Podcast #124 Show Notes: Financial Advisors: The Good, The Bad, and The Ugly with Michael Kitces

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Michael Kitces is the brains behind Nerd’s Eye View which I believe is the most widely read website aimed at educating financial advisors in the world. He blogs for advisors who are serious about their craft, the ones who actually view this profession as a calling and want to get better at it. He wants to teach them how to be more successful advisors and how to serve their clients better with more expertise. He believes that most harm inflicted on clients by their advisors doesn’t occur because of malice or greed but out of ignorance and he wants to help provide a higher standard for competency.

We discuss financial advisors acting as fiduciaries and what training we should expect our advisors to receive and what services they can provide. We talk about assets under management fees and whether we will see the end to them in our lifetime or not. We discuss conflicts of interest and advisors trying to specialize in different types of clientele. But what Michael Kitces really wanted you to take away from this discussion is that you have to get pretty far down the line of investing portfolios before the growth rate of your portfolio is larger than the impact by just spending less than you make and figuring out how to grow your income. It always comes back to the basics.

This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost-effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender-neutral policies (saving women significantly), priority underwriting handling and, on some occasions, exceptions in the underwriting process. Contact Jamie at Set for Life Insurance today.

Quote of the Day

Our quote of the day today comes from Peter Lynch who says,

“Everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.”

Isn’t that the truth?  Your behavior matters. The investor matters a lot more than the investment in a lot of ways.

Financial Advisors: The Good, The Bad, and The Ugly with Michael Kitces

Like most people that started in the financial industry around the same time as Michael Kitces, he started in sales. But he was terrible at it. He really liked the industry and bounced around for a couple of years before he found the CFP certification. He loved the idea of instead of just having your company’s product and trying to sell it to everybody you meet, you actually just get to know the people you meet, understand their problems, and then just help them with whatever they need.

“Find out what they need and give them the thing they need. It seems a lot easier than just trying to sell the thing you have to everybody you meet.”

Kitces started to see the impact of what happens when you really help people on the financial advice side and how transformative that can be.  He really started finding a passion for the industry in this particular subset and side of the industry which back then was really a small area. When he started, fewer than one in 10 advisors had CFP certification. It was really kind of a rare niche thing to go get this advanced education to give people advice that isn’t just the thing you’re selling.

“It’s getting bigger. It’s broadening now. We still have a long ways to go though. We’re still probably only about one in three advisers have something like CFP certification and even of all of those, not all of them are really in the advice business. Some are still in the product sales business, but they figured out CFP helps them sell products, which I’m not the biggest fan of, but that’s kind of the state of our industry right now. It’s a growing domain and it’s really the part of the industry that I spend all of my time focused on.”

michael kitcesMichael Kitces spent many years doing financial planning for clients but has found that he really enjoys teaching advisors. He likes that he can make a bigger impact teaching advisors that can then go out and help clients better.

Michael Kitces and AUM Fees

Michael has a couple of different businesses, like a recruiting business aptly called New Planner Recruiting. And the XY Planning Network which was built around doing financial planning for people in their 20s, 30s, and 40s by just charging a simple monthly subscription fee, no more AUM fees. Not that he is actually that negative on AUM fees.

“It wasn’t that we set out to specifically disrupt the AUM model or anything. My gripe about the AUM model is just that it actually makes advisors like insanely narrowly focused on just this tiny group of people that have giant piles of assets and are willing to hand it over to an advisor. We’ve actually done some of the market sizing estimates on this, about 93% of the population who either is not inclined to delegate their assets or just doesn’t have liquid assets available to hand over to an advisor who basically don’t get served and so our goal with XY Planning Network was just to expand that reach. The X and Y is for gen X and gen Y. We wanted to bring financial planning to people in their 20s, 30s and 40s by just letting them pay for it without needing to buy a product or hand over a pile of assets.”

What a revolutionary concept. Most of us live our lives off of our monthly cash flow so to make financial planning work for most people they set up a fee on a monthly basis because that’s what fits people’s cash flow.

Ignorance of Financial Advisors

Michael has on his website an I believe statement;

“Most of the harms inflicted on consumers by financial advisors occur not due to malice or greed but ignorance. As a result better consumer protections require not only a fiduciary standard for advice but a higher standard for competency.”

I asked him what he meant by that.

“There’s a lot of bad shade throughout the advisor world I think for a lot of very good reasons. The hot topic in advisor world for the past several years has been applying a fiduciary duty to everybody who’s giving advice and requiring that advisors act in the best interest of their clients and frankly it frustrates me that we even have to have that conversation. Like it’s kind of part of the definition of the word advice that it’s for the person who’s receiving the advice. That’s what makes it advice otherwise it’s really just a sales pitch and our industry has a lot of challenges with what essentially has become a blurring of the line between salespeople and actual advisors including an outright blurring of a bunch of the regulatory lines that were supposed to keep these separate 80 years ago when the laws were written and kind of gotten blurred over time because of the evolution of the industry.”

Kitces has long been an ardent supporter that the only way advice can be delivered is in the best interest of the person that’s receiving it. But he thinks what has been forgotten in the industry is that no one is actually asking the corollary question, which is what training does that advisor have to even know what the right advice would be for a client in that situation?

“Because the minimum regulatory standard to be an advisor is a fairly simple regulatory exam. They’re called series exams from FINRA. If you’re a reasonably smart person, you can study for it in a week or two and pass. It’s a two or three hour exam, multiple choice; you have to get a 72. Like the basic bar to give someone advice about their cumulative life savings and something that they have to spent literally 30 to 40 years working on is a three hour regulatory exam you can study for a week or two and a high school diploma and the diploma is technically optional.”

Pretty wild. It is an insanely low bar. He points out that the reason the bar is that low is originally it was a salesperson bar and it is probably fine for a salesperson.

“But at some point we morphed from sales into advice and we still have all of the sales-based educational standards, which to me are just unimaginably, abysmally low. If I’m going to give advice to someone that spent decades accumulating this, and even for those that haven’t accumulated yet, like I can pretty much blow up your financial life in a couple of minutes by giving you horrible advice, then we got to know what the heck we’re talking about. And when I look out there at so many of the bad products that get sold in our industry and so much of the bad advice that happens in our industry, most of the people that I see that do that, they’re not doing it because they’re greedy. They’re not doing it because they’re not acting in their client’s best interest. They’re not doing it because they’re just trying to part people from their money. They’re doing it because they have absolutely no training or education in financial advice.They have no education or training or context to realize that sometimes what their sales managers are teaching them is really bad advice that they’re going out there and selling.

CFP certification is basically the equivalent of about a half a dozen undergrad courses in a specialization in personal finance. Although there are some graduate degree programs and financial planning, the minimum bar for CFP certification, it’s not even graduate level work, it’s undergrad level work. It’s basically six courses but still a hell of a lot better than the excruciatingly low bar we otherwise have, which is the high school diploma and the three hour simple regulatory exam you can study for in a week or two. What I find in practice is that once advisors go through CFP certification and they get better training and knowledge in the industry, they see that some of the stuff the firm has been given them as a spiel to go sell, actually isn’t right.”

They realize that they need to do things differently and probably find a different firm. This has certainly been the driver toward the whole growth of the independence movement in the financial industry. If you really want to be in the business of giving people advice and helping them, it is generally easier to do that when you work for yourself.

He points out that if you want to be able to give independent advice, you really don’t want to work for the companies that manufacture and distribute the products. Medicine long ago tried to put in a separation between the drug companies and the doctors. The doctors prescribed the drugs, but they’re not employed by the drug companies at the time. The financial industry still mostly does that model where the advisors are employed by the companies that manufacture the products that they sell. Michael feels like creating that divide is ultimately one of the things that has to happen in the financial world.

Fiduciary Duty of Financial Advisors

I asked Michael to talk more about a statement on his website. He seems pretty clear about a fiduciary duty, but he seems to waffle a little bit more about how the advisor is compensated and he says, “there is nothing wrong with the suitability standard, but those in sales should be required to hold themselves out as a salesperson, not an adviser. The real distinction is between advisors and salespeople. The fiduciary standard can accommodate both free and commission compensation mechanisms. However, there must be clear standards in a process to which advisors can be held accountable to affirm that a recommendation met the fiduciary obligation despite the compensation involved.”

Ultimately being a fiduciary is about process, not compensation. How can a salesperson legally held to a suitability standard facing serious conflicts of interest really function as a fiduciary? The vast majority of the best investments out there don’t pay a commission. How can someone offer the best investing advice while they’re also selling those funds where the industry uses higher commissions to sell the worst products? I mean it seems to me that even a good person can’t resist that conflict of interest for long.

He answered me in a few ways.

“The first is just to recognize there are degrees of conflict of interest. In essence there are degrees of commission loads. I was in a world where when I started, like one of the annuities on the sales sheet was an annuity. This was back like 20 years ago that paid a 20% upfront commission with a 20 year surrender charge for the company to recover it, so there are some people who bought that thing and it’s literally just coming off the surrender period today after 20 years of my career. I did not sell any of these. That’s just a ludicrously outrageously ginormous number. I’m still stunned that a regulator anywhere in any state ever actually approved that thing but someone did and it actually got sold for a while.

Clearly there’s a level of this that just becomes so painfully egregious, it’s really problematic, but that doesn’t necessarily mean it has to be a problem forever and across the board and actually the areas that I would caution this on are what happens when you get out of the pure investment world alone. If I look at something like you need term insurance. Everybody should have term insurance at some point if they’re going to start a family and particularly once they’re having kids, so at some point we need to get our insurance in place. It’s kind of weird to charge an ongoing fee for managing your term insurance, like you just got to buy the thing once. You have the term insurance. There’s really not a lot to manage on an ongoing basis.

I can charge you a term insurance implementation fee to help you pick the right term insurance, find it, vet it, select the vendor, take into account your health considerations and issues if you’ve got some health complications because then it’s a little messier than just picking whichever one gives you the cheapest quote off of a quote engine, or the reality in our space today is all life insurance is built with some level of commission baked in.

It’s just part of how the products are priced. There essentially is almost no such thing as no load term insurance. From an advisor end, suddenly I have two choices. Option one, I’ll charge you a financial planning fee to help you pick the term insurance and then you can pay a website the commission to buy the thing that I already told you to buy or you can let me get paid for the cost that is already built in and I’m going to give you the same advice because frankly it’s not a very big dollar amount. It doesn’t actually introduce very much of a conflict because it’s not a very big number, but I can avoid you being double charged.

I suppose in my ideal world maybe we would strip all of those commissions structures out of everything. We would bring the cost of everything down and then I can just charge things on the client side but that’s a very real world conflict that a lot of fee-only advisors face today. If I charge you a fee to give you life insurance advice, you are actually going to pay for this twice. Once because the life insurance product has a built in commission and once, because I charged you a fee, and so I’m wary about being sort of overly dogmatic about saying there’s never a version where any level of commission is always universally bad.

