a very strong natural incentive for the firm to reinvest into team depth and staff development.

And when you do that, as the firm grows, what you get are career tracks — real “do this, do that, get promoted to this” career tracks — and a progression path for people to follow coming in. Then you essentially get a choose-your-own-adventure story. Are you an investment nerd? Cool, we have an investment team. Are you a planning nerd? Cool, there’s a financial planning department. Like serving clients? Great, we’ve got a service team. Like doing business development? Here’s what you need to hit partner. And all of those paths come forward, and people who come in get to choose. Which, to me, is part of how we’re ultimately going to help solve what the industry claims is a talent shortage. I don’t think it’s really going to play out that way, because the reality is we have so many more jobs and career tracks for people to come in. The shortage problems were 20 years ago, when there were two types of advisors — good business developers and ex-advisors — and there was nothing in between, because if you couldn’t hunt enough to eat what you kill, you didn’t have a job.

Sean Walters: Exactly. And that’s not really true today.

Michael Kitces: Well, it doesn’t have to be.

CFA vs. CIMA: Which Investment Designation Fits Which Role

Sean Walters: You’re definitely answering the second theme that we’re going to talk about a little more in a moment — solo versus team. But just to follow up that question, if you would double-click that: within that investment team, that specialist team, what’s the role of a CFA versus a CIMA in your mind?

Michael Kitces: As I look at the two — to me, CFA’s strength at its core is the analysis of individual securities, stocks and bonds. I actually started the CFA route, shifted as my career shifted, and went and got a tax degree as well. But I remember going through and passing Level I of my CFA and being able to calculate the dirty price of a bond with a financial calculator by hand. And I’m not even making light of that. If you are going to do individual bond analysis and selection and purchasing, you need to know enough about exactly how a bond’s price is calculated on the spot, so that in the modern era, if you’re looking at bond prices on a screen or you’re getting quotes from the desk, you can actually spot: am I getting a good trade? Am I getting a good price? Am I getting good execution or not? Hey, here’s an anomaly we should take advantage of on behalf of our clients — or, oh, that looks mispriced, we are definitely going to avoid that. There is incredible value to that knowledge. But to me, that strength comes down to when you’re analyzing and buying individual securities.

If you live more at what I’d characterize as the portfolio management level — not that buying individual securities doesn’t comprise a portfolio, but when I mostly think in terms of how am I allocating a portfolio, how am I designing a portfolio in the aggregate, and particularly if I’m using a wider range of vehicles than just individual securities — yes, the CFA covers some of that, but that’s where CIMA tends to sit more effectively. It’s really built for that, and frankly, it doesn’t layer you with a lot of individual security analysis — things that, if you don’t actually pull out balance sheets of companies and their cash flow statements, are just really not going to be useful to you in practice in the CFA curriculum. So I view them as different because of the level and depth and the focus of where they are.

Does that fit or not for a firm? That depends on literally what you do and where you’re positioned, or what the firm’s value prop is. If I’m running a mutual fund and we buy individual securities, I hope to see a whole bunch of CFAs sitting there. If I’m an advisory firm that likes doing individual stock and bond management, which many still do, I’m probably looking for at least some CFAs to be on that team. If the firm is more tactical or strategic, or asset allocating, or the focus is more on how we’re allocating amongst lots of different vehicles — not can we pick the right stock — now I start looking more toward CIMAs.

I think there’s also some crossover relevance. I can still see worlds where, if you are an advisor at an investment-heavy firm that needs to have a lot of investment conversations with clients and prospects, there’s some value for CIMA toward investment fluency — to be able to talk to your clients, or at least your engineer clients who want to nerd out on it, because the rest don’t want to hear “Treynor ratio” ever come out of your mouth. There’s a subset of advisors in very investment-oriented firms where I think CIMA also has some useful crossover. If you’ve got a CFA and that was your background, more power to you — but I wouldn’t really tell a young person to go get a CFA so you can talk investments to your clients. That is several years of exam overkill relative to what you’re really probably going to need in front of your clients.

So I do think there’s relevancy for both, but they show up in different types of firms and structures. Make sure you’re matching the designation either to what the firm’s investment process and structure really is — or, failing that, just what direction you want to take your career. If you’re young and looking and saying, I really like this, and maybe this firm isn’t a fit for me, but I want the designation that gets me to where I’m going — pick with that in mind.

