Michael Kitces – The Past, Present & Future of Financial Advice - [Invest Like the Best, EP.122]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guest this week is Michael Kitsies, who is one of our industry's go-to experts on all things financial advice and financial planning. We discuss the past, present, and future of financial advice, financial technology, and investing. If you are a financial advisor or use one, this conversation is full of great history and perspective. Please enjoy. I would love to begin with a sort of history, if you will, of the financial planning or advice model. If you could maybe tick the major stages of evolution that that model has gone through. And then we can begin by talking about where you think it might be going in the future. As I view just our world of financial advisors, I think we've essentially gone through three stages of the business of financial advice. And we're on the cusp of the fourth right now, which I'll talk about in a few minutes. Stage one is our roots. If you were a financial advisor 40 plus years ago in the investment business, you were a stock broker.

which back in the 70s, on a sizable trade, you could get paid as much as about $200 a trade in $1975 to execute a trade. It was a very lucrative business for the people who were good enough to get a book of clients to whom they could sell some stocks. That was the model. And it had continued that way for decades before because all the trading fees back then were fixed. It was part of the... rise of the SEC in the aftermath of the Great Depression and the crash of 1929, saying, geez, all these consumers basically got gouged during the bull market of the 20s and the crash of the 30s. We got to get control of this. So we're just going to set the trading fees and then no one can get gouged because they're set by the regulator. The problem, of course, is you also have no price competition when it's all set by the regulator. And so the first wave of financial advisors was essentially the financial advisor as stockbroker. And it changed in 1975. And for students of market history, you'll know 1975 was what we now know as May Day, which was May 1st, 1975. The SEC deregulated stock trading commissions and allowed them to float. And while the brokerage industry initially said, oh, this is awesome. Now we can charge $220 a trade. You know, we're not colluding. We just all happen to do it at the same time. A startup firm in Northern California decided to use these newfangled things that were coming out called computers to see if they could scale stockbrokering better than the human stockbrokers. You may have heard of them. The founder's name was Chuck Schwab. So in 1975, immediately after Mayday, Schwab was founded. Ameritrade was founded just a few months later. Scottrade and the predecessor to E-Trade all came forward in the few years after that. And there was actually a massive wave of what at the time was tech innovation to disrupt the financial advisor business model of stockbrokering. And the computers won. In the span of 20 years from 1975 to 1995, the cost to execute a stock trade fell by 90%. And stockbrokers went away. We talk about it historically as like consumers in the 80s had changing preferences and wanted more from their financial advisors. It's like, no, technology nuked our business model. We all had to find something else to do. And so we did. We went into the mutual fund business. We said, like, anybody can sell you a stock. I will find for you a great stock picker.

Now, I would argue this was ultimately a higher value proposition model for consumers. We're at least a little better aligned to say, I'm going to find you a great stock picker. Then I'm just going to sell whatever they're telling me in the boiler room to sell. This was a plus for consumers. They got access to better investment solutions. They had a less conflicted model. They got better recommendations. It began to change the entire model for financial services, though, because once I don't need to sell my company stocks, I don't have to work for a wire house. or a regional broker-dealer with an investment banking division, I can join an independent broker-dealer who's not directly tied to the manufacturing of product and just helps distribution of independent third-party products. And so you look through the 80s and 90s, you see the massive boom of the independent broker-dealer model. Most of the major IBDs today either got started or had virtually all of their growth in the 1980s and 1990s. And it was the boom of the mutual fund model. From 1990 to 2000 alone, the mutual fund industry went from half a trillion dollars to five trillion dollars. That was back in 1990s dollars, not 20 teens dollars today. It's like the explosion of mutual funds back then. It was actually comparable. I think even if you inflation adjust the math more extreme than the shift to ETFs today, driven entirely by a shift in the financial advisor business model. Because technology nuked the old one. And to be clear, just to make sure I'm tracking correctly, the fee at that point, so the evolution of the source of revenue for the financial advisor during that mutual fund era looked how? Began to change. So stockbrokers all the way up to the 1970s got paid commissions to execute stock trades. We talk about commissions like a commission for a sale. Back then, it was really just the trading fee as we would think of it today. Just they literally got paid to execute and sell the stock. execute the trade and sell the stock. As the industry began to shift and Mayday happened, the brokerage industry actually saw the beginning of the end of stockbroker profitability once competition was coming in. And so they lobbied the SEC for a change to create a new option in mutual funds, this thing called a 12B1 fee, where advisors could get paid an ongoing shareholder servicing fee to support

the advisory business that they were delivering to clients. And so we saw the first shift from commission-based advisors getting paid an ongoing fee in the rise of the mutual fund era in the 80s and 90s because of this rise of the 12B1 fee that went along with it. For decades prior to that, it didn't work that way. There was an unequivocal bright-line divide. Stock brokers got paid commissions to sell stocks, and the only people who got paid fees were either registered investment advisors, what we know today as REAs, or registered investment companies, what we know as mutual funds. And so the investment managers got paid fees, the stock brokers got paid commissions, and never the twain we're supposed to meet until technology started undermining the stock broker business model for financial advisors. started driving us towards mutual funds, and the industry innovated this new version of a mutual fund model where you could get paid an ongoing fee for the first time. It began to shift the business model as well. Suddenly, I was getting paid a little bit less up front and a little bit more ongoing and started to shift the model for then what came next. So you would call that phase two, generally speaking? Phase two, right. So phase one was the financial advisor, a stockbroker. They're essentially 50s, 60s into the 70s. Phase two was the financial advisor is the mutual fund salesperson. That was from essentially the mid-70s until the mid to late 1990s. Rise of the mutual funds model, rise of broker dealers, independent broker dealers, I should say. And then the financial advisor model got disrupted again by technology. The internet showed up. And platforms started marketing directly to consumers. You don't need a financial advisor to buy a mutual fund. Just come to our website and you can buy it yourself. And that was literally the E-Trade commercial at the time. It's so easy a baby could do it because they would actually show a baby day trading stocks and mutual funds in his crib. In his actual crib, not crib crib, like real crib. And so the model.

began to get impacted again for financial advisors. All of a sudden you couldn't get paid to sell a mutual fund because you could buy one directly online. This was the era of the launch of Schwab's OneSource program, which they lauded as this opportunity where you can buy a mutual fund yourself with no commission. It was a no-load fund. And so we talk about no-load funds rather ubiquitously today, the whole ETF structure is essentially a no-load structure as well as the rise of no-load index funds. But you have to keep it in context. In 1998, when Schwab launched OneSource, virtually 100% of advisors got paid 100% by commissions, and a technology firm offered a zero-commission solution. You think robo-advisor disruption was scary today. That was more disruptive back then. At least robo-advisors charge a quarter of a point when everyone else charges one. They offered a commission for zero when the average upfront A-share mutual fund commission was 5.75%. That's what I was getting paid when I started 20 years ago. So technology showed up again to disrupt the financial advisor business model again. We all got paid commissions to distribute mutual funds. It was a great model for 20 years through the 80s and 90s. And then technology companies launched internet websites and said, you can buy the fund directly and not pay the commission. They also relied in large part on the 12B1 fee that had been invented in the prior cycle. And the advisor business model was in trouble. And so we started the shift again. We said, well, anybody can sell you a mutual fund. I will create for you a diversified asset allocated portfolio of them. And we went into the AUM model. I would argue made created a higher value proposition for clients, right? Diversified portfolio better than just buying random one-off managers, even if they're good managers. We ideally want to create fully diversified portfolios for clients. And it drove a new shift in the business model. We went from commissions plus maybe a small slice of 12B1 fees into a full focus of charging ongoing assets under management fees. And so this is the cycle we've been in for the better part of 20 years now, the rise of the REA, the rise of the fee-based account, and this world where advisors essentially function as portfolio managers for their clients, or at least portfolio manager pickers for their clients, not just stock pickers like the mutual funds.