For a lot of people we’ve worked with, we are structured as a fee-only firm. We don’t take these commissions, we refer the business out, someone else does the implementation and takes the fee but I still have to look at it and say, I probably could’ve gotten the total cost cheaper for my client by not charging a fee on top of the commission and you know what, like the $200 commission or whatever is going to be for a bunch of hours of work, like I’m not that conflicted. Frankly, it’s not even good business for me.”

Michael Kitces and Financial Advisor Fees

Michael is a big fan of ongoing fee models simply because he feels like it provides a better relationship between the advisor and client.

“What it means from the client end is as soon as that advisor isn’t providing any value anymore, you terminate them. It’s a really simple model. Upfront commissions are problematic there because I get all the money up front and then I actually don’t even have to give you any service because you can’t get the money back because you paid me up front.

Leveling that compensation in an investment context, particularly for something that’s an ongoing service, I think is a much better alignment of everybody’s interest because it makes it easy for the client to fire the advisor as soon as the adviser isn’t delivering value, which is frankly really good pressure on us as advisors to make sure we always coming to the table and delivering value if we want to keep the relationship and continue to get paid. But sometimes the thing just has to get implemented and one of the biggest challenges that I see routinely in the fee-only world is a lack of follow through on a lot of products that don’t pay an ongoing fee because there’s literally no incentive for the advisor to do any of the work to make sure that you follow through.

It’s actually a reverse unhealthy incentive because they can’t charge you an ongoing fee. It’s not great to charge you a standalone fee on top of the commission so I just say, here’s how much term insurance you need, go to our website and do it yourself and A, I don’t think that’s good service and B, people don’t always follow through on that. Life gets busy and they get distracted and other stuff happens and now the client isn’t being served as well and maybe if there was a tiny financial incentive for the advisor it’s not necessarily enough to conflict them, but at least it’s enough to align them with their clients to make sure that the follow through happens.”

The End of AUM Fees

We addressed commissions as a method of paying. One of the questions I got from a listener is will we see the end of AUM fees in our lifetimes? It seems like AUM fees are taking a lot of flack such that many of my fellow financial bloggers won’t even take advertising dollars from advisors who charge any kind of AUM fee at all. I asked Michael if he thought that was fair?

“I don’t think it entirely is. Look, on the one hand there is no question there are a bunch of advisors out there who charge a pretty high AUM fee and basically do nothing after that fee and just pray that inertia will allow them to keep most of their fees which unfortunately kind of happens. The good news is an AUM advisor, you can fire your adviser anytime you want. The bad news is, it’s still kind of a pain in the butt because you’ve got to find someone new and you’ve got to find place to move your money and you’ve got to get it reinvested and that’s sort of a pain when you’re busy with the rest of your life.  So there are a lot of bad advisors who manage to keep fees way longer than they should for providing remarkably little service, but there’s also a domain of advisors that are actively trying to deliver value for every dollar that they’re charging their clients. They simply want from a business end a relatively stable, ongoing business arrangement where everybody’s interests are aligned.

You’d be amazed how interested advisers get about exactly how well their client’s portfolios are performing when you’re at risk of getting fired if you don’t do a good job for it, and frankly, if I was the client I kind of want my advisor that obsessed about how I’m doing. That’s probably a good thing for aligning our interests.”

He also points out that there are a large group of people that just want to delegate the managing of their money to someone else and thinks it is hard to come up with a more aligned model than running on an AUM model. The challenge is the big group of people that just want advice but not to hand over their portfolio, and advisors are only offering an AUM model that doesn’t fit for them. That is one reason he created the XY Planning Network, to give people other ways of working with advisors. But the fact that a monthly subscription model may be a better fit for you than an AUM model doesn’t mean the AUM model is bad.

The truth is an AUM fee is a great deal at a level of assets of $100,000 if you’re paying 1% a year. That’s a heck of a deal for financial advice, but what I see happen is people don’t decrease the AUM fee very quickly as assets go up. So I asked Michael how much does he think AUM fees should decrease as assets grow for full service financial planning and investment management? And what does he think is really a fair total annual fee in dollars for good financial advice from a full service provider?

“There certainly is a tendency that fees tend to decrease as assets increase. We call them graduated fee schedules. X% of the first 500K and a lower percentage of the next 500 and a lower percentage of the next million and it gets tiered out. Different advisers put the tiers at different places and frankly that’s often just a reflection of who the advisors target clientele really are at the end of the day. Some firms will have a fairly aggressive fee schedule that gives you a break every 100,000, right up to half a million dollars and then you’d go and look and it’s like, well look at their average client is about a half a million dollars. That’s where they’re targeted.

I see some firms out there where the first breakpoint doesn’t come until $3 million, except their average client is 10. That’s actually kind of like the hundred thousand dollars break point for the half a million dollar client. They’re just targeted to a very different clientele. The problem I think that crops up in our industry is as advisors we are terrible at saying who we’re for and who we’re not for. For a lot of us that kind of comes from our roots that if you’ve been in the business for more than 15 to 20 years, I can pretty much guarantee you started out as a salesperson because those were the only jobs 20 years ago. The advice jobs were all more recent.

When we start out in the sales world, we kind of start out with this mentality of anybody and everybody can be a prospect for me and so we don’t tend to get very specific about who we serve, but when you actually look at advisory firms, you see some very strong and consistent trends that the larger the advisory firm the more affluent the clients they tend to have and the more services they tend to provide for them. If you actually look at the industry numbers, like firms that serve clients with $10 million do not actually have higher profit margins than firms that serve clients with $1 million and they do not have higher profit margins than firms that serve clients that have $200,000.”

For a client that is paying AUM fees on $10 million, the advisor has to demonstrate a whole lot of value or they will get fired. Since they want to keep that client, they figure out how to add more value and that is why you end up seeing that advisory firms with $10 million clients basically have the same profit margins as firms that have $200,000 clients.

“The weirdness comes when a firm that typically works with people who have $200,000 and gets a $10 million client because now they’re charging them 50 times as much or 30 or 40 times as much with the break points but they’re delivering $200,000 client service and charging $10 million client fees and so the question I’d actually encourage asking and frankly you can figure it out just by looking up advisors forms is, who is your average client? What is the average client that you’re actually working with, particularly if you’re looking at an AUM model?”

You can look that up on their ADV forms which we link to with all of our recommended financial advisors. There are fields asking how many clients they have and what is the total assets that they manage. Then you can divide that and figure out who is their average client.

“The biggest problems come when you’re materially larger than the average client at that firm. That’s really where the gaps start to happen, where you might be paying 50% or 100% or 200% more than the average client and you may not be getting all that much more service. When you look at firms that average $10 million clients versus firms that average $1 million clients, very different depth of service and that’s part of what helps to justify the fees because otherwise frankly we would just get fired.”

I asked him what are the big differences in the services being provided to a $10 million client versus a $1 million client? He said it varies by firm. But with a bigger firm you may be getting deeper expertise. They may have law degrees and accounting degrees in addition to CFP certification whereas the firm with million dollar clients may just be CFP certified, so you end up buying sort of an implicit deeper level of expertise, which means when you start having to doing complex tax planning across your business and personal assets or complex estate planning across the state taxes in multiple states that you may be exposed to, you have a firm that just has a level of depth of expertise to be able to handle that.

Other firms will offer more services like doing your tax returns and business consulting advice. Or provide more meetings with the advisor. Instead of a meeting once a year,  you schedule anytime that you want a meeting.

“The million dollar firm will say, you need to update your will. The $10 million firm, we will go with you to the meeting and we will make sure your lawyer is good at what he does or she does and if they’re not, we’ll recommend another one. If you don’t understand what they’re saying, we’ll help you translate legalese back to English and we’ll support the processes, be the quarterback that coordinates all of these different professionals. If you’re a 10 millionaire client and have dealt with a whole bunch of different professionals, you’ve lived in a world where it’s really a pain that no one person knows what everybody is doing. That becomes one of the roles of the advisor at $10 million firms; we’ll quarterback across the six affiliated professionals that you work with.”

 

Real Estate Investment

Michael felt like some of those $10 million firms are also providing help evaluating and vetting private investment deals for accredited investors, so I asked him how investing in rental real estate fits into a portfolio?

“The economics of rental real estate can certainly be pretty appealing, but how well do you actually know the real estate in your area? We saw a lot of people try to buy rental real estate 12 years ago and blow up, before the financial crisis and the real estate crash because they didn’t actually know as much about vetting real estate as they thought they did.

There is an expertise demand around. Do you really know the risks associated with the real estate? Do you really know the appreciation potential or the risk of declining potential for real estate wherever it is that you’re going to do it? You either need enough dollars and a sizable enough real estate property that you can afford a property manager or you have to accept that a portion of your time is going to be a landlord. To each their own about whether they want to take the time to be a landlord but at some point when you’re spending a bunch of time being a landlord you’re actually not getting paid for your rental real estate, you’re getting paid for your landlord work and fine side hustle if you want it, but you’re really starting to get paid for your labor now and not just your capital.”

To him it really comes down to how much time do you actually want to spend on that stuff and how confident are you in your expertise to actually be able to make sure you’re getting a good property in a good area that you’re buying at an appropriate price and will be able to rent at an appropriate price and be able to avoid having any substantial level of vacancies while you take the time to manage all that. He recognizes that if that sounds exciting to you there is certainly a good business opportunity around real estate, and while there’s a downside risk of real estate leverage, there’s also a lot of upside opportunity in the leverage that you can get on real estate. Just be prepared to spend either your time or your money to be able to manage it and pick the right investment.

Non Advisor Financial Bloggers

Michael interacts with a lot of non advisor financial bloggers. I asked him what we get wrong about financial advisors and about investing most often?

“I mean I think part of the challenge, sort of like a caveat, they get wrong but they don’t, but they do is this mentality that none of us do anything for our value, we’re just trying to get our fees or our commissions and keep them and move onto the next person, and to be fair there are a whole lot of those in our industry. I hate them as much as all the other bloggers do. I try to get them out as much as the rest of them do. That’s part of the whole mission of our site is like, can we at least educate them to make them better so that they can realize some of the bad advice they’re giving and get them to give better advice, so they’re out there.

I’m not going to deny that they’re out there. In fact by industry numbers the majority of advisors work for a broker dealer which is a sales organization or a product distribution organization and don’t have CFP certification. I’ll grant kind of a fair criticism to us that literally like the average advisor is a salesperson that doesn’t have a CFP, but that doesn’t mean all advisors are bad. There is a segment that really are trying to lift this up into a profession from our end that really take the duty to serve clients well very seriously and they take the burden of professionalism and expertise and care that we actually want to be successful in our businesses, which means in part earning your damn fee every year, year after year, or you’re going to get fired and your business is going to blow up, and there are a lot of good advisors out there doing good work and frankly that’s the segment of our industry that’s growing.”

