Kitces and Carl: Why AUM Keeps Growing Despite Opportunities For Flat-Fee Clients

Share This

Kitces and Carl Podcast for Financial Advisors

In the early days of the financial advice industry, an advisor’s most valuable service for clients was simply providing access to financial products (as stocks, bonds, insurance, etc. couldn’t be purchased directly by consumers). However, the advent of online brokerages not only drove down the cost to purchase investment products, but made investing (as the slogan went) “so easy, a baby could do it”. As a result, advisors turned their focus towards building customized portfolios for clients, and rather than earning commissions on the products they sold, began charging recurring fees for managing those portfolios on an ongoing basis.  

More recently, however, ongoing technological progress has automated portfolio management to the extent that it’s now “so easy, a robot can do it”, and once again, advisors have evolved to make their main value offering the advice that they provide across their clients’ entire financial lives. Yet, despite the introduction of alternative fee structures (including hourly and subscription models) based on the delivery of advice rather than management of assets (as well as the growing consumer demand for flat fees), growth of the AUM model remains robust. 

In our 64th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how disconnects can sometimes arise between what potential clients may expect and how advisory businesses are structured to deliver advice, why the demand for quality advice continues to combat industry-wide fee compression, and why it’s been (up to this point, at least) such a struggle for alternative fee structures to gain better traction. 

Over the past several years, as more options for automated investment management have become available, consumers have increasingly sought out ‘compartmentalized’ planning engagements (i.e., advice on ‘just’ one or two, rather than on all seven, aspects of the planning process), but often run into difficulty when trying to find an advisor that has the capacity to accommodate their requests, particularly when it comes to higher-net worth clients. As while there are advisors who are able to accommodate limited planning engagements, their numbers are limited. Moreover, clients who are further along the complexity spectrum may expect the sort of service found at larger firms, which simply aren’t structured in such a way to provide compartmentalized service. 

Compounding the conundrum is the fact that it’s difficult for consumers to differentiate between advisors who actually offer advice and those who simply assume the title but may not be in the advice business. The supply of fiduciary advisors remains scarce, which (in turn) means that an advisor’s limited number of available spots can fill up quickly with clients who do want comprehensive planning (which is why so many of those advisors end out implementing wait lists). And with the high costs that advisors face to acquire clients in the first place, it just becomes impractical (at least at this point) to build a sustainable business that (primarily) serves clients on a limited basis. 

Ultimately, the key point is that, while fee structures and advisory models continue to evolve to provide better and more varied services to clients who may not want (or need) comprehensive planning, the fact remains that it’s expensive to not only acquire clients, but to service them as well. Which, at the end of the day, is why a fiduciary standard is so important for the industry, as it would drive down the cost of advice in the aggregate and would make it more practical to profitable and effectively serve clients who would benefit the most from flat-fee engagements. 

LISTEN TO ADDITIONAL EPISODES IN THIS SERIES
RECENT EPISODES

 

 

MICHAEL KITCES BIO

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning NetworkAdvicePayfpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

 

 

 

CARL RICHARDS BIO

Carl Richards is a Certified Financial Planner™ and creator of the Sketch Guy column, appearing weekly in the New York Times since 2010.

Carl has also been featured on Marketplace Money, Oprah.com, and Forbes.com. In addition, Carl has become a frequent keynote speaker at financial planning conferences and visual learning events around the world.

Through his simple sketches, Carl makes complex financial concepts easy to understand. His sketches also serve as the foundation for his two books, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money and The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money (Portfolio/Penguin).

 

 

 

This podcast first appeared on the Nerd’s Eye View at Kitces.com at https://www.kitces.com/blog/aum-flat-fee-client-acquisition-cost-fiduciary-standard/  and has been reprinted here with permission.

Share This
No Comments

Leave a Reply