Q100 – Seven Questions About The RIA Model Michael Kitces Has Never Been Asked.

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Seven Questions About The RIA Model Michael Kitces Has Never Been Asked.

I asked Michael Kitces to come on the podcast and be challenged with 7 questions about the RIA model he has never been asked before.  He accepted!  Come take a look to see how he answers:  #1 – Will we ever see the equivalent of a Chick-Fil-A in our industry (a systematized business with both hugely passionate clients and operators?); #2 – If you had to choose to run a $50M, $500M, or $5B RIA, which would you choose and why?; #3 – If you were king for a day 20 years ago, and could change one thing about our industry, with no ramifications, what would it have been?; #4 – What do you think the RIA model will look like 30 years from now?; #5 – If you were a mutual fund wholesaler today, how would you try to work with RIAs?; #6 – If you were asked to help invest $100M into the industry, how would you deploy the capital?; #7 – If you had more capacity, is there a business in our industry you would try starting, and perhaps others should be trying themselves?

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Full Transcript:

Brad: Seven questions about the RIA model Michael Kitces has never been asked. That is today’s topic of the Transition To RIA question and answer series. It is episode #100.

Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition to the RIA model.

If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available, from this entire series in video format, podcast format. I have articles. I have whitepapers. All kinds of things to help you understand the RIA model.

Again, TransitionToRIA.com.

This is episode #100, and that milestone deserves a fun and exciting show. So, for those of you watching on video, you can see we have a guest today, Mr. Michael Kitces. Michael, thank you for coming on.

Michael: I appreciate the opportunity. Congratulations. 100 episodes is an awesome milestone, Brad.

Brad: Thank you. I appreciate that.

You’ve probably quoted the stats, that unfortunately the average podcast doesn’t get past like seven episodes. I like to think if I could get to 50, I could get to 100, and we’ll see how far it goes! But I appreciate you participating here in episode 100. We’re going to have a fun one here.

When I reached out to Michael, I said, “I got episode #100, would love to have you on, love to talk about the RIA model.”

Well, Michael has been interviewed hundreds of times, and probably hears a lot of the same questions. So, I challenged him and I said, “I’d like you to come on if you agree to it. And I have put together what I believe are seven questions about the RIA model, you have never been asked before. Are you up for the challenge?”

And so, I ask you, sir, are you up for the hot seat today?

Michael: I’m up for the hot seat. I’m terribly curious what’s coming. Because no joke for anybody who’s listening, he has not told me. This is not a rehearsed spiel. I really have no idea what’s coming here. So, sure, let’s dive in. Let’s see.

Brad: He’s right, no questions were given ahead of time. And if you could, Michael, if you have a pen or something, don’t tell me as we go, but make a note as we go through and let’s see at the end how I did. I’m feeling good about seven for seven. We’ll see how it plays out, but I’m feeling good about it.

Question #1 – Will we ever see the equivalent of a Chick-Fil-A in our industry (a systematized business with both hugely passionate clients and operators?)

Brad: The first question to put Michael on the hot seat with. I don’t know about your neck of the woods of the country, but down here in Florida where I am, people are crazy about Chick-fil-A. People love Chick-fil-A. They will roll up to the drive-through, there’s 42 people in line, and they say, “I’m happy to be the 43rd person in line.” They will literally wait in line. I think it’s wild.

Not only do they have crazy demand from customers, they have crazy demand from franchise owners that want to have a Chick-fil-A franchise.

So, with that context, will we ever see the Chick-fil-A of our industry?

Michael: So, the chain franchise of our industry?

Brad: No, to have raving, passionate customers that are willing to, in this case of Chick-fil-A, sit in a massively long drive-thru line.  So, in our world, that would be the investor clients that need help. And then they also have the business owners that want to own a franchise. The equivalent is an advisor that says, “Not only do I hope they reach out to me, I hope I can get an opportunity to own one.”

Will we ever see such raving interest on both sides with a particular firm?

Michael: My heart of the industry wants to say, “Yes,” my pragmatic realist, “I’m not sure.” I worry we might never quite get there. The reason….now, I feel like I have to qualify that because that’s a slightly depressing answer to me.

Chick-fil-A is successful as a franchise because there’s a standard way of doing things, right? Everything’s a system and a process. They’ve got the whole thing buttoned down. They can teach the franchisees how to do it. “Here’s the game plan, execute this roadmap. It will work exactly this way.”