He said the total head count of financial advisors is declining. They are slowing getting rid of the bad ones. There are good advisors out there and the number is growing. So basically stop bad mouthing financial advisors.

The other thing he says we get wrong is that we tend to write for and attract a readership of do-it-yourself-oriented readers. But there is a whole other side of consumers out there who don’t want to spend the time on this stuff. They really want to delegate and there is nothing wrong with them delegating. Just because you are very do-it-yourself-inclined doesn’t mean everybody else is wired that way. He said that a quarter of people are full on do-it-yourselfers and a quarter of people are full on delegators and have no interest in doing it themselves. I think the important thing is to make sure you are hiring a good financial advisor who is giving you good advice at a fair price.

He was asked what financial advisors botch most often, and he thought it was that they end up with this world view or a particularly deep expertise in whatever channel they started in and tend to be much weaker in the others.

“Our knowledge often ends up being compartmentalized by channel because we come up from these roots of regulation by channel or by product type and there’s really only a limited subset of advisors who truly I think do the proactive self education and professional standards lifting to really make themselves experts across more domains. So we tend to have blind spots based on essentially whatever type of company happened to give us our first job 20 or 30 years ago.”

 

Financial Advisors Focusing on Physicians

A lot of doctors like having an advisor that works with a lot of doctor clients. Is that important?

“In general I would say yes. I’m actually one of these people who even from the advisor’s side of the industry pound the table pretty hard that advisors should focus more on trying to specialize in different types of clientele as opposed to this mentality of we can be everything to everyone. Particularly in areas like medicine and being a doctor where it is above average income, there’re a lot more dollars at stake, particularly if you’re running your practice. There’s a whole other level about how to manage your medical practice that’s really important that I think is greatly benefited by finding someone who actually specializes in doctors like you.

I encourage it regularly from the adviser end, like form a niche, form some kind of specialization, because, frankly, if all you do is work with doctors and eventually doctor compensation plans and how contracts are negotiated with hospitals and how to run a medical practice and what the standard ratios are, and how to find a good office manager for your medical practice, all these things that impact your career as a doctor, from the advisor and you can add so much more value from the doctor end, you’re likely to find an advisor who can add a lot more value for you if you find someone who works with people like you.”

Ending

Michael Kitces really wants to stress that you focus on what really rewards you for your time. Choose to delegate and recognize that building your own financial wealth in the long run is actually much more about your ability to grow your income by more than you grow your lifestyle than any of the saving and investment stuff that we discussed. The growth rate of your portfolio is impacted largely by spending less than you make and figuring out how to grow your income. The biggest driver of your longterm financial wealth is your ability to lift your income and your ability to manage your expenses. Find enjoyment in the dollars that you’re spending and don’t just get stuck on the treadmill of always wanting to buy more.

Full Transcription

WCI: This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.

WCI: Welcome to the White Coat Investor podcast number 124. Financial advisors, the good, the bad, and the ugly with Michael Kitces. Thanks so much for what you do. It’s really important work that you’re out there doing each day and sometimes we forget how important it is. I mean, at the end of the day, all of us feel like we are going to the office or we’re going to the factory and we’re making widgets on the line, but sometimes we forget that the widgets we deal with, particularly as physicians and other healthcare workers are pretty important widgets, so thank you for the sacrifices you’ve made to do that. You know, I’m pretty excited. In between the time I record this and the time it runs, I’m going to go down to Lake Powell on vacation, not once but twice, so I’m really looking forward to this next month. September is not a month where I tend to do a lot of White Coat Investor work, it is just a time where if I could I’d spend all 30 days down there at Lake Powell.

WCI: It’s just a wonderful time to be down in Southern Utah where the days aren’t quite as long. It’s not quite as hot, but the water is still super warm and so this is not a month when I do a lot of speaking gigs, I don’t go to a lot of conferences, I don’t write books, I don’t do any of that stuff, so I’m really looking forward to it as I record this just before September. By the time you hear it, I’ll be halfway through that glorious month but something we’ve been working on in August quite a bit is fixing our email issues. I know a lot of you have gotten an extra email or two or maybe didn’t get an email you were expecting or got sent through financial bootcamp three times or whatever it might be, so any snafus you’ve had with email in the last few months I just want to apologize for.

WCI: I think we’ve got them all worked out. I’ve actually changed email providers to a better service I think, and it looks like it’s going to work very well for us. We’re going to deliver the emails to those people who want them, help us not send emails to people who don’t want them and mostly just really facilitate our mission to help those who wear the white coat get a fair shake on Wall Street. You can sign up for our emails. If you have never gotten an email from me, you’re really missing out. If you go to whitecoatinvestor.com/email you will see there are a number of things that you can sign up for. You can sign up for our free monthly newsletter. Okay. This is like a special secret blog post that nobody else ever gets. It doesn’t run on the blog.

WCI: It’s an extra blog post each month but also includes a market report, includes announcements and special deals. Also includes a set of links to the best physician and other high income professional related financial information on the web for that month, and also it tells you about all the new stuff we’re doing around here at the White Coat Investors. So, please sign up for that. Not only do you get that newsletter, but you also, when you sign up for the newsletter you get the 12 step financial bootcamp. These are 12 emails that come to you and help you catch up to the rest of the White Coat Investor community as quickly and painlessly as possible. Other options you’ll see when you go to sign up there, we have a weekly digest and what this is, is a very quick blurb and a title that you have to click on to go to the blog post for everything published in the last week, so it’s a really easy way to see what’s come out. It only comes to you once a week and you only have to click on what you’re interested in.

WCI: The next option is kind of for the hardcore WCI fan, you get every single blog post or podcast notes that shows up on the website, emailed to your email box the morning it runs and so yes, you’re going to get a lot of email from me. If you sign up for that option, it’s going to come about six times a week but if you don’t want to miss stuff, you don’t want to have to go to the blog to get stuff, then you will get your emails, you’ll get all the email basically. We also have a real estate list for opportunities with regards to real estate investing that you can check that box and get those emails as well. Those ones are going to feel a little bit more marketing like… than the others.

WCI: I’m going to be talking about some of the partnerships I have as well as some of the investments I’ve had with real estate and there’ll be invitations for you to invest alongside me or with some of these partners and learn more about it so if that’s something you’re interested in, then sign up for that. If you’re like, dude, I’m not going to invest in anything but a 3-Fund Vanguard index fund portfolio, don’t bother checking that box or you’re probably going to feel like I’m trying to sell to you all the time if you checked that box and start getting those emails. Obviously all of these you can start and stop at will. Just be careful not to hit what I call the nuclear unsubscribe button, which basically if you hit that, I’m not going to email you anything including anything related to any courses you bought from me, any conferences you registered for. In fact, I’ve got a few people registered for WCI Con in March that I can’t email because they have unsubscribed from my list.

WCI: Rather than hitting the nuclear unsubscribe button, I would rather see you pick and choose what emails you want to get. I really don’t want to send you emails you don’t want, and so I have tried to make it as easy as possible with this new email system for you to choose exactly what you get. Sign up for all that, whitecoatinvestor.com/email. This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993. She started the firm while attending Washington University in St Louis and specializes in individual term life disability and long-term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. For more information, visit setforlifeinsurance.com.

WCI: Our quote of the day today comes from Peter Lynch, who says everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether. Isn’t that the truth. Your behavior matters. It matters a lot and the investor matters a lot more than the investment in a lot of ways. All right. Today’s special guest is financial advisor, Michael Kitces the brains behind Nerd’s Eye View, which I believe is the most widely read website aimed at educating financial advisors in the world. I mean, he’s got 55,000 Twitter followers and 35,000 people on his mailing list and speaks at dozens of conferences every year. If you don’t know him, you might be one of the very few. Michael, welcome to the White Coat Investor podcast.

Michael Kitces: Thank you Jim. Looking forward to being here and chatting today about financial advisor world and the industry and all of our strange intersections between what we do and what your community does.

WCI: Yeah, I’m looking forward to it. Let’s start with a few questions just about you though. Can you tell us a little bit about your upbringing growing up?
Michael Kitces: I’ll go all the way back. I’m a Washington, DC native, which if you’re from DC is actually very unique. The kind of the running joke is no one from DC is actually from DC. They’re all from somewhere else. You come to DC for a few years because you’re attached to a job or the political system or a contracting thing or some kind of gig and then you go back to wherever you’re from, so the standard greeting in DC is always what do you do and where are you from because I need to know what you do to make sure you’re not on like the other side of some political aisles. It’s very political here and then where are you from because no one’s from here. I’m actually a native Washingtonian. Born and raised in the area. Left for a few years for school, came back afterwards, been parked here ever since. I live about a mile and a half up the street from the house I grew up in. My folks are still living there, so I’m very much a set roots and park kind of guy in the area here.

WCI: Wealthy upbringing, middle class, relatively poor. What was kind of your background?

Michael Kitces: I think we would fit into somewhere between middle class, upper middle class upbringing. My folks were both computer science folks, so working for… one worked for a company called SAIC for most of his career, which was for a long time actually the largest employee owned tech company. They eventually IPO back in the early 2000s but my father was there close to 25 years from the ’70s until after the 2000s and he retired and my mother worked for a series of defense contractors that ultimately got rolled up into Northrop Grumman after a long series of acquisitions in the ’80s and ’90s.

Michael Kitces: I really actually grew up a computer nerd for the most part, being the child of two computer scientists. DC in general, like it’s a fairly affluent area here. I never really grew up with much awareness of that beyond just our needs were covered. I was actually pretty money ignorant growing up just it was never particularly a topic of conversation either that we were doing well or that we were not doing well just like needs were covered as child.
WCI: How did you end up in financial services given all that computer science background and interest?

Michael Kitces: It was really a fairly random landing as it were. I was a liberal arts grad and was a psychology major theater minor and actually on a pre-med track. As some may recall, the 1990s was kind of the early heyday of people being fascinated with emergency medicine, not the least of which because ER was extremely popular at the time and I was fascinated with the medicine side of things so I was actually an EMT in college for several years and did lots of internal work and shadowing at the hospitals in the area and was really kind of set on that track and then had a fairly abrupt, I don’t know, shift just a few months before graduation. Basically just deciding I’m really fascinated with medicine, but I don’t want to disappear for the decade of my 20s in med school plus residency and everything that follows and just decided I wanted to go a different track and wasn’t quite sure what that track was going to be.

Michael Kitces: I was a… so I joke sometimes. Like I was a psychology major, theater minor, pre-med student and the only thing I figured out by the end of college was I didn’t want to do psychology, theater or medicine. I needed a job and ended up landing fairly randomly in financial services, fell for the pitch from a sales manager at a life insurance company. A hardworking, good people and you’ll have a great potential for your career and lots of upside but you’ve got to work really hard.

