“We built our business historically by referrals,” said Kitces. “You’ll see referral-based growth is going to start to break down. The more you want to move up-market, the harder it’s going to be.”
Advisors have to differentiate into more specific niches to make themselves searchable, Kitces said. While it’s unlikely that any independent advisor will be able to establish a high position in Google’s search results for “financial advisor,” it’s more likely that they can rank highly in search for “bass fishing financial advisor,” he said.
“In a world where most of us can have a successful business with 50 to 100 clients per advisor, you can get amazingly narrow focused,” said Kitces. “There are wide niches with thousands of clients as an opportunity, but you can build a multi-multi-billion-dollar firm off of a narrow niche with a couple of thousand of people in it. I think this is where this route starts taking us.”
Multiple Revenue Models
While investor and advisor views around business models and fees are changing, Kitces does not believe that there is any threat to the AUM model itself.
The problem, as Kitces sees it, is that there may not be enough clients interested in the AUM model to go around, especially as more wirehouse and independent broker-dealer firms shift away from the traditional commission-based model and expand their AUM model offerings.
Kitces estimates that 5 percent to 7 percent of an advisor’s potential clientele will be suitable for an AUM model.
“How many clients have $1 million that’s not tied up in their 401(k) and are delegators?” said Kitces. “Somewhere around seven million households out of the 120 million in the U.S. actually have money, liquidity and a delegator mentality. For rich people who like to delegate, I think the AUM model is going to work fine.”
Some traditional clients, particularly older clients from the baby boomer and silent generations, may balk if faced with a flat fee for financial planning. Planning has typically been offered alongside the investment management services they’re used to paying a percentage of their AUM for. In other words, many of these clients have lived unaware that there is a significant price tag on the planning services they have been receiving—or any cost at all.
While some advisors have started offering fee-for-service, subscription or retainer models, like those in the XY Planning Network that was co-founded by Kitces, others are plotting out a middle ground between the AUM fee and the flat fee, most commonly using a percentage of annual income or some blend between a percentage of income and assets under management.