portfolio pickers. I'm curious as part of this last stage, stage three, and then obviously I want to cover what you think stage four might look like. If you think about robo advisors as showing up, I'm not sure when say Betterment and Wealthfront were founded, but let's say it's six or seven years ago, something like that. So obviously the perceived threat was large. I would say the outcome has been in terms of assets gathered by those firms quite a bit smaller than maybe I would have expected, which tells me that the human to human relationship remains a critical component of the value proposition of a financial advisor. And you talked about the role of advisor as asset allocation kind of manager. And I think that obviously that's become easier and easier for anyone to do with more and more technology and resources. So talk about the non-investing portions of the value proposition for a financial advisor, maybe in light of services offered by a betterment of the world. So first of all, I just sort of affirm what you said. I mean, fully agree. The robo-advisor model, like the literal robo-advisor model. has not in any way, shape, or form disrupted the financial advisor. And I was out pretty early on this. I was actually looking back. I wrote what, as far as I can find, was the first blog article in the industry that actually called robo-advisors robo-advisors all the way back in early 2012 when Betterment and Wealthfront. first showed up and said, we're declaring war on financial advisors. Those humans cost an arm and a leg. That was literally Betterment's pricing on their website. They would have a column for human advisor. And in the pricing row from advisor, it said an arm and a leg. And then in their column, it said 0.25%. So the robo-advisor showed up in 2012 declaring war on advisors. They'd been around a little bit earlier as they were building their products, but that was really when they came on the scene. You know, I'd written at the time, like, look, at the end of the day, robo-advisors are really just, it's a technology delivered managed account. It's a managed account for self-directed investors. Pick which website you want to go to and buy the technology that manages your managed account. And so I'd written at the time, like, the primary competitors for robo-advisors is not actually human financial advisors. It's anyone with a strong self-directed investor.

So I had written at the time, the primary people who should be worried about robo-advisors are Schwab and Vanguard as the leading direct-to-consumer asset manager and the leading direct-to-consumer platform. And sure enough, within three years – They're the two biggest, right? And they were the first two to launch response, right? Schwab Investment Portfolio, SIP, launched in 2015, and Vanguard Personal Advisor Services launched shortly thereafter. So it was really never a threat to – human financial advisors. But what robo-advisors epitomized absolutely is a threat and a transition to the industry and is really just an example of a larger picture, which is the minute we went into the asset allocation business in the very late 90s, early 2000s, that was the moment that technology started being applied to make that business model more efficient as well. And even this really ran in a couple of stages. The first actually was the rise of the TAMP, the turnkey asset management platform, where a couple of enterprising firms came forward pretty early and said, well, geez, if advisors can be in the asset allocation business, 10 advisors are going to make basically the same diversified portfolio. Why didn't we just have one centralized manager do it for all 10? It's much more efficient with economies of scale than having 10 advisors make their own. And so TAMPs appeared in the late 1990s. Then a few years later, the first round of technology showed up, rebalancing software. iRebal and early-stage Tamarack and some of those, these technology companies came and said, well, wait, wait, wait. If advisors are going to manage models and they want economies of scale, you don't have to offload this whole thing to a TAMP if you don't want to. Just buy a piece of technology that manages models, and you can hit the button to trade and rebalance yourself and kind of cut the TAMP out of the picture. Then robo-advisors showed up, which to me was actually just – it was financial advisor. model management and rebalancing software repackaged for consumers. Like there was nothing in the Betterment and Wealthfront trading process that you couldn't have done literally eight years earlier in iRebal, which was the first rebalancing software for financial advisors that launched in 2004. In fact, even iRebal had tax loss harvesting capabilities and asset location capabilities that the robo-advisors still haven't fully caught up on. iRebal had that in 2004, but they took this technology that advisors were using.

And so you don't even have to hire an advisor to get this technology. We'll give it to you directly. And to be fair, theirs was way prettier than ours in the industry. Our technology was pretty ugly. So just to circle back on the, so if asset allocation is increasingly being made easier and more scalable by technology, and obviously this is the arc that's just going to continue, which is whatever the world of financial advisors is doing, tech companies are going to rise to service and make their lives easier. And so I want to just really highlight what you believe the definition. of the independent of technology value proposition of advisors or planners is kind of through that period and then through to today? Well, so through this, through that period, I think, you know, of the past 20 years, our value proposition was primarily tied around asset allocation and tying asset allocation to investment objectives. This or the broad label is goals-based planning, but we are goals-based investing. We've given a bunch of different labels over the years, but the essential core is I'm going to create a diversified asset allocated portfolio, which itself was distinguished from just selling mutual funds or just selling new stocks. I'm going to create for you an asset allocated diversified portfolio. And instead of just buying something off the shelf, I'm going to tie it to your goals and objectives. So it's a retirement portfolio. It's a college portfolio, whatever those goals are. That's usually the two that covers most clients. But we were creating diversified asset allocated portfolios that would tie to goals, which if you compare that back to the prior cycle, everybody was a mutual fund salesman. saleswoman, that was a hell of an increase in the financial advisor value proposition. And that's part of why the RA model and the fee-based model has grown so incredibly well for the past 20 years. We really were delivering a much higher value proposition than the prior generation. And you're now only seeing the tail end of it, which is the mutual fund distribution model is finally under the last stages of decline, where you can see the entire mutual fund complex having net outflows. But as I would frame it, it started 20 years ago. It just took a while for the compounding to get to the point where advisors became mutual fund, or I should say became portfolio managers and eventually said, why would I add my management fee on top of a mutual fund manager? I may as well just build the portfolio myself and charge my own advisory fee. And if I'm going to do it myself, I want to bring the cost down to my clients. The first thing I do is not cut my fee. First thing I do is I cut the mutual fund manager's fee. And so we see this giant shift for

Transfer pricing problem, basically. We see the advisor community making this huge shift in index funds and ETFs, which I've said for years, the industry has labeled it as the advisor shift to passive, and it's completely wrong. There's a small segment of advisors that are all in on passive investing. The truth of what's really happening is advisors have been making themselves portfolio managers and disintermediating mutual funds. It's the infamous anytime there's competition up and down the vertical chain, whoever's closest to the client tends to win. The advisor sits across from the client. So when the client says, I feel like this portfolio is really expensive, the advisor doesn't cut their price. They cut the mutual fund manager's fee out and say, well, I'll just do this by managing a low cost ETF portfolio for you instead. So how does that then transfer into, I guess, the beginning of stage four and pricing power based on relative- scarcity, I guess, of the service or closeness to the customer is obviously an interesting idea here. But I'll adopt, this isn't necessarily my view, but I'll adopt the super skeptical straw man opinion here, which is, okay, so I know what I'm getting at the end, which is more or less seems like something obviously that I can get through software. And even if it's goals-based planning, I can probably put those inputs into a sufficiently long questionnaire or information gathering piece of software and get the same. Get the same end thing that my dollars are invested into to achieve that outcome. So why then has the world not changed drastically? Why is it still effectively assets coming through humans instead of software? So I have a few answers to that. One, we're still only in like the second inning of this. That's the first thing to bear in mind. The beginning of the end of the mutual fund model, I would say, is essentially the Schwab OneSource launch in 1998. It took about 15 years before mutual funds actually hit the stage of net outflows. And then we've been just watching them hemorrhage dollars for the past five years. It takes a while for these trends to get going. And so while I think we are on the front end of watching that value proposition for asset allocated portfolios essentially collapse as a pricing model, it'll still take 10 or 15 years to play out. I don't think you'll really see the most drastic levels of pricing pressure on this until the late 2020s, early 2030s, maybe, just if it follows the historical trends and paths. It does take a while. And part of that is just...