Michael Kitces: I was a 22 year old testosterone driven male, so I’m like, I can do this and so literally like the first business day after graduation I reported for work in the financial services industry and turned out I was a horrible prospector in sales person, so the life insurance world was not for me but I liked the industry enough that I stayed and bounced around and it took a couple of years before I found CFP certification in this whole world of… instead of just having your company’s product and trying to sell it to everybody you meet, you actually just get to know the people you meet, understand their problems and then just help them with whatever they need.

Michael Kitces: My fairly naive, 20 something year old world, frankly, I was just like, geez, that just seems easier. Find out what they need and give them the thing they need. It seems a lot easier than just trying to sell the thing you have to everybody you meet, so I think I-
WCI: Amazing how much easier it is and how much better you feel about yourself that evening, huh.

Michael Kitces: Yeah. I started migrating down that way of probably just the path of least resistance in the early years and then it was until about three or four years in that I really started to see the… I guess kind of the impact of what happens when you really help people on the financial advice side and how transformative that it can be that I really started kind of finding a passion for the industry in this particular subset and side of the industry which back then was really a small area. When I started, fewer than one in 10 advisors had CFP certification. It was really kind of a rare niche thing and to itself to go get this advanced education to give people advice that isn’t just the thing you’re selling.

WCI: Yeah, well I’m glad it’s getting bigger.
Michael Kitces: It’s getting bigger. It’s broadening now. We still have a long ways to go. We’re still probably only about one in three advisers have something like CFP certification and even of all of those, not all of them are really in the advice business. Some are still in the product sales business, but they figured out CFP helps them sell products, which I’m not the biggest fan of, but that’s kind of the state of our industry right now. It’s a growing domain and it’s really the part of the industry that I spend all of my time focused on.

Michael Kitces: When we publish Nerd’s Eye View as I sometimes joke, we’re serious about the advisors who are serious about their craft, like the ones who actually view this as a profession as a calling and want to get better at it and actually want to figure out how to be a more successful advisor and how to serve their clients better with better expertise and that’s the audience we serve and as you mentioned at the top of the show, have built a pretty good following now amongst that subset of leading advisors.

WCI: I mean, that sounds like that was your motivation behind blogging. What made you think that shoot, if I just sit down and start typing stuff into the internet, somebody will read it and I’ll change the industry?

Michael Kitces: It didn’t quite start out that grand. The first 10 years or so I was in the industry across a couple of different firms doing the financial planning work for clients. I was for many years a director of financial planning for a fast growing independent firm and was teaching and training planners and delivered literally hundreds and hundreds of plans to clients of the firm and really just on the side started doing a little bit of writing and speaking in the industry. I’m one of those nerdy types that has the alphabet soup of degrees and designations after my name and so I would go research something that we were working on for a client and then just kind of had this itch or calling of like I just studied this thing, I pretty much know more about this like random fact thing than anybody else out there. I’m going to write an article and just share it with other people.

Michael Kitces: I started writing a couple of articles for industry trade publication, so like financial planning magazine and so you’re doing some original research and submitting it to the Journal of Financial Planning and this was like the mid 2000s and so if you kind of dial the clock back 15 years or so, the internet was around but most publications were still print first, digital second and so I would write these fairly long form in depth articles of like here’s this expertise that I’ve taken deeper than anybody else. I want to share this with everybody else and then the magazine editors would come back and say, well, we had to cut your article by about 50% because it has to fit the two pages of available space in the magazine which only has this many inches of column width after the graphics we are inserting.

Michael Kitces: I just started getting really frustrated. I’m like, this is the internet age. You can just keep hitting page down, like why do we have to chop these in-depth articles into something that’s plain vanilla and bland because you cut out all the depth when you’re trying to fit into a two page article, like Why can’t we just use the unlimited space of the internet? And so in part out of basically frustration, I decided to make the shift in early 2008. Surely coincidentally what happened later that year, to say… I actually want to do this writing and speaking thing myself. I’m just going to publish a paid newsletter if I want it to be 12 pages of little single space, small font stuff so I can nerd out on this topic. I’m just going to publish it myself and I’ll sell it for 150 bucks a year and see if I can get a couple thousand subscribers and make a decent living.

Michael Kitces: It really actually started out as a newsletter business that would be complimented by speaking at industry conferences and I have this pretty straight forward vision of like the newsletter would promote my expertise so I could get speaking engagements and then the speaking engagements would promote my brand so I could get more newsletter subscribers and I was going to build that virtuous circle and it actually wasn’t until about two and a half years later in the fall of 2010 that I actually launched a blog and early on the blog only came about because I wanted to say some things about kind of practice management and industry trends and just how advisors could run their businesses better and just some of the things I was seeing happening in the industry that I wanted to put my 2 cents in on and the problem with the newsletter is it was designed to give advisers continuing education credit and in our world you cannot get continuing education credit for running your business better.
Michael Kitces: You only get the continuing education credit for like the actual technical knowledge stuff and so I couldn’t put this industry trends and business commentary in the newsletter I was publishing and so I really just launched the blog because I needed a place to put it and I was like, I’m going to pen my thoughts on the internet. Other industries have blogs. We don’t really have any blogs in our industry or really didn’t back in the late 2000s into 2010. The model wasn’t much more than… you’re nobody else’s financial planner blogger dude, so I guess I’m going to go be financial planner blogger dude.

WCI: That’s worked out well so far. Do you find that you enjoy teaching advisors more or advising clients more?

Michael Kitces: I have to admit. I really enjoy teaching advisors more. I think that was part of the natural reason that I just… I gravitated to the side having sat across from clients for the first almost 10 years of my career and nothing wrong with doing the advising for clients. I did it a long time and I did enjoy the work that we did and the impact that we had but I’m kind of a broad impact guy. It’s just sort of how I’m wired and so for me it started coming back to, I can do this cool thing for one of our clients or I can take this expertise I learned and write an article about it and help a thousand advisers who each have a hundred clients and now instead of just changing the client’s life that I’m sitting across from I can impact 100,000 people.
WCI: Yeah. Really scales up quickly, doesn’t it?

Michael Kitces: Yeah. By getting this multiplier effect because advisors all have their own wide reach of clients and again, I’m just focused on that subset of advisors who actually care about the fact that this is an emerging profession and want to treat themselves like professionals but there are tens of thousands of those people and so when tens of thousands of those people each are serving their hundred great clients, all of a sudden like we’re having a multimillion person impact and that’s just much more driving and motivating for me and so I kind of walked away from the salary and the partner track and all the stuff that was available on the advisor world to do this kind of writing, speaking, blogging, trying to educate advisors and let the advisory industry the… the irony is that actually ended up having such a positive impact on our firm that I became a partner a few years later anyways, can never quite tell how these things are going to work out and it’s actually evolved now into building a growing series of businesses that support the advisory industry.

Michael Kitces: We have a whole bunch of different outsourced and back office business and service providers for other advisory firms to help them be more successful in what they do while the blog tries to educate them about how to be more effective sitting across from their clients.

WCI: Yeah, it’s a good combination. It sounds like it’s working out great as a business as well. I want to take a question from… this one comes off Twitter from Ron Lieber, the New York Times columnist.
Michael Kitces: Yes.

WCI: Who wants to know how much of your existence you’ve outsourced to speak and work as much as you do. I mean your website says you’re doing 50 to 70 speaking gigs a year. I do 10 to 15 and I feel like that’s about twice as many as I want to do. How do you keep this up and what do you charge for speaking and what does seven days of your week look like?
Michael Kitces: It’s definitely gotten a little bit nutty as it’s evolved. I really started the speaking… again kind of in the mid 2000s when I was still at the advisory firm and I would just kind of go out on the side and speak for the occasional like local Financial Planning Association chapter meeting and charge 500 bucks just so I can say like I’m a paid speaker. It took me almost two years to be willing to charge anything because I felt so like nervous.
WCI: That sounds familiar. I think $500 was my first fee too.

Michael Kitces: Yeah, like it’s just that impostor syndrome thing and it wasn’t until I actually did the first one and I remember very clearly I was sending them the invoice and the end, it was something like $700 for the plane ticket and the hotel room and the rest and then I put my $500 fee on there. I was looking and I was like, they already spent $700 to get me there. I think I’ve made this $500 thing a bigger deal in my head than it probably actually was for them, like I kind of got to get over this and slowly found the courage to raise fees over time and charge more of what I was worth for the impact that I was having.
Michael Kitces: It started very gradually and grew over time and the good news of that is it meant that I had some time to really actually figure out like how do I manage my time, manage my day, outsource and try to leverage myself up and kind of got inculcated with this philosophy early on in my career. It was actually kind of a practice management trend in the early 2000s in the advisor world that rubbed off on me. That was all about how to be more successful as an advisor is to focus on your single highest and best use. Do that one thing, in the Dan Sullivan Strategic Coach world is called finding your unique ability. You’re supposed to find your unique ability and delegate and let go of everything else and just try to spend as much time as you can at the things that you are best at and I really took that advice to heart and so throughout the past 10 years as the business has grown, I just started actively outsourcing pieces.

Michael Kitces: It started with outsourcing my bookkeeping and then all of the invoicing and billing for the speaking agreements and then technology support to help run the website so I wasn’t spending as much time on it and then getting like a full on executive assistant just to help with coordinating the rest of the stuff and it’s really just continued to grow incrementally over the years up until about two years ago where I had two full time staff members supporting me. One kind of on the personal side of just being an executive assistant, handling everything from bookkeeping and invoicing and contracting for engagements to supporting our members and our members section that their CE credits are getting reported and then the second one that was just helping me on some of the background research work that I was doing.

Michael Kitces: I got to the point where I was traveling so much for speaking engagements that I just couldn’t like roll up my sleeves and dive into a spreadsheet for a few days the way that I had in years past, and so it was just this slow and steady trying to leverage myself by finding more and more tasks to hand off so that I could focus more of my time on the highest best use stuff from the sought of simple business economic perspective, like if I can do a thing that ultimately gets me paid one or $200 an hour or more and I can delegate it to someone I can hire who costs 30 or $50 an hour, ultimately I’m expanding the value of the business. In fact, even if it takes them literally twice as long as it would have taken me to do it myself, it’s still $100 for the airtime and I can build my time at $200 an hour or more and that makes my business grow.
Michael Kitces: That was really the philosophy of the whole thing and I just kept relentlessly sort of doing it and pushing in that direction to the point where almost all I was doing was the writing, the speaking, working with my business partners and some of the businesses we were creating and had offloaded and delegated virtually everything else.