Solo or Team: What the RIA Channel Data Actually Shows

Sean Walters: No, I mean, that’s great advice, Michael. So the next segment is so interesting. You and I both, give or take maybe five years, grew up in the financial planning industry around the same time, and we’ve seen this profession go from kind of a solo advisor to a real business model — you were talking earlier about a vertical team to more of a horizontal team structure. So I think I know the answer to this. But you also serve and counsel a lot of advisors who do just want to do their business by themselves. So this question of solo or team — I’m sure you’ve got a this-and-that type of answer, but what’s your take on solo or team?

Michael Kitces: I literally live both ends of this at the same time. I’m the Head of Planning Strategy for Focus Partners Wealth, which is one of the big mega-RIAs — many tens of billions of dollars and hundreds of people at the firm, and all the teams and all the structure and all the systems and all the fancy tech. And I’m a co-founder of XY Planning Network, which literally helps solo advisors run and launch firms entirely from scratch, with less than $10,000 in the bank, and get going successfully. So I think the reality is, it really is a both thing. And I don’t say that just to be evasive about the answer and not pick a choice. It truly is a both phenomenon.

I look at this even relative to the broker-dealer industry and how it evolved over the past 30 years. If you go back to the 1980s, early 1990s, the big shift was: if you were an investment person, you worked at a regional or national broker-dealer, aka wirehouse. And then this new thing came along called an independent broker-dealer, where you weren’t a W-2 employee on the payroll of the firm that gave you a forty-something percent payout because they handled all the infrastructure and costs and office space and team. It was this independent thing where they might have paid you 85 to 92 percent — they just covered compliance, tech, a little bit of community layer, but basically you built and ran your own thing. People on the independent broker-dealer side said, we’re the future and this is where it’s going. And the large-firm wirehouses said, y’all are nuts — we’ve got all the budget, we can make the better technology, you have no budget, we’re going to win.

Fast-forward over 30 years, and to me there are a couple of interesting things that play out. For all the discussion of breakaway brokers and the wind-down of wirehouses, there are still roughly 50,000 advisors at wirehouses. And when we talk about the breakaway movement, if you look at the industry statistics, the big debate is whether 100 advisors broke away or 200 advisors broke away. There’s 50,000 of them. So our grand debate is whether 0.2 percent or 0.4 percent of people left wirehouses — which is a nice way of saying the people who are there value the team, the infrastructure, the systems, and what’s there, and they’re quite happy in that environment. And if they’re not, they’re the ones that leave and go to the other side. The folks on the independent side are very happy being independents. They want to build their own teams and their own infrastructure and control their own stuff, and just rent the parts of infrastructure they need by paying a percentage to a platform they affiliate with. And they too seem to be pretty happy and don’t go the other direction.

So when I look at a world where there are mega-firms that have all this infrastructure, and independent channels where you build all your own infrastructure, and there’s almost no crossover between the two in either direction — what that says to me is, some of us just like being in structured team environments where someone builds all the stuff and you can just go serve your clients, and others of us like to roll up our sleeves and build our stuff from scratch.

And now you’re seeing the exact same thing play out in the RIA channel. The way it used to be, we had this spectrum: there were wirehouses where you were an employee, regional broker-dealers where you were still an employee, then maybe a statutory W-2 structure where you were a little more quasi-independent, then an independent broker-dealer where you were mostly independent, and then there was an RIA — the most independent, extreme end of independence. If you were one of those stubborn people who wants to claim your plot of land, chop down the trees with your own ax, and build your own log cabin — go be a pioneer. Those were the RIAs, Sean, when you and I were starting 20-something years ago.

When I look at the RIA environment today: I can still go do that and literally hang my own shingle and build my own log cabin, but I’ve got networks I can affiliate with that provide some infrastructure. We do a version of this at XY Planning Network for firms that want to be planning-oriented. Dynasty does a version of this at the other end, for firms building much larger team structures that still want a chassis to attach to. Then you’ve got corporate RIA affiliate models that are very akin to the independent broker-dealer model — you’re mostly on your own, but you pay a percentage of the revenue to get the compliance and the tech and the basic infrastructure. And then you’ve got various employee models, all the way up to mega-RIAs with restrictive employment agreements remarkably similar to the restrictive employment agreements wirehouses had 20 years ago.

So all you’re seeing happen now is this human range: some of us want to be in structured environments where we can just do the client things we want to do, and others of us want more control and autonomy over the way it’s done — I want to serve my clients the way I want to serve them, darn it, and I don’t want anybody to tell me otherwise. The RIA channel is now reinventing the same spectrum, from employee to full independence, that existed in the broker-dealer model for 30 years. Now you get the full range: I can be team versus solo, and I can be FINRA versus not FINRA — because if I only want to manage portfolios and give financial planning advice, I don’t need the FINRA license. I can switch channels without necessarily switching team-versus-solo infrastructure.