Consumers don't tend to change advisors or providers very often. We get comfortable with what we're doing and we tend to hang with it. It's not a high turnover industry, particularly those who are using advisors and third-party providers. They tend to hire them because they want to let go and not think of this so much. Change takes a while when the industry is this big and so many dollars are at stake and moving slowly. I do think we're on the front end of it. What essentially happens when you see this occur over time is Well, you're sort of twofold in the same manner as what's happened in the past. The old value proposition tends to get efficiencies up with technology. Pricing tends to continue to decline. Lower price plus volume means largest firms with economies of scale tend to do well. And we just look at this, the collapse of trading took zillions of regional brokerage firms and knocked them out. And we end up with just a small handful of ultra massive mega firms that engage in trade execution. to the point now where they're engaging their own price war to essentially take it as close to zero as they possibly can. So Schwab and the others just keep knocking the price down and down. They have continuously for 40 years, actually. We dropped the cost to execute a stock trade by 90% from 75 to 95, and then another 90% from 95 to 2015. When I look at that in the context of where the industry is right now, I see an investment management only asset allocation only fee that continues to decline and get compressed. And you're going to see that play out in a couple of ways that are actually starting already. One version will be firms that just drive down their costs by doing it with scale. So, you know, larger and larger firms that offer lower and lower AUM fees, right? Companies like Schwab have always been good at this. They use their economies of scale to pressure pricing. cross-subsidize an increasingly commoditized service and take it down to zero. So that's everything from Fidelity's launch of a zero-fee ETF, the general erosion of expense ratios on ETFs by cross-subsidizing with securities-based lending and things like that. You see the rise of what are called model marketplaces.

which are asset managers saying, hey, if you don't want to do all that model selection, model management stuff, like we'll give you the model. We'll even preload it into your rebalancing software. It's like you just have to hit a button and you get a model and your client's fully allocated and implemented. And we'll do it all for free, parentheses, because the models are filled with our funds. So, right. So you get the effects of vertical integration. You know, Schwab gave away Schwab Intelligent Portfolios RoboAdvisor because they make money on the underlying funds. And the all-in cost is actually not that different from most of the other robo-advisors. But you get all the pricing competition that erupts when Schwab says, well, we'll do it for free because we make money on the funds on the back end. And the other robo-advisors go, well, crap, we don't have a fund on the back end. So Betterment has continued to fight that fight. Wealthfront kind of capitulated and said, fine, we'll make our own risk parity fund, and then we'll withdraw dollars on the back end. And they run a hybridized version of that model now. So that kind of pricing pressure in the pure asset management space. I think just continues to play out. And as with anything that creates pressure in highly scalable, commoditizable markets, you essentially see two winners. The first are the mega firms that just flat out use their size and economies of scale to outprice everybody else and try to squish them out of the market. And the group at the other end are the niche providers, the specialists, the boutiques. who say, you know, yeah, they do that huge, massive mega thing at scale. Kudos to them. You get a basic commoditized service for a cheap price. But I have a special, you know, we have our special unique thing that we only do for our subset of people. whatever that is. In the asset management industry, that might be a particular investment management process. For the financial advisor, that might mean I've got a special niche. I've got a special type of clientele that I do this for that's different than everybody else and what you get in a scaled mega firm environment. So if the asset – I mean I think obviously what you've described for the trend in asset management is obvious and apparent looking at any of the data that –

Asset management fees have gone down. Advisor fees have not gone down by as much. But you know way more about the actual data behind this that I do. So you hear often like the 1% fee is like the common fee charged by a financial advisor to an end client. Obviously, that gets probably – there's breakpoints to that and larger accounts are charged smaller amounts. Could you first level set kind of what those numbers actually are today? My guess is it's not 1%. And where you see that going and what kind of alternate models you expect to see? Like for example, I talked recently with James Osborne. I think, made a lot of noise several years ago charging a purely flat fee regardless of assets under management. We had him out on our Financial Advisor Success podcast as well. He was a very popular episode talking about the model and what he's built. I'm sure. So maybe level set by describing what those prevailing fees are today and maybe where you see them going if it stays at asset-based fees or other models. So a few things about advisor pricing models and what we see today. The classic sort of benchmark advisory fee is 1%. That 1% fee actually does still hold with sort of an asterisk. The median fee is really 1% on a $1 million account. It is typically a graduated fee schedule. Advisors tend to have higher fees on smaller accounts, smaller fees on higher accounts. So you usually actually see sort of a downward sloping line as your assets increase, your fee goes down. So the low end under $250,000 accounts is actually typically more like 1.3 to 1.5%. And then by the time you get up to multimillion dollar accounts, it's usually about 0.6 to 0.8. Firms these days seem to be flattening at the top end to anywhere between about 0.25% and 0.5% as a fee by the time you get up to working with $5 million, $10 million plus accounts. And if you're working with 100 millionaires, it's all negotiated. So the 1% benchmark fee actually still holds pretty well because advisors do have graduated fee schedules. And frankly, we tend to work with some fairly affluent folks in general. revenue yield which is the purest measure of advisory firm fees like just literally add up all the fees divide by all the assets right so you implicitly take into account all the break points and graduated fee schedules and such you see an average revenue yield for advisory firms that sits right around 75 basis points and it's sort of fluctuated between about 72 and 78 basis points for

10, 15 plus years when you look at the benchmarking data. It wobbles a little because of sampling error, but it really hasn't moved materially with a very slight downward shift in the past few years, which most of us who follow this data think is actually probably not fee compression. It's just when we have graduated fee schedules and you get a basically a 10-year bull market, your average fee keeps going down because all the client growth comes at the cheapest fee schedule at the top. So if that's the kind of prevailing true revenue yield for financial advisors, is that sustainable? I mean, the fact that it hasn't moved that much in 15 years, while the underlying, let's say, asset allocation has become increasingly a commodity and a lot cheaper, you would think that that would respond at some point. Do you think it will? And will the Jameses of the world start to win? Yes and no. It will absolutely respond. It will not respond the way that people expect. I've actually been writing about this and pounding the table about this for basically ever since the robo-advisors showed up. And it's only just recently starting to show up in the data itself. So here's the effect that actually happens. The presumption has been – well, so there are sort of two false presumptions in this idea that advisory fees have to collapse. The first is median advisor fee was 1%. Median robo-advisor fee was 0.25%. all the advisors are screwed because you're going to have to come down to the robo fee. Nobody actually knew if 25 bps was the right price point for robos though. That was sort of a hypothesis that they just tested and launched a product. And even if it wasn't profitable for the first five or 10 years, that's okay. You've got venture capital money to burn through. But the trend that we've seen even in the robo space is that the average robo advisor fee has just gone up and up and up for the past seven years. Betterment started at 15 to 25 basis points, but then eventually they consolidated their fees at 25 basis points and they eliminated the lower price point. Wealthfront started at 25 basis points, but then they added in their risk parity fund. That really brings them more to like 30 to 35 basis points all in. Fidelity Go launched at 35 basis points.