WCI: What surprised you the most as Nerd’s Eye View got big?
Michael Kitces: I think the first was just the Nerd’s Eye View got big. We went through just multiple years in a row of these multi 100% growth compounding rates and of course in the… really early on, like it’s not that hard to grow by a couple of hundred percent because the denominator’s really small but then it keeps happening for a bunch of years and all of a sudden the compounding starts to really add up and so what started out for me is really just a blog on the side. Even though I’d gone out on my own in an independent world, it was originally a paid newsletter plus speaking business. That was all I set out to do originally. The blog was truly just… because I wanted a place to dump some ideas and share them out there with the world, I didn’t have any place else to put them and I just had to get them out of my head, so I made my own little digital soapbox that I could stand on and shout from for a little bit.

Michael Kitces: The growth and the compounding of it through the first three or four years alone, I had no idea how big it would grow. It ultimately more than tripled my speaking business in a span of about three years. It ultimately helped me become a partner in the firm because even though I was writing primarily for advisors, a lot of people were seeking out our information as well. We write long form dense articles frankly, the kind of stuff that most people don’t want to read, not even all advisers want to read much less the average investor.

Michael Kitces: Unless you’re really, really smart and have a lot at stake, and then you actually want to slog through this stuff and try to figure it out and we found over time that there were a subset of people that would read our stuff and say, yeah, you know what? This is actually messier than I realize like I’m just going to hire a professional to get some help and this Kitces guy seems to know what he’s doing, so let’s reach out to his firm because these are all the people that I trained over the years and so it led to becoming a partner at the firm and then it led to launching all of these other businesses.

Michael Kitces: We have a recruiting business aptly called New Planner Recruiting . We have an outsourced investment business for other advisors so that they can focus on the financial planning and will help them with their investments and then in 2014 we launched XY Planning Network which was built around doing financial planning for people in their 20s, 30s, and 40s by just charging a simple monthly subscription fee, so no more AUM fees and all the rest. Not that I’m actually that negative on AUM fees, I know… you’re a little bit more negative on them. We didn’t really…
WCI: Not far from being the most negative on them. I can tell you that. I know of several people that are far more negative about them than I am that just think it’s almost a crime to charge them.

Michael Kitces: It wasn’t that we set out to specifically disrupt the AUM model or anything. My gripe about the AUM model is just that it actually makes advisors like insanely narrowly focused on just this tiny group of people that have giant piles of assets and are willing to hand it over to an advisor and it leaves… We’ve actually done some of the market sizing estimates on this, about 93% of the population who either is not inclined to delegate their assets or just doesn’t have liquid assets available to hand over to an advisor who basically don’t get served and so our goal with XY Planning Network was just to expand that reach.
Michael Kitces: The X and Y is for gen X and gen Y. We wanted to bring financial planning to people in their 20s, 30s and 40s by just letting them pay for it without needing to buy a product or hand over a pile of assets.
WCI: What a revolutionary concept.

Michael Kitces: Yeah. Imagine that and if you’re going to pay something like financial planning or just any substantive service on an ongoing basis… most of us live our lives off of our monthly cashflow, you know, dollars in dollars out, so we kind of pounded the table around, well, if you want to do this and make it work for people, you just have to set the fee on a monthly basis because that’s what fits people’s cash flow and so we started that, basically launched off the blog and five years later that’s now… we just crossed a thousand advisors. We have almost 50 employees out in Bozeman, Montana, where my co-founder is and where we’re building the business.

Michael Kitces: As someone that just went to pen this blog and newsletter because I just wanted to write things and not have to be chopped down to the physical print size of a two page magazine column like it absolutely amazes me that we now have one of the largest media platforms in the advisor space and we spawned all these different businesses off of it as well that are now having this ever expanding compounding reach as well like across all the different businesses there’s almost 70 employees now, not including our advisory firm, which is another 50 employees and being an introvert who just wanted to write things on the internet. The idea that I helped to create a hundred plus jobs for a thousand plus advisors who help 100,000 people just kind of blows my mind.

WCI: It’s pretty awesome, isn’t it? It’s a good segue into something I want to talk about. On your website, you have an I believe statement that includes this statement. It says most of the harms inflicted on consumers by financial advisors occur not due to malice or greed but ignorance. As a result better consumer protections require not only a fiduciary standard for advice but a higher standard for competency. Tell me what you mean by that.

Michael Kitces: There’s a lot of bad shade throughout advisor world I think for a lot of very good reasons. The hot topic in advisor world for the past several years has been applying a fiduciary duty to everybody who’s giving advice and requiring that advisors act in the best interest of their clients and frankly it frustrates me that we even have to have that conversation. Like it’s kind of part of the definition of the word advice that like it’s for the person who’s receiving the advice. That’s what makes it advice otherwise it’s really just a sales pitch and our industry has a lot of challenges with what essentially has become a blurring of the line between salespeople and actual advisors including like an outright blurring of a bunch of the regulatory lines that were supposed to keep these separate 80 years ago when the laws were written and kind of gotten blurred over time because of the evolution of the industry.

Michael Kitces: I’ve long been an ardent supporter that the only way advice can be delivered is… in the best interest the person that’s receiving it, that’s sort of a definitional thing to me, but the piece I find that often gets forgotten even within our own industry by a lot of the people that advocate for fiduciary standard for advisers is we’ve… I think I’ve gotten so narrowly focused on this idea that we have to make sure that people are giving advice in the best interests of their clients that nobody is actually asking the corollary question, which is what training does that advisor have to even know what the right advice would be for a client in that situation? Because the minimum regulatory standard to be an advisor is a fairly simple regulatory exam. They’re called series exams from FINRA. If you’re a reasonably smart person, you can study for it in a week or two and pass. I’s a two or three hour exam, multiple choice, you got to get a 72.

Michael Kitces: Like the basic bar to give someone advice about their cumulative life savings and something that they have to spent literally 30 to 40 years working on is a three hour regulatory exam you can study for a week or two and a high school diploma and the diploma is technically optional.
WCI: Yeah, it’s pretty wild isn’t it?

Michael Kitces: Like it’s an insanely low bar and the reason the bar is that low is originally it was a sales person bar and I think that’s kind of fine for a salesperson. Like if all you’re doing is selling a product, fine, get your three hour regulatory exam, after you study for a few weeks we’ll put you through product training and then you can go sell the product. I don’t love the sales world, but if we’re just going to let salespeople be salespeople, like that’s a fine model but at some point we morphed from sales into advice and we still have all of the sales based educational standards which to me are just unimaginably abysmally low.

Michael Kitces: It freaked me out when I started my career. The first time it kind of dawned on me like, I’m giving advice to these people about stuff they have literally been accumulating longer than I’ve been alive and I could blow all of that up in about five minutes of bad advice and I have absolutely no training whatsoever in anything that has to do with advice in order to be an advisor and sell my services to these people and that just seems horribly wrong. For me, that was part of why I went and got two masters degrees and a whole bunch of designations like I want to know what the hell I was talking about.

Michael Kitces: If I’m going to give advice to someone that spent decades accumulating this and even for those that haven’t accumulated yet, like I can pretty much blow up your financial life in a couple of minutes by giving you horrible advice, that we got to know what the heck we’re talking about and when I look out there at so many of the bad products that get sold in our industry and so much of the bad advice that happens in our industry, most of the people that I see that do that, they’re not doing it because they’re greedy. They’re not doing it because they’re not acting in their client’s best interest. They’re not doing it because they’re just trying to part people from their money.
Michael Kitces: They’re doing it because they have absolutely no training and education and financial advice, so what’s happened is a product sales manager has taught them the product that you’re selling is the greatest thing since sliced bread and you were doing a service to all mankind by selling it to everybody that you can meet and if they have absolutely no other training or education otherwise they often believe it. Like, why wouldn’t you? And so, so much of the harm that I find that happens in our industry is really not driven by malice or greed although there’s a little of it. We definitely have some of that in our industry as well and I hope-
WCI: You say people don’t become financial advisors for the same reason other people become kindergarten or teachers.

Michael Kitces: Well, so a bunch do so like that’s part of what we’re finding is… yeah there’s a segment out there that just wants to make as much money as they possibly can, wolf of Wall Street style give or take a little, but most of the people now that are coming in on the financial planning side, your advice is a helping profession and they’re coming in with a helping profession mentality but yeah, I kind of feel like preaching to the choir given your medical background and your audience like it’s not a brilliant idea… like it’s not a brilliant breakthrough to say maybe if people are going to be giving that level of professional advice they should have to go to school for it first like all of you did, but all of us actually don’t have to.

Michael Kitces: A lot of this bad advice ends up being given not because the people are greedy, but just they literally don’t know any better. They have no education or training or context to realize that sometimes what their sales managers are teaching them is really bad advice, that they’re going out there and selling. It’s actually one of the reasons why both… we published the blog and occasionally do article of… we don’t word it this way, but basically like, here’s why what your sales manager told you is wrong and how the stuff really works and part of why we pound the table so hard for things like CFP certification and professional designations in our world, it’s frankly still a drastically lower bar than other what other professions go through.

Michael Kitces: CFP certification is basically the equivalent of about a half a dozen undergrad courses in a specialization in personal finance. Although there are some graduate degree programs and financial planning, the minimum bar for CFP certification it’s not even graduate level work, it’s undergrad level work. It’s basically six courses but still a hell of a lot better than the excruciatingly low bar we otherwise have, which is the high school diploma and the three hour simple regulatory exam you can study for in a week or two and what I find in practice is just once advisors go through CFP certification and they get better training and knowledge in the industry, even they start to actually see like, okay, some of the stuff the firm’s been given me as my spiel to go sell, like this actually isn’t right. I need to do this differently and I probably need to find a different firm.

WCI: Yeah. I think that happens to a lot of people four or five years into their career and as they start learning, they start realizing that and they go out and hang out their own shingle or at least go work for a different firm.

Michael Kitces: Yeah. It’s certainly been I think a driver towards the whole growth of the independence movement in our industry is just… if you really want to be in the business of giving people advice and helping them, it really is generally easier to do that when you work for yourself and not someone else where you have to answer to them and your clients and not that every firm that has an employee model is bad. In fact, ironically some of the independent firms are growing so big that they’re starting to replicate the employee models of some of the other big firms in our industry but I do think it drives you towards independence, that just if you want to be able to give independent advice, you really don’t want to work for the companies that manufacture and distribute the products, right.

Michael Kitces: Medicine long ago tried to put in a separation between the drug companies and the doctors. The doctors prescribed the drugs, but they’re not employed by the drug companies at the time. Our industry still mostly does that model where the advisors are employed by the companies that manufacture the products that they sell and creating that divide I think is ultimately one of the things that has to happen in our world and will happen eventually but it’s one of the things that we push for as well.
WCI: Let me ask you a little bit more about the statement on your website. You seem… are pretty clear about a fiduciary duty, but you seem to waffle a little bit more about how the advisor is compensated and you say there’s nothing wrong with the suitability standard, but those in sales should be required to hold themselves out as a sales person, not an adviser. The real distinction is between advisors and sales people. The fiduciary standard can accommodate both free and commission compensation mechanisms. However, there must be clear standards in a process to which advisors can be held accountable to affirm that a recommendation met the fiduciary obligation despite the compensation involved.

