Michael Kitces says when it comes to dealing strictly with dollars and cents, fintech has done a stellar job of filling gaps and allowing firms of all sizes to deliver services at scale.
But scaling the human touch as
"We have portfolio management tools, trading and rebalancing tools, and investment research tools. Lots of ways that we create scalability on the investment side of the business," Kitces said. "But when you get down to the client relationships, the financial planning, the sort of complementary ends of wealth management that more and more firms are now bringing together with their investment management, we suddenly discover that the advice side of the business (and) the financial planning side of the business is not as scalable.
"When we get to the human financial advice and financial planning side, it gets messier."
Kitces,
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To put the hour-long conversation into perspective, Kitces began by giving listeners the example of an experienced carpenter being hired by a client to repair a squeaky floorboard.
He described the carpenter walking the floor, locating the squeak, pulling a nail from his toolbox and eliminating the noise with a single swing of his hammer.
The carpenter then hands the client a bill for $100.
"You say 'wait a sec. It's $100 for a nail?' (The carpenter) says 'no. It's 5 cents for the nail, $5 for my time to come and hammer the nail, and it was $95 for knowing exactly where to put one nail to stop your floorboard from squeaking.'"
Kitces said that example should illustrate to advisors that most value comes from "knowing where to put the nail to make the pain go away," and is a core value process for anyone in a skilled trade or profession.
"From carpentry to financial planning, it's that fundamental difference between whether you're selling a product, which is how many of us in the business grew up and evolved … over recent years we've been increasingly encouraged to sell our time," he said. "But when you look at those that drive the most productivity and income … they're not actually in the time business. They're in the expertise business. They're specialists that sell their expertise and their wisdom."
But aware that time is indeed money, the c
His advice included establishing your expertise as a planner; making parts of your process repeatable; determining what kind of client base you want to serve; and learning how to leverage up your time with a combination of good tech and good people.
On the topic of establishing expertise, Kitces said specialists across professions tend to earn more than generalists. He pointed out how much more accountants, lawyers and doctors who specialize earn compared to their peers, and said the same phenomenon exists in financial advice.
But you may not see or feel the income gap until you begin to pull away from the pack and become a top earner, Kitces said. The average general advisor earns nearly as much as the average specialist.
"The top 10% highest-earning advisors who don't have a specialization earn as much as $400,000 a year in take home pay. And the top advisors who are specialists — any kind of specialization — the top 10% average almost $700,000 of income instead of $400,000," Kitces said. "Granted, anybody who's at the top of their game is making some pretty good money. But those who are at the top of their game and specialize are earning 50% to 100% more than what the best advisors can figure out how to earn if they just try to be the best without being a specialist."
Kitces said some of this draws from what he calls the "experience-expertise gap," noting that internal research finds advisors and their teams spend about 36.5 hours on the first year of a client relationship.
That includes upfront planning, onboarding, initial meetings and going through the "get-to-know-you and data-gathering process."
But when the expertise of having a CFP certification comes into play, things change. Kitces said that number grows to 41 hours for non-CFPs and shrinks to 32 hours for CFPs. Going deeper and looking at experienced advisors with 10 years or more under their belts, the gap widens, and in unexpected ways.
Experienced CFPs spend 29 hours on the first year of a client relationship, while experienced non-CFPs spend 52.
"You would think in general, the more experienced the advisor, you should get faster and better at this, right? You'd literally have years of experience in practice. But the phenomenon that happens for most of us is, the more years of experience we have and the more established we get, the more affluent clients we tend to bring in," Kitces said. "And the more affluent clients, the more complex the clients. And the higher-complexity clients, if you have not invested into your expertise, become more and more time consuming."
But as important as what advisors do is who they do it for. Kitces said if he were to go back to when he started as an advisor, a prospect was a prospect. Period.
"Basically, if you could fog a mirror, you were a prospect. Hopefully, I could sell you like a $250,000 variable universal life policy or open a $2,000 IRA for you. That was my world back 23 years ago when I got started," he said. "That's a fine way to build a product business. But it turns out, it's not a good way to scale an advice business. Because what you get is a high level of client variability."
Kitces went on to explain the multiple types of client variability and the strain it can put on planners. From simple matters like the time of day clients like to meet to more complex issues such as client sophistication, working through a book of business that is wildly different from cover to cover can make it hard to establish consistent workflows.
"For a lot of us as advisors, I feel like we have just sort of accepted (that) this is advice. This is how clients (and) businesses work. Clients are wonderfully varied human beings, and they want different things, and you do what the client wants," he said. "That's not really how it works in scaled, professional services businesses. If I go to a neurosurgeon and I say my knee hurts, he doesn't say 'I can meet with you at your home or office. Let me take a look at your knee and I'll do what I can.' He says 'I'm a brain surgeon. You need an orthopedist. I'll give you a referral.' And he sends the person out the door."
Kitces said the two classic ways of dealing with client variability is to accommodate or eliminate. But he urges advisors to consider a third and fourth option: "low-cost accommodation" or "all-in focus."
He then gives the example of a client who prefers meeting in the evening. Instead of saying yes or no, low-cost accommodation could be giving the client the option to attend one of his firm's periodic client education events held in the evening. And in the meantime, the client can use the firm's client-facing financial planning software that is available 24/7.
All-in focus, however, would see him create a niche of serving young families who can only meet at night while dialing back work hours during the day.
"So yes, I'll serve the clients that have some unique demands. But I'm not going to do it by saying I will meet with you in the evening or I won't," he said. "Here are some other things I can do that (are) cost effective for me because I can do this for every client that wants to meet in the evening."