The piece that gets lost in the industry dialogue these days, though, is there’s a little bit of talk-your-book from the mega-firm perspective — that you cannot survive without large-firm capabilities and scale, which is basically a nice way of saying you’re going to die without us, so you may as well sell yourself to us, which is great because we have a lot of PE money and we’d like to buy you. I think there is some of that dialogue happening because they’re trying to convince people they can’t survive on their own, because they want to acquire them. When I actually look at the benchmarking studies and the research studies that we do, the hard-dollar reality is that it has literally never been more profitable and easy to be a solo advisor. It used to be something you needed a bunch of staff for. Now I just buy a bunch of $49 apps, and I can run ludicrously profitably as a pure solo advisor.

Utopian or Dystopian: AI and the Future of Financial Advice

Sean Walters: I’m actually — and he’ll be a good guest for your podcast, too — I’m trying to get Mark Casady on our podcast. He had a quote in our last article on AI, in our last issue of Investments & Wealth Review: he sees a $1 billion RIA of one in the future. So that kind of gets into our last topic, which is utopian or dystopian future. Obviously we could spend a whole episode on that, but I’m curious, in general: if you look out 10, 15, 20 years into the future, how positive are you? What type of industry analogy will we be — the insurance space? The accounting world? Or will financial planning and advice be something wholly different than either, when you think utopian or dystopian?

Michael Kitces: I’m still very bullish on our space. On that spectrum, I’m more utopian than dystopian. I struggle a little with the word utopian, because it’s still going to be hard. It’s still going to be competitive. The space will be more crowded than ever. It’ll be even harder to differentiate, because more and more advisors are coming in and doing this stuff. You’ll have to be even better in your knowledge and capabilities, because if you want to have a job as an advisor, you have to be better than the machine. And that’s how it’s always been in every job and profession since forever: the more technology comes along, we always have to stay one step ahead of the machines and do the things the machines can’t do — and the machines keep getting better. As the bar goes up for the machines, the bar goes up for the humans.

That’s why growth in CPWA, and growth in CFP — all the major designations are growing right now. The advisor community, collectively, is feeling the pressure of: the more the technology — first it was robo, and now it’s AI — the more it does that stuff, the sharper I have to be on my game to move up and go to the next level. I don’t think it gets magically easy, where the technology creates this utopian world where everything is simple and the outcomes are great. But I’m very, very bullish on the advice opportunity.

At the end of the day, there is just the reality that when life gets to a certain level of complexity, people don’t want to have to figure it out all on their own. As much as we talk about how robo, and now AI, is going to help consumers do some financial planning on their own — yes, and most of the people who want to do it themselves online are not the people who hire me in the first place. The people who are going to use AI today are the people who used robo ten years ago, who used the internet and E-Trade 20 years ago, who used Schwab’s discount brokerage dial-up service 30 years ago. Technology has been progressing in parallel to financial advisors for decades. There are technology tools that are great for do-it-yourselfers who do it themselves, and there’s a subset of people who either don’t have the time, have too much complexity, or just have a preference to delegate and don’t want to deal with this stuff, who say: I’m just going to go hire an advisor and have them figure this stuff out for me, because there are other things I want to do with my time and my life.

If there’s one thing that creates a fundamental tailwind for all things advice, it’s that despite all the advancements of technology, our lives are not getting simpler. It is not easier to navigate my day. I don’t know anybody who gets home at the end of their day and says, thanks to all the advancements of technology over the past 10 or 20 years, I’ve never had more free time sitting at home after work to hang out and go on the internet and learn finance things. I don’t hear that from anyone, anywhere. All this technology is amazing, and it’s just making our lives more complex, more frenetic, and the cognitive load on our brains is higher than ever — which is why we see this world where the technology, including for consumers, has never been better, and the latest Cerulli study showed consumer willingness to pay outright fees for financial advice is the highest it’s ever been in the history of the profession.

Sean Walters: We had a similar survey we just released with Julie Littlechild at Absolute Engagement on advisory clients, and the role of credentials is definitely increasing. To your point: as the machines get smarter, we humans have to get smarter as well. So you’re absolutely right — I would echo all your comments on that. I know we have a hard stop at 30 minutes, and I want to make sure we respect your time. Thank you for joining us, Michael. We could go on for quite a while, and usually do. This is a great conversation. Absolutely — thank you, Michael.

Michael Kitces: Thank you, Sean. Appreciate it.

Sean Walters: And thank you all for listening to The Exceptional Advisor. For more insights, resources, and leadership from the Investments and Wealth Institute, be sure to subscribe and stay connected, and we’ll talk to you all soon. Let’s be careful out there.