WCI: Ultimately being a fiduciary is about process not compensation. How can a salesperson legally held to a suitability standard facing serious conflicts of interest really function as a fiduciary? I mean don’t the vast majority of the best investments out there not pay a loader commission? How can someone offer the best investing advice while they’re also selling those funds where the industry uses higher commissions to sell the worst products? I mean it seems to me that even a good person can’t resist that conflict of interest for long.
Michael Kitces: Well, so I’d answer that in a few ways. The first is just to recognize there are degrees of conflict of interest. In essence, there are degrees of commission loads. I was in a world where when I started, like one of the annuities on the sales sheet was an annuity… this was back like 20 years ago that paid a 20% upfront commission with a 20 year surrender charge for the company to recover it, so like there are some people who bought that thing and it’s literally just coming off the surrender period today after 20 years of my career. I did not sell any of these. That’s just a ludicrously outrageously ginormous number. I’m still stunned that a regulator anywhere in any state ever actually approved that thing but someone did and it actually got sold for a while.
Michael Kitces: Clearly there’s a level of this that just becomes so painfully egregious, it’s really problematic but that doesn’t necessarily mean it has to be a problem forever and across the board and actually the areas that I would caution this on are what happens when you get out of the pure investment world alone. If I look at something like you need term insurance. Everybody should have term insurance at some point if they’re going to start a family and particularly once they’re having kids, so at some point, we need to get our insurance in place. It’s kind of weird to charge an ongoing fee for managing your term insurance, like you just got to buy the thing once. You’ve had the term insurance there’s really not a lot to manage on an ongoing basis.

Michael Kitces: I can charge you a term insurance implementation fee to help you pick the right term insurance, find it, vet it, select the vendor, take into account your health considerations and issues if you’ve got some health complications because then it’s a little messier than just picking whichever one gives you the cheapest quote off of a quote engine or the reality in our space today is all life insurance is built with some level of commission baked in.
Michael Kitces: It’s just part of how the products are priced. There essentially is almost no such thing as no load term insurance. Even if you buy it off of it like a… avoid the advisor term.com website. The website literally just takes the commission that would have been paid to the human and the website gets it instead. Like it’s built into the product. From an advisor end suddenly like I have two choices. Option one, I’ll charge you a financial planning fee to help you pick the term insurance and then you can pay a website the commission to buy the thing that I already told you to buy or you can let me get paid for the thing that’s already… the cost that’s already built in and I’m going to give you the same advice because frankly it’s not a very big dollar amount, it’s not changed the world money. It doesn’t actually introduce very much of a conflict because it’s not a very big number, but I can avoid you being double charged.
Michael Kitces: I suppose in my ideal world maybe we would strip all of those commissions structures out of everything. We would bring the cost of everything down and then I can just charge things on the client side but that’s a very real world conflict that a lot of fee only advisors face today is if I charge you a fee to give you life insurance advice, you are actually going to pay for this twice. Once because the life insurance products has a built in commission and once, because I charged you a fee and so I’m wary about being sort of overly dogmatic about saying there’s never a version where any level of commission is always in universally bad.
Michael Kitces: For a lot of people we’ve worked with we are structured as a fee only firm. We don’t take these commissions, we refer the business out, someone else does the implementation and takes the fee but I still have to look at it and say, I probably could’ve gotten the total cost cheaper for my client by not charging a fee on top of the commission and you know what, like the $200 commission or whatever is going to be for a bunch of hours of work, like I’m not that conflicted. Frankly, it’s not even good business for me.

Michael Kitces: I do it because it’s the right thing for the clients anyways and I would just rather not gross up fees on top of built in commissions. That’s kind of the domain that I look at it. When you get down to portfolios, I’m generally a big fan of ongoing fee models simply because what it means from the adviser client end is as soon as that advisor isn’t providing any value anymore, you terminate them, you fire them. It’s a really simple model. Upfront commissions are problematic there because I get all the money up front and then I actually don’t even have to give you any service because you can’t get the money back because you paid me up front.
Michael Kitces: Levelizing that compensation in an investment context particularly for something that’s an ongoing service I think is a much better alignment of everybody’s interest because it makes it easy for the client to fire the advisor as soon as the adviser isn’t delivering value, which is frankly really good pressure on us as advisors to make sure we always coming to the table and delivering value if we want to keep the relationship and continue to get paid, but sometimes the thing just has to get implemented and one of the biggest challenges that I see routinely in the fee only world is a lack of follow through on a lot of products that don’t pay an ongoing fee because there’s literally no incentive for the advisor to do any of the work to make sure that you follow through.
Michael Kitces: It’s actually a reverse unhealthy incentive because they can’t charge you an ongoing fee. It’s not great to charge you a standalone fee on top of the commission so I just say, here’s how much term insurance you need, go to our website and do it yourself and A, I don’t think that’s good service and B, people don’t always follow through on that. Life gets busy and they get distracted and other stuff happens and now the client isn’t being served as well and maybe if there was a tiny financial incentive for the advisor it’s not necessarily enough to conflict them, but at least it’s enough to align them with their clients to make sure that the follow through happens.
WCI: We’ve addressed commissions as a method of paying. One of the questions I got from FI physician on Twitter is will we see the end of AUM in our lifetimes? It seems like AUM fees are taking a lot of flack such that many of my fellow financial bloggers won’t even take advertising dollars from advisors who charge any kind of AUM fee at all. Do you think that’s fair?

Michael Kitces: I don’t think it entirely is. Look, on the one hand, there is no question there are a bunch of advisors out there who charge a pretty high AUM fee and basically do nothing after that fee and just pray that inertia will allow them to keep most of their fees which unfortunately kind of happens. The good news is on AUM advisor, you can fire your adviser anytime you want. The bad news is, it’s still kind of a pain in the butt because you’ve got to find someone new and you’ve got a find place to move your money and you’ve got to get it reinvested and that sort of a pain when you’re busy with the rest of your life and so there are a lot of bad advisors who manage to keep fees way longer than they should for providing remarkably little service, but there’s also a domain of advisors that are actively trying to deliver value for every dollar that they’re charging their clients. They simply want us… from a business end a relatively stable ongoing business arrangement where everybody’s interests are aligned.
Michael Kitces: You’d be amazed how… because I mean, I lived this in advisory firms. You’d be amazed how interested advisers get about exactly how well their client’s portfolios are performing when you’re at risk of getting fired if you don’t do a good job for it and frankly, if I was the client I kind of want my advisor that obsessed about how I’m doing, that’s probably a good thing for aligning our interests and I think frankly that’s why not only has that AUM model been around so long, I mean it dates back hundreds of years to trust companies in the 1600s. If you were a merchant in Boston who just bought a whole bunch of goods in Massachusetts and needs to take them across the ocean to the old world, where you’re going to be on a ship for six months and hope you don’t drown and someone has to watch your affairs here in the US, like those were the original trust companies in Boston because that was the major port in the 1600s to watch after the affairs of merchants and they basically charge a version of AUM fee 400 years ago.
Michael Kitces: It’s remarkably robust because I think it’s a particularly strong alignment around portfolio management. Now, the challenges I think that come are… it’s really better attuned to portfolio management than holistic planning and so the more that advisors are focused on providing value outside the portfolio and the portfolio stuff kind of gets a little more commoditized, certainly it gets a little bit less clearly aligned like I kind of got to give you the money to get a whole bunch of services that have nothing to do with the money starts getting weird and to me that’s just why what you ultimately see is, there is a subset of folks that just want to delegate. I just want to hand it off to someone else and have it be their problem to worry about.

Michael Kitces: I want to go live my life or build my career or travel the world or enjoy my retirement more or do whatever it is I’m going to do and I want to delegate that stuff and if you want to delegate it, frankly, it’s hard to come up with a better more aligned model than running on an AUM model and that’s why it stuck around for 400 years. Again, the challenge to me is, that there were a whole bunch of people that want advice and don’t want to delegate their portfolio and hand it over, and so I don’t think that means the AUM model is like automatically bad and terrible, needs to be eliminated. I think the challenge that we’ve had in our industry is for so many advisors that’s the only way you can work with them and then we create all these tensions around, hey, I’d like to hire you for some advice. Well, sure I’d be happy to manage all your money.
Michael Kitces: It’s like… well, no, I just want to hire you for my advice. Yeah, yeah give me all your money and I’ll give you all the advice you want. Like that’s the weird interplay that our industry has right now because it’s become so focused around assets under management and that’s part of why frankly we created XY Planning Network was let’s try to champion other business models to give people other ways of working so if you just want to pay for the advice and you don’t want help with the investments, you don’t need help with the investments or you just don’t have a pile of investments to hand over, you have a way to engage an advisor and pay them but you know the fact that like a monthly subscription model may be a better fit for you than an AUM model doesn’t mean the AUM model is bad.

Michael Kitces: It just means other models may be better fits for other types of consumers and that to me is what it’s ultimately about is just finding whatever that right alignment is for whatever the service set is that you want to buy from an advisor. If you don’t want to hand over your money or don’t have a pile of money to hand over, like finding an AUM advisor isn’t going to go very well.
WCI: You know, the truth is an AUM fee is a great deal at a level of assets of $100,000 if you’re paying 1% a year, that’s a heck of a deal for financial advice, but what I see happen is people don’t decrease the AUM fee very quickly as assets go up. How much do you think AUM fee should decrease as assets grow for full service financial planning and investment management? And what do you think is really a fair total annual fee in dollars for good financial advice from a full service provider?
Michael Kitces: I kind of answered this in two ways. One, there certainly is a tendency that fees tend to decrease as assets increase. We call them graduated fee schedules. X% of the first 500K and a lower percentage of the next 500 and a lower percentage of the next million and it gets teared out. Different advisers put the tiers at different places and frankly, that’s often just a reflection of who the advisors target clientele really are at the end of the day. Some firms will have a fairly aggressive fee schedule that gives you a break every 100,000, right up to half a million dollars and then you’d go and look and it’s like, well look at their average client is about a half a million dollars. That’s where they’re targeted.