Schwab launched, quote, free, but the underlying funds average about 30 something basis points. Some of the large firm robo advisors that have launched have been as high as 40 and 50 basis points. And so the idea that we all have to collapse down to 25 bps, it turns out may not have actually been right in the first place. I mean, certainly the fee was going to be lower than what human advisors were charging for their full service stuff. It turns out the gap is probably a lot smaller than the difference between 1% and 25%. First of all, advisor revenue yield is more like 75 bps. And it turns out the robo fee that really has to be there might be more like 30 to 35 bps. And that's at scale, which not all of them will reach. So, okay. So yeah, the all in fee is 70 something. The underlying asset allocation costs about half of that. What are you doing for the other half of your fee? And the answer from advisory firms is, well, crap, I guess we do have to do more. And so what you're seeing play out in advisory firms and the prediction I'd made a whole bunch of years ago was the way this is going to play out is advisors are going to try to defend the 1%. And they're going to do it by not saying, I'll cut my fees to match the robos. They're going to do it by saying, I'm going to value add my way up to justify my original fee, which means I do more financial planning. I give more comprehensive advice. I get deeper niches and specializations. You at a firm level, I upgrade my talent. So I got to put them all through CFP. If they already have CFP, I'm going to put them through CPWA and a bunch of other higher end designations. Like I have to upgrade my talent to justify my fees. And the way that plays out in the industry data, what you would expect to see is not fees going down. What you would expect to see is profit margins going down because I'm charging the same fee, but like I got to get. more people who do more stuff with more talent. So the wages are higher and I got to have more of the people. And that's what we're actually seeing in the benchmarking data. We are 10 years into a raging bull market. Advisor profit margins should be at blowout record highs. And the average profit margin for advisory firms has not been rising. It's been flat or even declining slightly through all of the scalability of the past 10 years, despite bull markets, lifting assets, more technology, making us more efficient, like all this good stuff.

that should create mind-blowing record highs in profit margins, the margins aren't showing up. And I think the reason is we are trying to defend our 1% by adding more value along the way. And I don't think that's a bad thing. It's firms, frankly, realizing we're not venture capital-funded startups. There's no freaking way we're going to ever compete against a robo-advisor. Our only chance is to value out our way up and try to provide a higher value service. for what it is we're already doing. And frankly, that's not unique to the financial services industry. There was a study that came out a year or two ago by, I think it was a French economist, Philippon, who did this study going back 100 something years, like 150 years of the average revenue that the financial services industry extracts from the economy as it turns like savings into investments, sort of like they did this whole. aggregate study of how the financial service industry extracts from GDP and the economy. And what they found is that the average fee that the financial services industry extracts has hovered almost precisely between 1.5% and 2% of savings for over a century. I mean, we're going all the way back to everything is, you know. accounted for by hand. We have almost no regulation and human stockbrokers are throwing tickets at each other to today, like the modern financial services world with the rise of the robo-advisor and the rest. And it's the exact same fee because what the industry tends to do is once we get used to the slice we take from the economy, we tend to figure out how to just do more to validate that service as opposed to literally scaling to the point where our segment and share of the economy goes down. When we look at the retail industry, It is actually scaled to the point that, ironically, it shrunk its share of GDP with the scale and efficiency that's come from modern technology. Financial services apparently tends to not scale its pricing down. It tends to value add its way up to maintaining the fee structure. And that's not specific to advisors. That's the entire financial services industry in the aggregate. But we are seeing that exact microcosm.

play out in the financial advisor space as well. So it makes me think of a ton of questions surrounding what those new services are, the value add up, and also this notion of financial advisor as behavior management. But before we get to those two topics, I just want to make sure I get your opinion on the flat model, that when you read about it, it seems super interesting and compelling, especially if the desire from the consumer is a fairly straightforward portfolio, but with someone that they can talk to and all the benefits of working with a person and security that that feels like. Like one of the things I always say to people when they ask me about financial advisors is my daughter recently had a spell of week-long flu A 105 fevers, like scary. Yeah, it's scary when it gets that high. And you know, I can go on the internet and I can read what I should do and it's going to be accurate. And I've already been through this. three times with my kids. But even despite all that, I wanted to talk to the damn doctor. And so that just seems like a permanent human desire and that having another voice that's an expert is just always going to be valuable to some extent. So I would like your thoughts on that. But assuming that the value of a human, the flat fee model is very interesting. And I'm, I guess, frankly, surprised that it hasn't. become more ubiquitous, or maybe it has in secret and I'm just not aware of it. But what are your thoughts on the viability of that model? So I'm a little bit mixed on the flat fee model. And the reason is that what most people have tried to do with the flat fee model so far is to use it as an alternative pricing model to compete with AUM fees in the investment management business. And I just don't think it's viable. It doesn't scale the way that you need it to scale. When you do that to compete with an AUM fee, there are a lot of indirect benefits to the AUM model that I think the industry or at least sort of the naysayers to AUM don't fully consider. It is the only business model that I'm aware of anywhere in the history of any industry where your average revenue per client automatically goes up at a real increase above inflation simply by keeping the client because you lift with the.

return of the markets and the return of the markets is generally a risk premium for inflation. So we get this natural lift in a world where every other industry that's ever existed has to actually go back to their people, declare a fee increase and get them to buy in. And that kind of automatic fee increase is just ludicrously powerful from a business scalability perspective. And just a pricing power perspective. If I take two advisors, one of them charges a $10,000 fee, like write me a $10,000 check. And the other one charges 1% of a million dollars, same $10,000 fee. I guarantee you the 1% advisor on a million dollar portfolio will have higher retention rates than the one who makes their clients write $10,000 checks. Assume they're both awesome advisors who give great value of advice. Like I'm not trying to bash anyone's value proposition. Just the pricing psychology is, We do tend to like our fees to be transparent. I want to be able to see what I'm paying, but you don't have to slap me upside the face with it, which unfortunately is what it tends to feel like when we write checks. We hate writing checks and paying for things. We feel much better when fees are just kind of debited out. We sort of know it's out there someplace. We can look it up if we want to. Now, again, people also abuse that, right, if you make your fees not salient enough. You can also just do some really crappy stuff for a really high cost and nobody realizes what they're paying. I don't advocate the bat. Use this particular force for good and not for evil, please. But if you take two advisors who charge that way, all else being equal about how awesome they are, I guarantee you the flat fee will lose relative to the AUM fee. Even in year one, the moment you try to go out for that renewal, never mind the fact that the. $10,000 advisor's fee is probably on average going to increase to $10,500 or $11,000 next year, thanks to a lift in the market. And the retainer fee advisor has to go and explain, even though the check last year was $10,000, this year it's $10,700 to give you the same level of services. It's just brutally difficult to compete head-to-head against the AUM model that way. Now, it's not freeloading for the AUM model as well. You want to keep your clients as your fees go up? You darn well better be doing more.

