“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.”