Michael Kitces: I see some firms out there where the first breakpoint doesn’t come until $3 million, except their average client is 10. That’s actually kind of like the hundred thousand dollars break point for the half a million dollar client. They’re just targeted to a very different clientele. The problem I think that crops up in our industry is as advisors we are terrible at saying who we’re for and who we’re not for. For a lot of us that kind of comes from our roots that if you’ve been in the business for more than 15 to 20 years, I can pretty much guarantee you started out as a salesperson because those were the only jobs 20 years ago. The advice jobs were all more recent.
Michael Kitces: When we start out in the sales world, we kind of start out with this mentality of anybody and everybody can be a prospect for me and so we don’t tend to get very specific about who we serve but when you actually look at advisory firms, you see some very strong and consistent trends that the larger the advisory firm the more affluent the clients they tend to have and the more services they tend to provide for them. If you actually look at the industry numbers, like firms that serve clients with $10 million do not actually have higher profit margins than firms that serve clients with $1 million and they do not have higher profit margins that firms that serve clients that have $200,000, and in this kind of world, and I know some of the consumer in your reader mentality around AUM is like, oh my gosh, if you’re charging AUM on $10 million portfolio, it’s like you must be ripping these people off with huge dollars that you’re making and that’s not really what happens.

Michael Kitces: What happens instead is you sit across from a client that has $10 million who’s paying all these fees and at some point not too long into the relationship, they start asking like, what the heck are you doing for me to justify all these fees? And either the advisor demonstrates a whole lot of value that they’re delivering or they get fired and since most of us don’t want to get fired, we figure out how to do more things and deliver more value and the more value that we pile on, the lower our profits get and that’s why you end up seeing that advisory firms with $10 million clients basically have the same profit margins as firms that have $200,000 clients.
Michael Kitces: The weirdness comes when a firm that typically works with people who have $200,000 and gets a $10 million client because now they’re charging them 50 times as much or 30 or 40 times as much with the break points but they’re delivering $200,000 client service and charging $10 million client fees and so the question I’d actually encourage asking and frankly you can figure it out just by looking up advisors forms is, who is your average client? What is the average client that you’re actually working with particularly if you’re looking at an AUM model? If you look up our form ADVs which is our disclosure forms, you can find it on the investment advisor public disclosure website that the SEC runs or you can ask advisors directly. We normally we’ll have it posted to our website and we have to provide it upon request.
Michael Kitces: It’s got fields in there that say how many clients do we have and what’s the total assets that we manage so you can divide A and the B and figure it out yourself. The biggest problems come when you’re materially larger than the average client at that firm. That’s really where the gaps start to happen where you might be paying 50% or 100% or 200% more than the average client and you may not be getting all that much more service but when you look at firms that average $10 million clients versus firms that average $1 million clients, very different service set… depth of service and that’s part of what helps to justify the fees because otherwise frankly we would just get fired.

WCI: What do you see as the big differences in the services being provided to a $10 million client versus a $1 million client?
Michael Kitces: It varies a bit by firm. For some, you’re just buying flat out deeper expertise. The firm with the… serving $10 million clients you may be seeing up front across from a bunch of people who have law degrees and accounting degrees in addition to CFP certification whereas the firm with million dollar clients may just, kind of putting that in air quotes, like just be CFP certificants, so you end up buying sort of an implicit deeper level of expertise, which means when you start have to doing complex tax planning across your business and personal assets or complex estate planning across the state taxes in multiple states that you may be exposed to, you’ve got a firm that just got a level of depth of expertise to be able to handle that.
Michael Kitces: Sometimes larger firms start bringing additional service support in, so they’ll do your tax returns, they’ll do your business tax returns, they’ll provide additional business consulting advice. Sometimes you see services like that that get in sourced. For a lot of firms, it’s just a higher touch, more meetings, more advisor time if you wanted more access to the advisor. Whereas at the smaller firm it’s like, we’ll meet with you once a year. That’s the deal. We’ll meet with you once a year and if you’ve got questions in between give us a phone call we’ll try to fit you in.

Michael Kitces: If you’re on a firm that average $10 million clients like you call and say you want a meeting, we’ll get you on the calendar in the next 48 hours, like we will make it work because you pay a lot of money and when you have a service need we are going to jump, so it varies by the firm in that some… sure, I’ll say do this more with service, some do this more with deeper expertise, some do this with deeper work with affiliated professionals, you know, the million dollar firm will say, you need to update your will.
Michael Kitces: The $10 million firm, we will go with you to the meeting and we will make sure your lawyer is good at what he does or she does and if they’re not, we’ll recommend another one. If you don’t understand what they’re saying, we’ll help you translate legalese back to English and we’ll support the processes, the quarterback that coordinates all of these different professionals, which if you’re a 10 millionaire and have dealt with a whole bunch of different professionals, you’ve lived in a world where it’s really a pain that no one person knows what everybody is doing and that becomes one of the roles of the advisor at $10 million firms is, we’ll quarterback across the six affiliated professionals that you work with.

Michael Kitces: Some of it’s deeper expertise, some of it’s higher touch service, some of it’s just like additional support services that the firm provides you. If you move further up the line sometimes it moves into a realm of unique and different investment opportunities. The value of those is a whole discussion unto itself, but if you’ve got more than about $10 million, you virtually always have created that by being attached to the value creation in a business. It’s really hard even with a good income to save and invest your way to more than about five to $7 million. Even if you earn a really good income and living really frugally and get good returns, just there’s only so many years of working and saving to get there.

Michael Kitces: When you get people that have 10 plus million dollars and had been attached to the business value creation process as an executive or a founder, something along those lines, people that have done that often want more investment opportunities to invest into businesses, which is insanely risky and so there’s a whole bunch of additional investment work that some firms do at that high end about helping you evaluate and vet private investment deals that you’ve got to have a certain dollar amount before it’s even worth taking the risk on some of those I’ll try risk things and they’re very ultra high risk, but if that’s how you made your first $10 million, it often makes you want to go in and go try again, and so that becomes an investment domain that just a firm working with million dollar clients just isn’t going to have the depth, the expertise, the time and the capacity to vet those sorts of deals, investment opportunities. Sometimes there’s just a pure deeper investment specialization as well.
WCI: Along those lines, how do you think rental real estate fits into a portfolio? Should it or should it not or it’s right for some people? And how do you tell?
Michael Kitces: Well, I guess the first question is just are we talking, commercial rental real estate, residential rental real estate, specifically direct owned real estate, because I can do this through real estate investment trust. REITs are just a bunch of rental properties that pass through the rental income.
WCI: Sure. I’m mostly talking about investing directly.

Michael Kitces: On the investing directly end, I mean… the economics of rental real estate can certainly be pretty appealing but A, how well do you actually know the real estate in your area? Right. We saw a lot of people try to buy rental real estate 10 years ago and blow themselves up. Well, I guess it’d be like 12 years ago now, but before the financial crisis and the real estate crash because they didn’t actually know as much about vetting real estate as they thought they did.

Michael Kitces: There’s an expertise demand around, do you really know the risks associated with the real estate? Do you really know the appreciation potential or the risk of declining potential for real estate wherever it is that you’re going to do it. You either need enough dollars and a sizable enough real estate property that you can afford a property manager or you have to accept that a portion of your time is going to be a landlord. Teach their own about whether they want to take the time to be a landlord but at some point when you’re spending a bunch of time being a landlord you’re actually not getting paid for your rental real estate, you’re getting paid for your landlord work and fine side hustle if you want it, but you’re really starting to get paid for your labor now and not just your capital.
Michael Kitces: To me that quickly comes down to how much time do you actually want to spend on that stuff and how confident are you in your expertise to actually be able to make sure you’re getting a good property in a good area that you’re buying at an appropriate price and will be able to rent an appropriate price and will be able to avoid having any substantial level of vacancies while you take the time to manage all that, and if that sounds exciting to you, like more power to you. There’s certainly good business opportunities around real estate and while there’s a downside risk of real estate leverage, there’s also a lot of upside opportunity in the leverage that you can get on real estate, but you got to be prepared for either the time or outsourcing the time which will take out piece of your profits away and just having the expertise to actually be able to do it and manage it and pick the right investment.

WCI: Now, by virtue of your work online, you have a lot of interaction with financial bloggers particularly non adviser financial bloggers. What do they get wrong about financial advisors and about investing most often?
Michael Kitces: What do they get wrong most often? In terms of advisers in general, I mean I think part of the challenge… sort of like caveat, they get wrong but they don’t… but they do is this mentality that none of us do anything for our value, we’re just trying to get our fees and rip our fees or our commissions and keep them and move onto the next person, and to be fair there are a whole lot of those in our industry. I hate them as much as all the other bloggers do. I try to get them out as much as the rest of them do. That’s part of the whole mission of our site is like, can we at least educate them to make them better so that they can realize some of the bad advice they’re giving and get them to give better advice, so they’re out there.

Michael Kitces: I’m not going to deny that they’re out there. In fact, by industry numbers, the majority of advisors work for a broker dealer which is a sales organization or a product distribution organization and don’t have CFP certification. I’ll grant kind of a fair criticism to us that literally like the average advisor is a salesperson that doesn’t have a CFP, but that doesn’t mean all advisors are bad. There is a segment that really are trying to lift this up into a profession from our end that really take the duty to serve clients well very seriously and they take the burden of professionalism and expertise that care that we actually want to be successful in our businesses, which means in part earning your damn fee every year, year after year, or you’re going to get fired and your business is going to blow up, and there are a lot of good advisors out there doing good work and frankly that’s the segment of our industry that’s growing.

Michael Kitces: Total head count of financial advisors is actually declining right now and has been for almost 20 years because we are excruciatingly slowly but steadily wringing out the bad apples and lifting up the standards and so just be mindful like… I think two things. One, there are a lot of good advisors out there as well. I’m not going to deny that the bad ones are out there, but don’t throw out the baby with the bath water, and the other caveat just I would give that I think the bloggers sometimes get wrong is, if you’re going to stand up a blog writing about this stuff, you tend to be very do it yourself oriented, it’s really why you like doing this stuff and writing about it and to be fair you tend to attract a readership that’s also very do it yourself oriented because that’s why they go and read blogs to figure out how to do things but I can tell you there’s a whole other side of consumers out there who don’t want to spend the time on this stuff.

Michael Kitces: Who would rather spend time on their hobbies or with their grandchildren or traveling the world or doing more work or growing their business or just basically anything besides dealing with their money that’s just not a fun topic to them, who really don’t want to do it themselves and really want to delegate and there’s nothing wrong with them delegating. You try to find a good advisor, don’t delegate to a bad advisor that sort of a whole discussion unto itself, but just because you are very do it yourself inclined doesn’t mean everybody else is wired that way. If you actually look at some of the industry research even on consumers the estimate is that, only about a quarter of people are full on do it yourself, I would never hire an adviser but almost a quarter of people are full on delegators and have no interest in doing it themselves and it’s not even necessarily because they don’t know how or they’re not smart, they just don’t want to take the time and they’d rather spend their lives doing other things.