And we do see that in the advisory industry and the aggregate. The larger the firm, the more affluent the clients tend to be, the more deep the services, the deeper the specialization, the more handholding. Firms really do, at least on average, value add their way up further as they tend to move up market because of this. So there's probably a little bit of freeloading, but it's actually a decently efficient market. But it's just brutally hard to charge flat fees. Now, that being said, I think it's worth noting, I think what you're going to find 10 to 15 years from now, is that flat fees are actually the dominant model. Oh, interesting. Okay. So what's going to precipitate that? What's going to precipitate that is expanding the market for financial advice. So if I look at US in the aggregate today, there's about 120 million households in the US. Roughly a third of them are what we call the mass affluent, which means they have at least $100,000 of investable assets outside of their primary residence. So about a third of the population is what we in the industry would call prospects. I can't work with the other two-thirds. The account balances aren't high enough to make the math work. I can work with about a third of the population that are massive fluid and have at least $100,000 of investable assets. The problem, though, is about half of those, the money's in a 401k plan. So they're a future prospect, whenever it is they get around to retiring. But for most of us, we can't give advice and directly manage 401k accounts today. We have to wait until they can actually distribute it out to an IRA that we can manage. So we really only have a fair shot at like, 15 to 20% of households where the dollars are available outside of a 401k plan. Then the caveat from there is not all consumers necessarily even want an advisor. So Forrester has done some really good research in this over the years. They essentially segment consumers into three groups. On the one end of the spectrum are do-it-yourselfers. They'll go online. They'll do their own thing. Maybe they'll buy a robo-advisor after researching 17 of them. Maybe they'll go directly to a brokerage platform. They do their own thing. They don't call an advisor in the first place. At the other end of the spectrum are the classic delegators. Here, just take my money, do the thing. I don't want to deal with this stuff. In the advisory industry, we call those great clients. And then there's a big group in the middle that are typically called the validators. They may want some advice, like I'd like a second opinion, sort of literally, I would like you to validate what I'm doing. Like, here's what I'm thinking about my financial situation, but I'd like an expert's opinion to make sure I'm on track.

Those folks tend to have a lot of trouble in the industry today because they say, hey, I'm just looking for a second opinion about what I'm doing. And we respond with, well, give me your life savings. And I'm happy to give you that advice. And like, no, no, I just want to ask a question. Like, yeah, yeah. Give me your life savings. I'll answer all your questions. Not what I was looking for. So when we really drill down to who we serve, we're really built for delegators with at least mass affluence and the money's outside their 401k plan. And so the mass affluent is only about a third of households. Money outside the 401k plan is only about half of that. People who actually have a delegator mentality is only about a third of that if you look at the market sizing. And so what you come down to is our whole financial advisor business model is built for about 5% to 7% of the population that has a pile of money and is willing to hand it over in exchange for advice. And so in that group, I got a pile of money, I'm willing to hand it over, and I want advice. AUM works freaking awesome. For all the pricing psychology and other reasons that we talk about, scalability, lifting fees, reinvesting your business, all that great stuff. The problem is we don't serve the other 93% of households. Now, to be fair, probably half of them will never engage a financial advisor by any means. They don't have the income or the assets or anything else. They just literally don't have the financial wherewithal to pay an advisor. But you're still left with what we estimate is probably 40% to 50% of US households. who have the financial wherewithal to pay an advisor, as long as you don't require them to hand over assets, you just charge them a fee. So I call this broadly the fee for service model. That could be annual flat fees like James Osborne does. That could be monthly subscription fees. I'll give you financial planning advice for $100 or $200 a month. That could be an hourly model. There's lots of different ways that you can structure fee for service. But the opportunity is fee for service is now what's emerging and on the rise. We do AUM for five to 7%. Basically, no one's doing fee for service for 50% of households. And so if I project out what that opportunity looks like in 10 or 15 years, what I see is a world where the people with money probably just continue to pay good old fashioned AUM fees. The consumer psychology is good. The scalability is good. You got assets you want to hold on to. We all reinvest into our businesses that way to hold on to them.

You may actually see that as a niche model for rich people. And everybody else ends up picking up a fee-for-service model instead and pays some version of these flat fees that we're talking about because they literally don't want or need investment advice. They need advice on everything else going on in their financial life, right? I got to navigate my career, my salary, a job change, starting a business, cash flow and spending. my student loans, my credit card debts. I'm getting married. I'm having a kid. I'm buying a house. I'm getting divorced. I'm having a new marriage. I'm having my new kid. I'm starting a business. All these massive series of life changes and financial events that hit us, particularly through our 20s, 30s, and 40s, where we need a steady stream of ongoing financial advice because life just tends to change and veer left and right throughout that time period. I don't have a pile of assets to hand anybody for advice. But I got money in my bank account, and I'm willing to pay a piece of it for someone to tell me what the heck to do about this challenging financial situation that I'm facing. And so the model of the past 10 years or past 20 years has been 1% of assets. I think what you're going to find is the model of the next 10 and 20 years is 1% of income. Interesting. Yeah, it's a fascinating shift and obviously a massive market opportunity for somebody that can figure that out for the existing group of advisors who have had to sort of add services to justify their fee in this most recent period. What are some of the cutting edge things that you've seen them doing? So what are those new services that stand out as interesting and valuable to you? So for where it's been so far, the bulk of advisors are focused on baby boomer retirees. And that's simply because if you As we said earlier, you do that asset under management model. As the famous saying is, you go where the money is. The AUM model obviously necessitates having a pile of assets, and the piles of assets are in the hands of baby boomers, just age demographic-wise. They're literally at the point where they're done with most of their career accumulating money, and they're ready to use it. That's where the money is. That's where we focused. Because we focused on baby boomer retirees, that means the first stage of what we're really seeing as value-add services.

is all around the issues of retirees. So it starts with things like in the past five years, we've had a half a dozen different social security timing calculator tools start coming out. So advisors can get better social security advice, right? Because if you're working with those clients, a whole bunch of them are going to be somewhere between age 62 and 70, and they have to make a decision about when to take social security. And it's a high dollar amount, high impact decision for most people. So it started with things like social security timing. It's morphing from there into discussions around Medicare. Health insurance, health insurance before you're eligible for Medicare, which is a challenge for a lot of people. What do I do between work and 65? How do I make Medicare decisions? Medicare Part D prescription drug plans. Do I take a Medicare Advantage plan versus a traditional Part B plan? Like making all of those decisions. It may expand further into not just things like, hey, should I buy long-term care insurance, which the industry has done a long time because we got paid for selling long-term care insurance. Hey, let me help you make decisions about are you going to move into that continuing retirement care community? What's the upfront fee? What's the ongoing cost? Is that actually a good deal? Would it be more cost effective for you to age in place in your home? Maybe you just don't want to be in a retirement home. You want to be in your home. What modifications do we need to do to the home in order for you to be able to safely age in place? How are we going to afford that? Where are we going to finance it? Are we going to borrow against the house? Does that mean we're going to do with the traditional mortgage or reverse mortgage? All of these additional questions and issues. that start cropping up when you go past the portfolio needs of the retiree and into pretty much everything else in their life that touches money besides the portfolio part, which is actually a wider range of stuff and is why we see advisors that are going there increasingly starting to specialize in it. And so you can see these offshoots. We've had multiple versions of social security timing software crop up as advisors are trying to get deeper on this. The American College, which is one of the first organizations to make professional designations for advisors, literally going back 100 years to a program called the CLU for professional life underwriters. Their fastest growing designation program in a century was their retirement income specialist program they launched about three years ago. And it's done so well that the Investments and Wealth Institute.

