The last thing Michael Kitces wants is regulatory discrimination against the 1,500 plus investment advisors who are members of his growing planning network and charge subscription fees for financial planning-only services. The subcription fee-for-service model has become increasingly popular over the last decade, particularly among younger advisors and their clients, both of whom find the traditional assets under management compensation model has its limitations.
So it’s not surprising that Kitces, the founder of XY Planning Network, said he has a meeting scheduled with Colorado regulators on January 25 to ask for changes in the state’s “Ongoing Financial Planning Guide,” which he said still disadvantage subscription advisors, but not those advisors who charge asset-under-management (AUM) or hybrid fees. This is Kitces’s second meeting with regulators to press his message on the guide, which Colorado has revised once based on feedback since it was published in March, 2022.
“Overall, we find that Colorado has been very responsive to have the conversation, but we remain extremely concerned that their guidance implicitly assumes that those doing financial planning for a subscription fee need to be regulated differently than those doing financial planning for an AUM fee,” Kitces said.
Kitces said he believes “that to the extent Colorado is going to do more to regulate ongoing financial planning, it should be done consistently for all those doing financial planning and regardless of the way they’re paid for it.”
The XYPN founder is also asking that Colorado consider doing a sweep exam of hybrid advisors “to further understand how much of an AUM firm’s fees are actually for investment management versus financial planning (to ensure the financial planning AUM fee is earned in a similar manner to how Colorado requires the financial planning subscription fee to be earned),” according to his most recent comment letter.
Kitces said he was “very appreciative that Colorado has been willing to have and continue the conversation, and looking forward to our discussion with them on January 25th to delve further on this.”
Jeff Eaby, chief examiner of the Colorado Securities Divison said Kitces did point out "a gap that could use some clarification and that's the hybrid model. That's what this dialogue is designed to do. I think we agree with XY Planning Network that we can make it clearer in the future that when there are hybrid advisors who offer both asset management and ongoing planning that really their duties are the same with regard to recordkeeping and documentation for both sides of their business."
Eaby said he anticipates changing a few words in the guide but not a major overhaul of the guide at this point.
"A lot of states are trying to figure out how to handle this matter. And it’s clear in the guide I think that Colorado thinks that choice is best for consumers, but we want to be ahead of the curve in terms of our possitions and recommendations.
The staff of the Colorado Securities Division denied in an earlier letter that it favors the AUM model over subscription models.
“The staff disagrees with this characterization [and] currently regulates advisers that offer various fee models and believes that a diversity in offerings allows consumers options to meet their specific needs…Every model, however, must comply with the rules and statutes that are grounded in the principles of consumer protection and the fiduciary standard toward clients,” the state agency said.
For example, similar to the recommendations for ongoing financial planners, staff recommends AUM advisers maintain books and records documenting that they have monitored client accounts and investments and regularly update their investment profile, the staff said.
“It should also be noted that the statutes and rules require AUM advisers to keep a record of every trade placed on behalf of clients and written information about each client that is the basis for making all recommendations; describe their services in detail as required by the Form ADV,” Colorado securities staff said.
The staff also noted that any advisor “charging solely for availability will generally not meet their fiduciary obligation, though the determination of the reasonableness of fees is a fact specific analysis.
While Kitces says in his letter that Colorado should have to go through a formal rule-making process to change the regulation of subscription planners, Colorado disagrees.
“This Guide is a collection of best practice recommendations collected through staff observations and does not establish or impose new laws or rules,” the state staff said.
“The observations and best practice recommendations all fall within the current regulations that require investment advisers and investment adviser representatives to be held to the highest professional standard: the fiduciary standard towards their clients,” the Colorado Securities Division added.
Knut Rostad, founder of the Institute for the Fiduciary Standard, said his group is meeting with Colorado regulators tomorrow about the guide. “This is a serious issue…of how to evaluate the financial planning services that more and more of these smaller advisors are charging distinct fees for. The states are rightfully trying to understand what it is they are doing and ask is this a reasonable fee for what is delivered,” Rostad said.