“Don’t stretch it wider, get focused and put the net where the fish you want to catch are," he said. "That’s the fundamental shift we’re only now on the front end of.”
A small subset of firms have already specialized, said Kitces, pointing out that RAA in Dallas grew to $2 billion just by serving airline pilots and was recently acquired by Sacramento, Calif.-based Allworth Financial.
“Two things ... come when you start being specific,” said Kitces. “The first is that the services the firm provides start moving into what we would call non-traditional services. You can go beyond what most of us would usually do with your training and CFP curriculum ... moving out of the traditional realm and into what in the pure sense are actual differentiated services.”
For example, Kitces discussed a firm that serves dentists and dental practices with financial advice, particularly young dentists. The advisor found that there were huge succession issues in dentistry, with the average dentist being older than the average advisor. Succession plans were failing because younger practitioners were struggling to come up with the financing to buy practices from retiring dentists. So the advisor founded a subsidiary bank that makes succession loans to dentists.
Creating a more specialized practice also helps advisors become more efficient, said Kitces, because they develop repeatable expertise in serving their niche.
“One of the challenges most firms are facing as we go deeper on financial planning stuff is that financial planning is time consuming because all of our clients are different. You have to research and do it all over again for the next client,” he said. “Do you know how similar the plans are when you do the same dental practice over, and over, and over again with the same issues? You don’t really have to do it all over again when you finance a succession plan, it’s going to be the same template.”
Kitces also responded to questions about the AUM fee model in the face of alternatives that are rising in popularity, like the idea of charging clients a monthly subscription, annual retainer or hourly fee, or basing fees on a percentage of income rather than a percentage of assets.
“I don’t hear the negativity about the AUM model,” said Kitces. “I mean, people actually pay it. The negativity is just not there from our clients. We hear it sometimes from prospects, but what we usually find at the end of the day is that they’re not a delegator. ... When we drill down to people who are delegators, the AUM model just works.”
Kitces cited a Pershing study that shows more RIAs are raising their AUM fees than lowering them and that revenue yield has been flat since the onset of robo-advisors in 2012.
Instead, new fee models will introduce professional financial advice to thousands or millions of new potential clients, said Kitces.