bought another program called the Retirement Management Advisor to compete against the RICP program from the American College. So all of this focus on like, okay, we get it. The retiring needs an asset allocated portfolio. Yeah, I got to set that up and do that right. All right, that takes a little bit of an upfront process. Great, that's done. I'm going to do that on a largely technology efficient automated basis for the next 30 years with the client. So what else are you doing that's useful for them over the next 29.7 years after you get their retirement portfolio set up? And that's where all these other value add advice areas are starting to crop up. But again, that means your advisors need CFP certification. Your CFPs need the RICP or RMA designation. You got to start reinvesting into your firm's talent. the advice offering. Now you better make the investment process efficient because you need the time to have all these value-added conversations around social security and health insurance and Medicare and continuing care retirement communities and all these other issues that crop up. Fascinating stuff. The designation and the retiree classification raises an interesting question, which is if you had to sort of... place consumers or clients of advisors into major buckets, what would be the questions you asked first? For example, I would think taxable, non-taxable, and retired, not retired. That forms a basic grid that would do a large amount of the separating between the needs and maybe the investment solutions delivered by the advisor. Are there other dimensions along which you think it's important to think about slicing the consumer into cohorts? Absolutely. What ultimately happens for most advisors is you actually end up slicing them into incredibly narrow cohorts. I know an advisor with an incredibly successful practice in Kentucky. He works with all of the doctors in their 20s and 30s who are starting jobs at three hospitals in his town. That's his entire client base. Young doctors at one of three hospitals in his one town. Because their big problem actually has nothing to do with the portfolio stuff and all the rest. It's negotiating the hospital contract that they're going to get paid under, which has a whole bunch of weird specialized rules about how units of time get compensated for various things that you do. It's a horrifically complex thing. No doctor who's starting out has any clue how it works. He does. Specialist knowledge will be rewarded. So his primary value proposition out of the gate is.

I can probably get you $30,000 to $50,000 a year of additional income every year for your life by getting this hospital contract negotiation right for you on day one. So what's 30 grand a year of cash over the next 30 years worth to you? I've heard interesting similar examples such as specializing in employees 10 through 50 at a startup who have options and helping them through that process. You can pick them by profession. You can pick them on kind of psychographics and issues they need. My favorite, there's a guy out in the Midwest. His niche is bass fisherman. Right, not all fishermen because I would be too wrong. Bass fisherman. He grew up on a lake that had a bass fishing tournament. He's been involved in that community all of his life. I didn't know about it until I heard about him. But apparently there's a ton of money that moves around the bass fishing community, like million dollar prize purses. If you win one of the big tournaments, then all the like bass fishing equipment endorsement deals start rolling in. And he's the guy. He's the guy in the bass fishing community. And so he's like late 30s. I think he has more than 100 million dollars under management as an individual. And 90% of his clients are bass fishermen. And he knows all the issues that crop up in that community. Those are the opportunities. The phenomenon that I think is not well understood about, particularly down the advisor level, like how do advisors survive and thrive in this environment? Most advisors can be wildly successful with about 50 great clients. We tend to top out at about 100. If you see an advisor that's got materially more than 100 clients, I guarantee you they haven't talked to a big chunk of them in one or three or five years. Historically, we would sell stuff to anybody we could find. So I knew advisors of 500 clients. Some of them you haven't even seen in 10 years. You opened an IRA for them in 2003 and haven't seen them since. I get it. You still get paid a little trail on them, but that's not a client. That was a... a person you sold something to once years ago. Most advisors tend to top out at about 100 active clients that they work with, maybe up to 200 or 300 clients if they've just been selling stuff for a long time. But the 80-20 rule tends to hold pretty strongly. 80% of the profits come from the top 20% of the clients. And so even if you're 200 plus clients, most of your profits and success comes from your top 40 or 50 clients. And so in a world where

Most advisors as individuals can be wildly successful with 50 great clients. You can pick anything ludicrously narrow and specialized niche and have an incredible opportunity to be successful. I've seen advisors specializing in UK expatriates who have been transferred here to the US. It's all he does. UK expats. Because if that's your issue and you have to know how like US tax laws work with your UK pension, which has going through a bunch of new rollover rules, you need someone who's specialized who knows what the heck they're talking about. He's the guy. That's all his clientele. And there's actually a lot more than 50 affluent UK expats here in the US. So you can get incredibly focused and specialized and have wildly successful firms. And it's another version of that. You can be huge. or you can be focused, or you can be a behemoth, or you can be a boutique. Firms that already operate at scale have to go broad and wide and try to come up with a scale, low-cost service for everybody. But for most individual advisors who are not huge and never going to be huge, like I just want to serve my clients and get paid my dollars, the model is 50 great clients. And if you want to have 50 great clients, you just have to differentiate. And the way you differentiate is you become really awesome at some particular clientele that has some particular problem. none of which usually has much of anything to do. with their investment portfolios. What do you think about a source of differentiation on the investment side? So obviously this is kind of the trend here has been much cheaper asset management, which is obviously I think that's a good for investors, generally speaking. You pay less, you earn more. That's the whole BOGO thesis. But it has created a sort of one size fits all little boxes on the hillside phenomenon for portfolios. Do you see anything interesting and innovative on the investment side happening that might allow advisors? to differentiate themselves through that dimension? So I think there are a few things that jump out at me on the investment side. You know, the first is just to recognize like there will always be a subset of clients who are willing to pay for the opportunity for outperformance. We can have a long active versus passive debate about whether or how likely it is you're going to be to find the outperformance, the manager who can do it or execute it and so on and so forth. But just consumer psychology, there will always be a group of people.

who are willing to pay for the opportunity of doing better. Maybe they just like to have a crack at being above average. Maybe they've got dreams that require significant wealth accumulation. They think that's the best way to it. Whatever it is, active never goes away. It's a consumer psychology piece to always demand a piece of it. And it can't from a market standpoint, it can't. Right. Yeah. Logical extreme. At some point, price discovery breaks down if we lose too many active managers. But even in the retail space, like I could. at least theoretically construct a world where a moderate segment of institutional dollars only just does all the market goes past it. We could do that and still maintain price discovery, I think, but it just won't happen from the consumer end because there's always a segment of people that want to pay for the opportunity to do better. The caveat to that is a lot of people really don't do better. And to me, what we're really seeing play out right now in the investment landscape, you know, there's all this discussion of like indexing is going to 100%. We're going to destroy active management. And all I can see when I look at it is like, no, I'm sorry. I think you're not seeing the destruction of active management. You're seeing the destruction of bad active managers. You're just seeing the destruction of a huge swath of the industry that charged unreasonably high rents for unreasonably low value. They weren't actually good active managers. They weren't delivering out performance. They were charging higher fees with very little active share or however you choose to manage it. And they're getting drug out for charging fees and not adding value. And I don't think that means the active space goes to zero. And there's no doubt. I'm sure there are some good managers that have gotten thrown away with the bad, at least in the short term. But it's like the dynamics of markets itself. You go back, I started my career in the tech boom and the tech crash. And there were plenty of companies that got irrationally bid up, even though they were crap, right alongside some good ones. And there were plenty of great companies that got bid down because everything else was getting sold off. And eventually, five and 10 years later, the wheat and the chaff were separated out and the good companies survived and the bad ones went bankrupt, as they should have. And I think we're just in that sorting phase right now in the investment management realm. A couple of good companies getting thrown out with some bad, a lot of bad companies getting thrown out because they should.

