GARRETT KEYES, REPORTER, FINANCIAL ADVISOR IQ: Hello. My name’s Garret Keyes. I’m a reporter for Financial Advisor IQ. And I’m here today at the Schwab Impact Conference with director of wealth management for Pinnacle Advisory Group, and publisher of the Nerds Eye View blog, Michael Kitces.

Michael, what are the five main trends you see shaping the advisory industry?

MICHAEL KITCES, DIRECTOR OF WEALTH MANAGEMENT, PINNACLE ADVISORY GROUP: So to me, the primary driver of what’s changing the industry right now is technology. And it’s not technology in the way that we typically talk about it, like the robots are coming and going to replace all the humans. I think it’s actually much more subtle than that.

It’s how technology has evolved for the past 40 years. Where back in the ’70s and ’80s a financial advisor was a stockbroker. Then technology started doing stock brokering. So the financial advisor started doing mutual funds. Then online brokerage platforms came out. And anybody can buy a mutual fund themselves. So we started doing asset allocation. And now technology is doing asset allocation with robo advisors. And so we continue to move up the value chain.

And that to me is really the driver of technology. There’s this positioning that once the tech shows up, the humans won’t be necessary. And what really happens in practice is once the tech shows up, the humans evolve and move up the line, right. We continue to add value on top of what the technology provides.

And, to me, we’re really just in another one of those inflection points. But that inflection point now is starting to send ripples across the entire industry. It’s causing all the channels to converge. Because when consumers can buy their products through technology, we all have to really be in the advice business, which means broker dealers are in the advice business, and RAs are in the advice business. Insurance agents are in the advice business. And historically, those were separate trends. Those were separate channels. Those weren’t supposed to converge into one the way that they are now.

And the convergence then is starting to drive more challenges for differentiation for advisors. I actually call it the crisis of differentiation, that more and more advisors now, we all say, well, I give comprehensive financial planning advice with my industry credentials, and my years of experience. And we’re focused on our clients. And so does everyone saying the exact same thing, because we’ve all converged on the same advice proposition.

And that, in turn, is spawning new business models, a lot of innovation in how advisors are trying to charge for what they do. And a big push on the client experience that says, if you want to justify your fee in a world where the technology does all this stuff, you really have to create a better experience on top of what the technology alone can provide.

GARRETT KEYES: Is technology going to be a tool that advisors can use to amplify their differentiation?

MICHAEL KITCES: Absolutely. And when I started in the industry 20 years ago, I started right at the peak of the internet boom and bubble. And the statement at the time was, Michael, you’re an idiot to become a financial advisor. Investing is so easy to do with the internet, a baby can do it. Because that was actually the ETrade commercial at the time was a baby in the crib using ETrade to day trade stocks. Like why would you need a financial advisor in the technology age?

And what we ended up with instead is sites that sell direct to consumers, use platforms like ETrade to do their own investing. And for the rest of us, we as advisors use the technology to run our businesses and be more efficient.

And so we can now run smaller firms with higher profitability more effectively than we ever can, because the technology that was supposed to replace us became the essential technology to operate. To the point now that we don’t even say, "I’m an internet-enabled financial advisor because I use the World Wide Web to manage my practice." It’s just the technology we all use.

And I think we’re at the same transition point now with robo advisors, where first it was robo advisors. Then it was robo advisors for advisors. Then it was digital advice. Eventually it’s just going to be the technology we all use that makes us more efficient, takes tasks we shouldn’t have been doing and automates them, and lets us spend more time doing the meaningful advice with clients.

GARRETT KEYES: And so for advisors to correctly harness new technologies that are emerging, do they need different infrastructure or different operation systems? Or how is it changing business models for advisors, or business structures?

MICHAEL KITCES: So the biggest challenge I actually find is not, "What’s the right technology? What’s the magic technology?" Or just trying to set the right structure around it.

The biggest challenge actually is, "Who are you trying to serve?" I mean, who really are you trying to serve? Because in a world of this more and more focused client experience that is just supremely relevant for a particular segment of clients, you have to pick a particular segment of clients to be relevant for.

In the past we could just cast a wide net and service anyone, because anybody needed the product. But when we’re crafting advice experiences, you have to know who your advice experience is good for, because everybody wants something different. And that’s kind of the point.

As [for] large scale firms like Schwab, they will have to serve everyone across all the channels. And they have a full-spectrum offering. For the individual advisor that doesn’t have $2 trillion of scale like Schwab, we succeed by finding our 50 great clients and doing fantastic work for those 50 great clients.

And so the question becomes, who are your 50 great clients? What is common to them? What can you do that serves them? And then along with it, well, what technology are we going to include as well? But it’s not just a technology question, or an infrastructure question, or a business model question. It’s a target clientele question. Who do you actually want to serve? And then what are all the things you need to put in place to be awesome for those 50 great clients so you can have a fantastic practice?

GARRETT KEYES: Do you think advisors that don’t implement these new technologies, or update their business models, or drill down their client segment targets, are they going to run into issues down the road? Or do you think it’s going to be difficult for them to continue building their practice?

MICHAEL KITCES: There is this discussion out there of something to the effect of like, adapt or die. Like you have to rebuild all your practice with all this new technology and infrastructure, and change your business model, and who you’re serving, and all of that, or your practice will die. And I actually don’t think that is true at all.

The foundation of what we do as advisors is still client relationships. Clients get very bonded to us. It’s a pain in the butt to change advisors for lots of different reasons. Client attrition is incredibly low, whether you’re a high tech-adopting firm or a low tech-adopting firm.

The challenge will be the growth. And the challenge that will emerge is firms that can’t get really clear about who they are best at serving won’t be able to win the business from everybody else who gets really good at that. It’s the firm that specializes in divorcees that grabs that divorce prospect. And it’s the firm that specializes in small business owners that grabs the small business owner client. And it’s the firm that specializes in executives that grabs the executive client. And no one of them takes all of your prospects. All of them take all of your prospects one at a time, because each one of them is more relevant for that individual prospect.

And so the challenge, I think, that we’re going to find is firms that don’t adapt will be able to continue serving their clientele. They may slowly pass away over time, but will be profitable for a long time. But growth will get really, really hard if you can’t figure out who exactly you want to serve, how you’re going to differentiate with them, and then build the rest of the technology, infrastructure, and business model that you need to deliver to them.

GARRETT KEYES: Great. Thank you for speaking with me today, Michael.

MICHAEL KITCES: Absolutely. My pleasure. Thank you, Garrett.

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