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Michael Kitces names his price for RIAs to charge the other 80% of investors and it's a 1% fee but on income, not 1% on assets under management

The Columbia, Md.-based guru and entrepreneur sees a seminal shift in the industry -- and a life raft from dependence on the AUM fee model -- because a critical statistical mass of advisors are converging on a rate where consumers see value

Author Guest Columnist Michael Kitces February 14, 2019 at 11:39 PM
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Michael Kitces: The AUM model happens to be remarkably robust and scalable… it doesn’t work when all financial advisors converge on the same model at the same time!

Steven Draper

Steven Draper

February 15, 2019 — 4:15 PM
The statement: “Unfortunately, though, the process of billing on total net worth and assets under advisement can be messier, because there aren’t automated systems to facilitate the valuation and invoicing and billing of net-worth-based fees the way there is for portfolio-based fees under the AUM model.” Understandable, but there is a new technology solution - <a href="http://www.eton-solutions.com" rel="nofollow">www.eton-solutions.com</a> - for the valuation and invoicing and billing of net-worth-based fees. It also uses special Assets-Not-Held at a custodian accounts to allow the holding, pricing and reporting of non-investable assets. These two approaches combined help facilitate true net worth based servicing.
Brian Murphy

Brian Murphy

February 16, 2019 — 8:42 PM
Clever-er by a 1/2! Seems like the goal of the work behind these industry gurus is NOT to serve a bigger client base, but to a) serve a larger client base while b) continuing to justify similar compensation to themselves. So we jump through a bunch of hand-waving and impracticalities to arrive at "a new model" that opens up the market to a broader population. Did it ever occur to any of these gurus that fees (whether charged on managed assets only, or including illiquid assets) have to come out of liquid taxable funds? That, in and of itself, throws the biggest monkey-wrench into this mental exercise...the "take" by investment advisors has to come out of liquid assets - regardless of how you wish to bill. If you wish to broaden the market - the only answer is the most obvious; move from Asset based fees to a pure subscription model. Unfortunately for the industry of today, the only way to do that is through increased use of technology, and means a "winner take all" market.
brooke

brooke

February 16, 2019 — 9:48 PM
Brian, Surely the Kitces fee model in question is fledgling in many respects but not for lack of his explication and a basis in his experience. It doesn't seem fair to label an act of guru hand-waving. Meanwhile, I am curious what you mean by "pure subscription model"? And an 'increase (of) the use of technology'? And who do you imagine is the 'winner that takes all'? It seems like if we've learned anything in the in-process RIA take down of Wall Street it's that each RIA is a snowflake and that investors like it that way. Technology has yet to talk an investor off a ledge, right? Do you see evidence that suggests otherwise? Cheers, Brooke
Brian Murphy

Brian Murphy

February 16, 2019 — 10:38 PM
Any solution that solves a problem by adding additional barriers to overcome is not well thought out, regardless of who it comes from. I have nothing against Mr. Kitces (or anyone else) and from what I understand he'd be considered something of a guru in this business - so that's where "guru hand-waving" came from. Nothing more. AUA is not a viable solution for a number of reasons as mentioned both within the article and in my prior response. That said, I'm perfectly comfortable with other's pursuing short-sighted solutions meant to keep the game as it's currently being played intact. It just leaves the table open for real innovation when it comes along. The facts are that only 20% of the U.S. household population has more than $100k in savings...40% have nothing and 40% have up to $100k. So on that front I agree - today's solutions aren't viable for the majority. The way you reach these people is not through human advisors - human advisors don't "scale". You reach them via subscription technology that handles everything that needs to be handled. Wealthfront and Betterment started down this path - but their businesses are poorly thought out; hence they end up creating services that a) compete headon with one another and b) can easily be replicated by any incumbent and c) "rides" on existing business models - just at lower cost. There is no reason from the client side of the equation for any sort of AUM fee. It's a completely contrived model created by the industry to make human advisors economically viable. Technology will change the prevailing business model from AUM to SaaS. The "winner take all" solution has not been launched yet - but I'm working on it. I would suspect others are too, but to date I haven't seen what I believe to be the compelling technology/business model mix that stands a chance of winning. It's a completely open table as I noted previously because when the winner emerges, the industry will be dramatically different within a decade. Sure, human advisors will remain (and perhaps thrive) - but they will have to find a niche. Given $290 billion was spent on investment fees in 2017 I believe, there is ample incentive. To the point that each RIA is a snowflake - perhaps, but I'd again challenge you on that front. Each community bookstore was a "snowflake" before Amazon launched...and each corner drugstore was a "snowflake" before Walmart moved in. Again, no malice intended towards anyone. I just find much of what passes for "innovation" in this industry is mental gymnastics meant to keep the status quo of human advisors/asset based pricing in place - whether those advisors are brokers, RIAs, or robos. Peace. Brian
Alvin Gentry

Alvin Gentry

February 17, 2019 — 8:17 PM
Murphy idea sounds a lot like what Joe Duran is doing at United Capital
Brian Murphy

Brian Murphy

February 18, 2019 — 5:02 AM
@Alvin - To some extent, though not focused on the "life-coaching" side of the game.
Jamie McLaughlin

Jamie McLaughlin

February 18, 2019 — 2:46 PM
There is widespread evidence that clients now value many non-investment service (NIS) components at least as much as the investment components where their performance expectations have been muted by low single digit returns. While firms have been slow to use this latent demand to modify their pricing strategies for NIS-related services, they’ve expanded their service offerings embedding increased fixed costs for their staff complements. This “arms race” is unsustainable and, unless corrected, will systematically erode their margins. Michael may be a little early, but there's no question we are moving from an asset-based fee model to a negotiated fee-for-service model that corresponds to the true cost of the services rendered plus some reasonable markup. The challenge, however, will be for firms to demonstrate their value. No small feat.
David Garcia

David Garcia

February 18, 2019 — 3:24 PM
find enormous value in the services my CFP/RIA provides. That said, the thought that someone considers it reasonable to even suggest charging me based on my net worth or income scares the crap out of me. A 2%/20% is a better value proposition, as bad as that is. If a percent of AUM is not working for the advisor they may need to do what everyone else does without sufficient income: get a second job until a single full-time job can provide an adequate living. We all need to be careful of overestimating our own importance or the value we provide to our employer or customers. A happy client but disturbed observer.
Realist

Realist

February 20, 2019 — 3:33 PM
Charging an advisory fee based on income is the most ridiculous gimmick I've seen yet. As income rises, more money is devoted to CPA's, estate attorneys and insurance companies. It shouldn't be allocated to a financial planner. If anything, a financial planner should be paid a flat fee annually based on the amount of anticipated work. I appreciate what Kitces is trying to do to help the industry, but he is largely out of touch with the reality of what most advisors experience on a daily basis.
Not a fan

Not a fan

March 22, 2023 — 12:44 PM
I've become less and less of a Kitces fan as time has gone on. How long has it been since this man actually had a book of business of actual retail clients? Pay a % of income? Are you insane? We don't manage the careers of our clients - we're not booking agents or business managers. We're FINANCIAL managers. We should assess a % of the balance of the assets we have assumed fiduciary responsibility for, end of discussion.

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February 14, 2023 at 3:15 AM

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January 12, 2022 at 3:13 AM

March 12, 2020 at 1:45 PM


Mentioned in this article:

Kitces.com
Consulting Firm
Top Executive: Michael Kitces



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