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

Episode Summary

Executive Summary: Patrick O'Shaughnessy interviews Michael Kitsis on the evolution of financial advice from stockbroking to fee-based planning, arguing technology repeatedly reshaped the model and will keep pushing advisors toward specialization, planning, and fee-for-service.

Main Topics: Evolution of financial advice (Priority: 5/5): Advice moved from stockbrokers to mutual funds to AUM as technology disrupted each prior model. Robo-advisors and tech disruption (Priority: 4/5): Robo-advisors never beat human advisors, but they accelerated automation of portfolio management. Advisor pricing and margins (Priority: 5/5): AUM fees remain sticky near 1%, but margins are pressured as firms add services to defend pricing. Shift to fee-for-service (Priority: 5/5): Flat or subscription pricing may grow as advice expands beyond wealthy delegators to broader households. Specialization as differentiation (Priority: 5/5): Advisors win by serving narrow niches with high-value expertise rather than generic portfolio management. Technology gaps in the industry (Priority: 4/5): Account opening, transfers, reporting, and client portals remain clunky and are ripe for improvement.

Key Arguments: Technology repeatedly killed old advisor business models and forced the next stage of value creation. Robo-advisors mainly pressured Schwab/Vanguard, not human advisors, because they served self-directed investors. Advisor fees stay near 1%, but firms defend price by adding planning services, compressing margins. Flat fees are hard to scale against AUM, but fee-for-service may fit middle-market clients better. The market for advice is bigger than current AUM-only firms serve; income-based pricing could expand reach. Specialized niches like doctors, UK expats, or bass fishermen can support highly profitable small practices. The future of advice may be 1% of income rather than 1% of assets for many households. Investment alpha will persist for some, but the industry is mostly eliminating bad active managers, not all active managers.

Data Points: Stock trade commission: about $200 a trade in $1975 - Historical brokerage economics before May Day deregulation Cost to execute a stock trade: fell by 90% - From 1975 to 1995 as computers and competition replaced stockbrokers Mutual fund industry size: from half a trillion dollars to five trillion dollars - Growth from 1990 to 2000 Typical upfront A-share mutual fund commission: 5.75% - What the speaker said he was paid when he started 20 years ago Robo-advisor launch year: 2012 - Betterment and Wealthfront declared war on advisors Schwab Intelligent Portfolio launch: 2015 - Schwab’s response to robo-advisor competition Advisor revenue yield: right around 75 basis points - Average true revenue yield for advisory firms Low-end advisory fee on under $250,000 accounts: 1.3 to 1.5% - Typical graduated fee schedule Multi-million dollar account fee: 0.6 to 0.8 - Typical fee range on larger accounts Top-end fee on very large accounts: 0.25 to 0.5% - Common fee range for $5M–$10M+ accounts Mass affluent households: roughly a third - Households with at least $100,000 in investable assets outside primary residence Advisor-served population: about 5 to 7% of the population - Households that fit the current AUM model well Recurring industry fee extraction: between 1.5% and 2% of savings - Reference to Philippon study across 150+ years Advisor client capacity: about 50 great clients - Most advisors can be wildly successful with about this many clients Typical active client ceiling: about a hundred - Advisors with more usually have long-inactive accounts Social Security timing tools: a half dozen different tools - Recent advisor tech focused on retirement-income decisions

Pivotal Quotes: "technology nuked our business model. We all had to find something else to do." — Michael Kitsis: Describing how stockbrokers were displaced by computers and online trading "The future is not getting paid for your company's products or managed accounts. It's actually getting paid for your advice" — Michael Kitsis: Advice-business career guidance for new advisors "the future is 1% of income rather than 1% of assets" — Michael Kitsis: His forecast for how advice pricing will broaden beyond asset-based fees

Implications: Advisors who want to thrive should build niche expertise, stronger planning capabilities, and better client tech while preparing for more income-based pricing models.