And I think what we end out with probably is a smaller active management space in the future, because the truth is it was only a smaller active management space actually providing value for their fees in the first place. We're just getting rid of the ones who weren't. And then do you see anything across the spectrum, whether it's in access to different asset classes and any sort of differentiated holdout investment function from advisors that you think is interesting beyond the kind of, I'll call it commoditized equity bond kind of starting point? Yeah. I mean, I think we'll see firms try this a bunch of different ways. We can debate investment theory about which of these are going to work or not, but I see the rise of firms that are doing. essentially tactical management. They're saying like, look, you can own a diversified asset allocated portfolio, but maybe your allocation to bond shouldn't be exactly the same, regardless of whether interest rates are two or eight. I kind of feel like maybe that should impact your portfolio a little. Like if valuations, you know, if the P ratio of stocks goes from like 30 down to nine, maybe you would change your allocation a little, right? And sort of this acknowledgement, like we can hold diversified asset allocated portfolios. But we can still make cases for reasons why these would shift and tilt and tactically adjust over time. So I see a segment of advisors going there. We'll see who manages to do that and deliver that effectively. But that certainly to me is a category that has been rising for the past couple of years. We've seen the rise of tactical ETF managers and such. And I think there will be some legs to that category for a while to come. You see advisors that are going into what I'll just broadly label the alts category. You can buy your generic stocks and bonds online from any number of digital platforms, but I'm going to give you access to some unique scare stuff. As always happens in that world, that also opens the door for scare stuff, scare crap, overpriced scare crap. There's some good and bad that goes with that. Hopefully, the advisors are doing a good job on due diligence on what they're putting their clients into. Some maybe do that better than others. But that whole idea of my value proposition is giving you access to stuff you didn't have access to before has always been one of the founding value propositions of investment managers. And so I think that value proposition continues to have opportunity. And frankly, just in the meta level of the investing world, just watching the shift of wealth creation that's occurring in private markets versus public markets.

I'm seeing more advisors spending time trying to figure out how do we give clients access to all this private market stuff. So we'll be a feeder for a private equity fund. We'll make our own private equity fund. We'll do local real estate investing. We'll do local small business investing. People are going about it in different ways, but essentially saying maybe the whole public markets and the aggregate have become too efficient that the last frontier of investment value creation is going out there into those darker private markets. There is less trading. There is less price discovery. There probably is a little bit more opportunity there, but it's also more complex. It's more opaque. There's more risk that you do something wrong, lose a lot of money, and just the overhead costs are higher. So even that is a realm that I suspect firms will tend to do once they're a little bit larger with some economies of scale, just to be able to do the due diligence vetting on a bunch of private equity funds or direct business investments or whatever else it is that advisors. decide to do if they're taking their firms or their clients further into private markets. The next category is, you mentioned at the beginning, sort of the rise of financial technology firms. And I'm curious, rather than doing a whole survey, what you think the most interesting... jobs to be done or problems to be solved for the advisor are on the investing side and on the non-investing side. So if I'm an advisor that wants to hire technology to do aspects of those two categories, what do you think are the juicy problems left to be solved? On the technology side pertaining to investing, I think it still just comes down. Well, so our immediate problem is there are still a remarkable number of investment vendors where I can only open an account. with a wet ink signature, like an actual physical piece of paper with the wet ink of the pen still on the paper. I can sell my house. I can sell a physical piece of real estate electronically, but I can't open a stinking retirement account at a lot of vendors without a physical piece of paper with a wet ink signature on it. So there's a process of just finishing the digitization of account opening account transfers.

that it's the non-sexy guts underbelly of what happens in the financial services industry. But the fact that ACAT transfers can still take days or weeks, non-ACAT transfers usually take weeks because it's not on that system. Account opening still requires paperwork to move back and forth. Up until two years ago, we still had a vendor we worked with where we had to fax, fax the account applications to get them open. We couldn't even... email a PDF because their process was literally tied to a fax machine two years ago. So the actual digitization of the guts of the investment industry, we've done so much on the trading realm and what's happening with stock indices, some good, some bad. But we've been really slow on just the paperwork, the transfers, the execution process. I can ACH my money from one bank to another in a day, or I can wire it in the same hour, but I can't move my... stinking investment securities for a week or a few at a time. So I think there's a lot of room there to upgrade and improve the guts of what's happening. I think there's a lot of room just to get better on the performance reporting tools that are in our space, just making them easier to use, less complex, more intuitive for consumers. I feel like a lot of our investment reporting tools are really still kind of 10, 20, 30 years ago. They made a digital version of a piece of paper. of what statements used to look like. But the statements were lousy 20 years ago, and the digital version of them is not that much better. I want actual interactive charts that I can work with and use to understand where I stand and how I did from any point to any other point in time in any of the things that I owned. And I just don't see a lot of technology to really do that very effectively and efficiently yet. We're kind of sort of getting there, but I think we actually have a long ways to go just to make the information. easier to interact with and more intuitive. And frankly, we have a challenge right now because the primary people that do that are the investment platforms. And they don't really make money to make things simple and easy to understand so that you relax and chill out. They make money by showing green red lines and red headlines that rile up your emotions and freak you out and make you want to do something because then you trade more and that's how they make their money. And so I think this is actually a room area in particular where people that are actually designing technology for the end consumer.

rather than designing the technology to get a platform that does more trades would be a welcome refresher to the space. How about on the non-investing side? So to me, the starting point of the non-investing side is frankly more platforms like mint.com, you know, more platforms where we can just have our own personal financial management dashboard that helps us manage our financial lives, not the investment stuff. The cash flow stuff, the balance sheet, that's where I spend most of my life. In fact, if I'm working efficiently with an advisor, I should never look at the investment accounts because they're worrying about that. I got to worry about my household cash flow and what's happening with my overall net worth. And I continue to be shocked with how few platforms there are that are really built to do this. Mint.com is still out there, but frankly, even as a longtime Mint user, it's really clear to me they have spent years. iterating on their technology, not to make it better for me as a consumer, but to figure out how to sell me more stuff from their various product sponsors and affiliates. Why doesn't the financial advisor make this part of their value add where they create some technology that allows slick cashflow management where they're like onboarding the customer onto a system? One advisor did. His name is Edmund Walters. He made a company called eMoney Advisor. It has a beautiful, slick portal that advisors can use with their clients that pulls in cash flows and net worth and all the rest. His financial planning software with this portal sells for a fee that's three times the price of any other financial planning software, and Fidelity bought him for a quarter of a billion dollars. It's been built once, but he's only one provider. And while I think he had a pretty good take on what he built, there's room for more than one provider in this space. And to me, it's still a huge gap that... more advisor technology is not building around these kinds of client portals. Because the truth is, we just don't log into these investment portals very much. We actually usually encourage our clients not to, right? Because we don't want them to obsess about the investment stuff. But people log into their bank accounts a couple of times a week sometimes. Mint users log in several times a month.

A lot of advisors struggled at their clients to log into their investment portals twice a year. And then if they do, it's usually because they're going to complain about some investment thing. And then they're like, crap, I shouldn't have given you that portal to log into. So I think it's still a wide open space for more personal financial management tools specifically used for advisors. Because in the advisor context, I don't need to upsell some product or cross sell a credit card or a bank account or a checking account and all this stuff that Mint obnoxiously throws at people. I just have to make something that's so awesome that you want to keep logging in and that helps you stay as a client because you're already paying me a fee to be your advisor. I don't need to upsell you off my software. That's just a value add that can be designed. to be a pure and fantastic value add. So two closing questions for you and then my standard closing question. So I guess three more. The first would be just advice for young financial advisors. I get this question all the time and you're way better situated to answer it than me. So I'm just going to steal your answer. So advice you give to advisors who are interested in getting into this business, maybe words of caution that are relevant today given the landscape. And you've mentioned a lot of great ideas around specialization, the bass fishermen or whatever it is that might allow them to build a nice business. business, but any other advice that you haven't mentioned for advisors that want to do this and are getting into the business? Yeah, a few things I would offer up. The first is the future is not getting paid for your company's products or managed accounts. It's actually getting paid for your advice, the knowledge between your two ears and your ability to deliver it well to clients and engage with them. And so what that means is a starting point is the industry's talent in the aggregate has to come up. Frankly, you know, the minimum requirements to be a financial advisor is a two to three hour regulatory exam and a high school diploma. And the diploma is actually optional. And that's all I need to take responsibility for someone's life savings. I think it's a absolutely absurd and ludicrously low bar. And so for any advisor coming in, like, yes, you can get your series exam and go be an advisor.

