Many RIAs are struggling to grow because they're fighting for clients within their own zip codes, according to advisor Michael Kitces.

Advisors must differentiate their practices and focus on underserved niches, Kitces, partner in Pinnacle Advisory Group, an RIA based in Columbia, Md., said last week at the 2019 Schwab IMPACT conference in San Diego.

“The competition in the RIA model is drastically ramped up. That’s why we see so many firms now struggling with growth rates,” said Kitces. “Growth is worsening because competition is getting worse.”

The key to jumpstarting growth, said Kitces, is to differentiate along the lines of niche clientele. The problem, though, is that most RIAs have used their service model, fiduciary status—and even their location—as their differentiating traits.

“Who here has built their business on the premise that they have a more convenient zip code? The hard truth is that that’s actually a differentiator for most of us,” said Kitces. “Think of how many clients you have within five or 10 miles of the office.”

That was fine when an RIA might be the only firm offering comprehensive wealth management in its area, but that’s no longer the case, he said.

Kitces said that Pinnacle once was able to close 70% to 80% of its leads on the basis of its business model and fiduciary status alone, but now has a success rate no better than “a coin toss.”

“It starts to drive this question of what’s next? It’s all about specializations. It’s all about having some kind of much more specialized, focused value proposition,” said Kitces.

In Schwab’s 2018 Benchmarking study, advisors who could identify their ideal client and tell stories addressing that person experiences had 26% more new client acquisition and brought in 41% more assets per client.

Differentiation into a niche can aid marketing efforts more than generalized marketing, said Kitces, using the analogy of a fishing net. If a fisherman stretches their net out to try to encompass a larger population of fish, more of their potential catch will slip through the widening gaps in the net.

“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.

“In 10 to 20 years, we could find that the AUM model is a niche model for a niche of high-net-worth delegators,” said Kitces. “There’s a giant remainder of the marketplace, a blue ocean of people, who want to pay for advice. We’re building that up with fee-for-service models.”

Kitces also voiced concern about the continued growth of robo-advisors, but not for fiduciary advisors themselves.

In fact, robo-advisors are poorly suited to compete for the traditional advisor’s clientele, said Kitces, because most of that traditional clientele consists of delegators who want someone else to take responsibility for their assets. Instead, he worries about the impact on the corps of administrators, paraplanners and other support staff working with advisors.

“It’s going to replace a lot of the back-office staff,” said Kitces. “We’re trying to put paraplanners through planning courses and bring up our operations team because this is going to add on pressure to all of our back offices. You’re just not going to need much of them. The paperwork is gone if you’re doing work on a smart phone and iPad and with chat bots. It will so drastically simplify administrative work, I do worry about that on behalf of our team. But I’m psyched about it as a business owner. It’s a huge productivity lift for our firm.”

Speaking of productivity, Schwab’s Advisor Benchmarking Study showed that the time to service a client has dropped by two hours per year over the last five years, in part because firms are starting to leverage more of the technology introduced by robo-advisors internally.

Kitces said that it’s important for RIAs to understand their productivity as a firm and what it means for their ongoing viability as a business.

“If you take total number of clients divided by the total number of people in your firm, you have clients-per-staff, and that is one of the purest measures of productivity,” said Kitces. “It picks up the productivity of all of your team members. How many of your people does it take to serve the people you serve? In the past, that client-per-staff sat in the mid to high 20s for a lot of firms, but over the past five years it’s lifted from the high 20s to the mid to high 30s. There’s been a 20% boost in aggregate staff productivity over the last five years.”