Michael Kitces: Just because your worldview is that you like doing it yourself doesn’t mean people who like to delegate and do it differently are wrong and likewise vice versa on the delegators.
WCI: Speaking of do it yourselfers, what do you think about the Bogleheads online forum?
Michael Kitces: I’m a fan of the Bogleheads. It’s a cool community. I’ve only interacted with them on a limited basis but frankly some of the best both feedback and constructive criticism, like truly just constructive criticism on even the research that we’ve put out over the years has come from the Bogleheads forum, so I’m not active in posting there. I am an occasional lurker less so these days because just life’s gotten pretty busy with some of the businesses but I’ve been a lurker to the forums for a while. Really appreciate some of the feedback that we get there. Again, for people that are inclined towards that, do it yourself world and want to find a community for them, like I think there’s great conversations that happen in the Bogleheads community and a lot of really smart people there who are doing some really awesome stuff contributing to that community.

WCI: On a similar question, what do you see… and this one comes off Twitter, this one comes from someone that goes by druginfogeek but says, what do you see professionals handle suboptimally either through ignorance or other barriers, and I think we’re talking about advisors. What advisors botch most often.
Michael Kitces: I find the thing… aside from just the general, like some advisors sell some really crappy product stuff because they just have never gotten the training education to know that what they’re selling is crappy so like… that segments aside. I think the biggest challenge that we tend to have in our industry is our industry is still very, very segmented by channels. Essentially different types of product types and this comes from the fact that if you dial the clock back a couple of decades when we didn’t have holistic advice there were banking products and insurance products and annuity products and investment products and investment managers and we had all these different groups and each one had its own regulator and that was fine in a product based world. It’s hugely problematic in advice based world because we are now being subject to like three or seven different regulators at a time, which is not a very pleasant way to run a business.

Michael Kitces: The challenge I think it creates kind of getting to druginfogeek’s question is that most of us end out with this world view of either a worldview or a particularly deep expertise in whatever channel we started in and we tend to be much weaker in the others, so the advisers that have come up in the RIA, the registered investment advisor community, which is where all the fee only investment management happens, tend to be really, really weak on even basic insurance advice. If you came up in the insurance channel, you know the insurance stuff cold but you tend to be a bit less sophisticated on the investment side. If you came up on the insurance or the investments side, you basically know almost nothing about mortgages and debt and credit cards and the rest besides whatever you’ve just managed to glean as a personal consumer yourself who touches these things because you’ve never dealt with any of the products on that side and the companies on that side and even our curriculum of CFPs doesn’t actually teach us all that much about it.

Michael Kitces: Our knowledge often ends up being compartmentalize by channel because we come up from these roots of regulation by channel or by product type and there’s really only a limited subset of advisors who truly I think do the proactive self education and professional standards lifting to really make themselves experts across more domains and so we tend to have blind spots based on essentially whatever type of company happened to give us our first job 20 or 30 years ago.
WCI: You know, a lot of doctors like to have an advisor that has a lot of other doctors as clients. Do you think that’s important that a doc looking for an advisor, should find one that has a lot of other clients similar to him or her?
Michael Kitces: In general I would say yes. I’m actually one of these people who even from the advisor’s side of the industry pound the table pretty hard that advisors should focus more on trying to specialize in different types of clientele as opposed to this mentality of we can be everything to everyone. I think the whole mentality for us comes back from our… again, our product roots, like I hate to keep coming to it but it’s really a very recent phenomenon that we moved away from being product salespeople into advisors. I’ve only been doing this for 20 years and I spent the first several years of my career as an insurance agent and then a salesperson for a broker dealer because those were the only jobs. Those were the only advisor jobs that existed and I’m still a relatively young guy and even I still lived back to the sales days.

Michael Kitces: The challenge with our product groups is anybody who can buy your product is a prospect and so we tend to come at this world where I can work with anybody because I do comprehensive financial planning advice and again, by analogy to medicine, you can’t specialize in everything at the same time and in fact at a certain level of complexity in your health issues, you really need to find a specialist because the generalists can’t take you that far down the road. In medicine, I think there’s a much better framework about what is accepted in terms of scope of practice, like here’s how far you can go down the road as a general practitioner in helping someone with a cardiovascular problem or a neurological problem before you need to make a referral out or get a consult.
Michael Kitces: We don’t really have much of that framework in the advisor world and the challenge I think it creates is we end up just sort of being low to mid level generalists for everyone, which is fine up to a point but particularly in areas like medicine and being a doctor where it is above average income, there’s a lot more dollars at stake, particularly if you’re running your practice. There’s a whole other level about how to manage your medical practice that’s really important that I think is greatly benefited by finding someone who actually specializes in doctors like you.

Michael Kitces: I encourage it regularly from the adviser ends, like form a niche, form some kind of specialization because frankly if all you do is work with doctors and eventually doctor compensation plans and how contracts are negotiated with hospitals and how to run a medical practice and what the standard ratios are, and how to find a good office manager for your medical practice, all these things that impact your career as a doctor, from the advisor and you can add so much more value from the doctor end, you’re likely to find an advisor who can add a lot more value for you if you find someone who works with people like you.
Michael Kitces: I know there’s now a growing base of advisors that specialize in doctors. There’s also some out there that are specializing in dentists and lots of different career professions in particular because people in the common profession tend to have common needs and gathering common places like certain associations for their profession so it’s pretty easy to find them and start educating them and helping them but I’m a huge fan of trying to find people who specialize or should try to find advisors who specialize in people like you. You will tend to get a much better level of deeper advice that’s just flat out more relevant for you.
WCI: It’s interesting though. It feels like every advisor I run into specializes in whatever they specialize in and doctors, and I don’t know if that’s because of perception that doctors have money because doctors actually have money and can actually afford advisory fees but I feel like there’s all these firms out there that specialize in doctors and I never see a firm that specializes in engineers or tech workers much less Walmart workers.

Michael Kitces: Yeah. I mean, in part that’s just because, well they don’t spend your time crossing your ecosystem at all. If you specialize in tech workers, you just spent all your time in networking meetings in Silicon Valley trying to find tech workers and if you specialize in engineers… I know a couple of advisors that actually have niches with engineers. One of them just works with Intel employees. One of them just works with Hewlett Packard employees, so like you won’t see them unless you’re at Hewlett Packard or Intel because that’s where they are and that’s where they do their stuff and that’s where they get referred and that’s where they spend all their time, so they are out there in a wide range but the ones who are really good at that frankly tend to keep their head down and the only place you’ll ever see them is in that community where they actually specialize.
Michael Kitces: Now that being said, yeah, our industry figured out a long time ago that doctors on average have a pretty good amount of money and so doctors have always been an area of specialization for adviser. Certainly going back for all of my career. I mean, one of the partners who founded our firm 10 years before I started, build his career 10 years before that in the ’80s with a specialization in doctors. So, yeah, there’s a lot of us that serve the doctor space as you noted. A bunch of them are… well I serve doctors and this other thing or I do this and that and the doctors at the end. Frankly from the doctor ends like I would find advisor who just works with doctors and doesn’t have a bunch of commas and other things because they’re more likely to actually be focused on people just like you.

WCI: Now, we better wrap this up soon. I think we’re both known for a being long winded both in our speaking and our writing, but I wanted to give you one last chance to speak directly to… well, a typical podcast gets 20 or 30,000 people listen to it. I suspect I may get a few of your followers in here listening to this one, so likely more, but these are mostly high income professionals, mostly doctors. What would you like to tell them that we haven’t talked about already?
Michael Kitces: I think the biggest thing I would focus on is… frankly it comes back to a version of my own life and career path that we talked about earlier. When you’re in a profession that has a lot of upside and you’re in a professional services world where you can get paid very, very well for your time and all the expertise and skills that you’ve developed and invested in yourself on over the years, just make sure you’re staying focused on either A, what really rewards you for your time or not, so that covers everything from like how much time do you want to spend on your finances to how much time do you want to spend mowing your lawn or fixing your toilet or whatever else it is that you may choose to delegate and recognize that you’re building your own financial wealth in the long run is actually much more about your ability to grow your income and grow your income by more than you grow your lifestyle than any of the saving and investment stuff that we talk about.

Michael Kitces: You really got to get pretty far down the line of investing portfolios before the growth rate of your portfolio is larger than the impact by just spending less than you make and figuring out how to grow your income. Whether that’s get a raise, get a promotion, take on more hours, go out and start your own practice, you know, all the different options that you have depending on your business structure, your arrangement as a doctor. Again, it’s part of our bias in the advisor world. I think it’s part of the bias of the broader financial services industry that we love to talk about the investments in the assets because frankly that’s where we get paid and in sort of the literal truest sense, like that’s where the money is but for most people until they’re relatively few years before retirement, the biggest driver of your longterm financial wealth is your ability to lift your income and your ability to manage your expenses and find enjoyment in the dollars that you’re spending and not just get stuck on the treadmill of always wanting to buy more.

Michael Kitces: I think we spend far too much time in the aggregates talking about what to do with the assets that we’ve accumulated and not nearly enough about how to enjoy what we spend so that we just don’t get stuck on the treadmill of spending more and how to lift our income up because it’s really the biggest driver through almost all of your career leading up to retirement.

WCI: Well said. Thank you so much. This is Michael Kitces who is the founder of Nerd’s Eye View and at least half a dozen other companies I think, and I want to say just thank you for coming on the podcast and sharing your expertise and your wisdom about the financial advising world with our listeners.
Michael Kitces: Oh my pleasure, Jim. Thank you for having me out. I hope it’s helpful food for thought at least maybe a little bit of a different perspective for some of your listeners.

WCI: That was great having Michael on. It was a lot of fun. Honestly, I’ve got three times as many questions as I think we got to today, so we may have to get him back on the podcast at some point. Thanks to all of you who left us questions for him on Twitter and on the WCI forum, which we could’ve gotten them all answered. As you noticed he’s quite a bit more wordy than some of the other guests we’ve had, like I remember having Alan Roth on here and we got to the end of it and he’s like that’s it and I’m like, I asked you twice as many questions as I ask anybody else, but he just happens to be a much more succinct speaker, I think, than many of the people we’ve had on here. At any rate, I think it would be a good episode and I hope you learned a lot about the financial advising industry. It’s got its issues but there is good, bad and ugly there, so look for the good.

WCI: This episode was sponsored by Set for Life Insurance. Set for Life is first and foremost a client centric company. They listen carefully to the needs of clients because the volume and exceptional reputation of Set for Life Insurance as well as the relationships they have developed over the years. Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies, saving women significantly, priority underwriting handling and on some occasions exceptions in the underwriting process. For more information, visit setforlifeinsurance.com.

WCI: Thanks also to those of you who are giving us a five star review on the podcast and telling your friends about it, that really does help get the word out about financial literacy for physicians. Be sure to sign up for the newsletter, whitecoatinvestor.com/email. We’ve got all kinds of new options now, so check them out. Head up, shoulders back. We’ll see you next time on the White Coat Investor podcast.

Disclaimer: My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not licensed accountant, attorney or financial advisor, so this podcast is for your entertainment and information only and should not be considered official personalized financial advice.