I would not aim for that. I mean, yes, it's a minimum legal requirement. You do have to do at least that part. But I would be looking at something like you have to get your CFP certification if you're coming in today. And frankly, your CFP certification is not the end point of being an advisor. That's your starting point. Then you're going to need to go get some post CFP specialization as well. Like if you want to be succeeding in this space in five and 10 years when the majority of all advisors will have CFP certification. Having it isn't a benefit, not having it as a negative. People will be like, why don't you have it? I thought all advisors had this. And if you want to differentiate, you're going to have to go above and beyond that. So investing in yourself substantially above the minimum regulatory requirements is the starting point. The other big both advice and caution I'd give to anybody who's coming in the industry today, you know, we. We still have this problem in the industry that huge swaths of people call themselves financial advisors. I'm kind of putting that in air quotes here. Some are actually in the business of financial advice. Some are in the business of product sales and distribution. And it's often hard to tell the difference, particularly if you're younger and newer and coming in, you don't really know the lay of the land yet. And so trying to clarify, like, are you taking a financial sales job or a financial advisor job is really important. Sales jobs require you to get your own clients out of the gate and advisor jobs do not. So if you're talking to a firm that says we'll help you get your clients from day one, you're there to sell. You're not there to learn to be an advisor. So find financial advisor jobs. The primary way I tell people to do that, first of all, just ask them to show you a sample version of their financial plan. If they don't have one, that pretty much answers the question about how focused they are on financial advice. Number two is ask them about how they make their money and where it comes from. And what you're actually looking for is not just the industry's fee versus commission debate. The fundamental question is, is their revenue recurring? That could be 12B1 fees. That could be AUM fees. Is their revenue recurring? Because if the firm doesn't have recurring revenue.

The truth is every January 1st, they wake up and they have no revenue in the bank. And so all firms tend to hire when they have no revenue coming in until they go sell something is more salespeople. Firms that have recurring revenue, I've got my $100 million under management. January 1st, I got a million dollars of revenue coming in. All I have to do is be awesome financial planner for my clients so they stay. So firms with recurring revenue tend to hire financial planning jobs. Firms with non-recurring revenue tend to hire sales jobs. And so ask to see a sample financial plan. Ask what kind of revenue they earn and whether it's recurring. If at least 70% of it is recurring, your odds are good. You're getting into a good place. And just find out if they're growing. Firms that are growing tend to create more opportunities as they grow. So you may not know what it's going to look like. There's a saying in Silicon Valley, like if you have a chance to get on a rocket ship, you don't quibble about which seat you're going to get on. You just get on the rocket ship and you figure it out later. Because growing firms tend to create lots of opportunities for everyone. So what's that sample plan look like? Do they have recurring revenue? And is the firm growing? And if they can check all three of those boxes, you have probably crossed off 80 to 90% of the firms you're going to be talking to. And there's a pretty good chance you'll find a firm that's going to be a solid first step for you in the industry. So the most popular question, as voted on by Twitter, came from our friend Morgan Halsell, which is to ask you how you invest your own money. My money is essentially a roughly three-way split, but the three pieces are not even. The smallest piece actually is just my... Good old fashioned investment accounts manage to save and accumulate a little bit. That's actually managed by our advisory firm. So, you know, my dollars are in our company profit sharing plan and gets managed with our advisory firm's investment management process. The second piece actually is a big old pile of cash because it ties to the third piece, which is the primary place I actually invest is myself and my business. I spent most of my 20s reinvesting into my education. That's how I ended out with.

two master's degrees and a whole bunch of designations after my name. The ROI on getting myself degrees and designations is exponentially better than anything I ever could have done by putting money into a Roth IRA. More power to a Roth IRA, but investing in yourself is better. And over most of the past 10 years, I've been investing into businesses that I've been creating. Our Kitsis.com platform, XY Planning Network, which helps young advisors start a business, a tech company called AdvicePay that I co-founded, as well as a number of others. The success of building those companies, frankly, is exponentially higher than any other investment accounts to the point that I actually don't contribute to retirement accounts and haven't for many years so that I can keep cash available for business opportunities. I don't necessarily advocate that for everyone. Like investing in businesses and starting businesses is also extremely risky. And depending on whose statistics you look at, somewhere between like 80 to 95% of them fail. So at least acknowledge it's a very high risk path. I just see so many business opportunities in our space and my brain is kind of wired as an entrepreneur and a vision person. And so I found pretty quickly that the most effective way to invest was, I mean, it's sort of the Buffett style, right? Like keep cash available to invest in good businesses when you get opportunities to. It's just most of the businesses I'm investing into are the ones that I'm involved with. And I'm actually involved with a few because that's a... effectively a form of diversification for me. Love it. The closing question I ask everybody is for the kindest thing that anyone's ever done for you. So there's a gentleman in the industry named Bob Veris. Some folks in the advisor side will know him. He's published a practice management newsletter for the better part of, I think, almost 30 years now. Fantastic newsletter on financial advisor business and practice management. Back in the 2000s, like mid-2000s, I was starting to write articles in trade publications. I was doing retirement research and stuff on nerdy tax law and putting all that alphabet soup I was getting to good use. And I kind of had this spark, this idea of Bob has this really successful business where...

He writes a newsletter, shares his expertise, and people pay him for it. And it's pretty scalable because it takes the same time to write the newsletter, whether it's for 10 people, 100 or 1,000 or more. Bob's made this work. I think I might try a newsletter business. Bob writes about practice management stuff. I'm going to write about nerdy planning strategies because I was the planning nerd. But I was like, I think I want to do this. And so I went and talked to Bob, just like, you are the guru. Am I nuts to try this business idea? Do you think there's something here? You've seen my articles and you read a lot of stuff. Do you think I can do it? And he said, not only do I think you can do it, but I'm going to have my web developer make you a site and set up your technology using the same systems I use so that you can get this launched and go do it. And he did it. He did the whole thing. He covered it out of whatever his contractor agreement or whatever it is with his developer. He just stood up my first site. and got me launched and then sent an email out to his mailing list saying, Michael Kitsis has launched this cool newsletter. You like mine on practice management. He's on technical stuff. You're going to love it. Go sign up and got me about 200 subscribers out of the gate and standing up the website and giving me an initial base of subscribers. It wasn't a huge amount. That was probably $20,000 or $30,000 a year of revenue, but it was enough that paired together with some speaking other stuff I was doing, I was able to take that leap. And, you know, now ultimately that morphed into my blog and my blog morphed into a podcast and that morphed into a whole bunch of businesses that I've created and like all this other stuff that's come. But it all started with Bob Veris just not even giving me the initial nudge to go forward, but like actually reaching out a hand, lifting me up to make it happen. And so it's part of why I've now been involved with starting up a lot of. small businesses in our advisor space, just trying to seed good people that I think are doing good things that has a business opportunity and trying to give them the same hand up that Bob gave me. Awesome. Great answer and a thoroughly information-rich conversation. So thanks so much for all your time. My pleasure. Absolutely. Thank you for having me on. Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com forward slash podcast.

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