And then the parent company builds such a wonderful brand around the country you know you’re going to get that experience no matter where you go. And off you go with that experience.

It’s so specialized to me, the irony on the flip side, I know at least one advisor whose niche is Chick-fil-A franchise operators, shout out to the Pando Wealth folks. It’s so standardized. They made a business out of serving the people that do it.

Here’s the part that I struggle with when I think about this from an advisory firm perspective. We are at its core a service business. You show up, we do things and we do knowledge work. And I don’t mean this in a negative way, but, we’re not just preparing food. We’re not just making widgets. We’re not just shipping something down the line. There’s a level of knowledge work and service that goes into this.

I guess I’ll frame it this way, in the best-case scenario, I don’t know how someone can make that Chick-fil-A equivalent in our industry without it taking literally 20 to 30 years. For the simple reason that every single advisor at every single location has to get trained in not just being a financial advisor, but their way of being an advisor, doing things with their particular systems and structure and processes, trained in it, executed in it, and delivering it multiplied across a zillion other advisors at other franchise locations doing the same thing.

To be fair, there’s a scale in training challenge to that, that I think is very difficult in such a knowledge worker-based industry as ours. That feels a little bit different than the food service industry or a manufacturing kind of world.

At best, you can’t build that quickly. You must build it slowly to bring in all the people that want to be part of that, that want to learn your way of being the Chick-fil-A advisor way of being an advisor.

And for better or worse, most of us who get into this business, we do it because we want to serve clients. We don’t do it because we want to build a nationalized training system for serving clients. If you’re that person out there, “Business idea, opportunity,” call me, we can figure something out! Because I do see opportunities in that.

But that whole nature, that is a really different thing. How to build a nationalized training model to help all advisors advise in a certain way that consumers will love. And then finding the advisors who actually want to do it and learn it. That’s a whole other level of challenge.

Brad: So, maybe even if the heart is in the right place, the culture’s in the right place, the logistics just might be too hard to overcome to that point.

Michael: Yeah. I mean, that’s a heck of a scaling challenge, right? “Cool idea. Can you teach 1,000 advisors to do it and stick with you? Can you train 5,000 advisors to do that and stick with you and follow the system?” I don’t know if we can quite figure out how to build and hold human systems together at that level in the financial advisor world.

The asterisk I would get from the flip side, you can also have a wonderfully, wildly successful business with 50 great clients. So, there’s also a part of me that’s, “What entrepreneur is insane enough to actually want to inflict that upon themselves to build?”

You can have a wildly successful practice that will feed your family and your kids and your grandkids for a few generations without doing anything near that size and scale. But just there’s a level of scaling humans at a national scale that we’re already seeing a few firms that are trying to do this, right? The Peter Mallouks and Ron Carsons of the world. It’s hard. It’s really hard.

Brad: Yeah, and as big as those firms are, if you talk to someone outside of our industry, I would argue only a small part of the population would recognize them. Whereas everyone knows who Chick-fil-A is.

Michael: As much as firms like Peter Mallouk are talked about for how big Creative Planning has gotten, I think they’re like $200 billion under management now or something. Cool, they’re one-tenth the size of one wirehouse. I think Merrill and Morgan, each have more than $2 trillion. And then there’s Wells, and then there’s UBS.

Our largest, mega, mega, mega, mega RIAs in our world, we’re still tiny compared to national wirehouses. Like, “Oh,” and Merrill Lynch and Morgan Stanley, those are all firms that have low single-digit market share.

And they’re 10X, 20X the size of mega, mega RIAs. The pool is so big, so unimaginably large, when you try to start wrapping your head around how big our space really is.

I think it’s that fractured and diverse because humans are wonderfully varied people. We all want our different things in what we want to do and how we want to serve clients. And to me, basically, the whole growth of the independence movement is because most of us don’t actually really want to be widgets in someone else’s planning system. But it also makes it really hard to make the national Chick-fil-A franchise of financial advisors.

Brad: We will see. I would agree with you. It would be extraordinarily hard. I guess the only thing I’d say, “Never say never, right?” Thirty years ago, if you said, “There’s going to be a chicken restaurant that people will wrap the building around for a basic chicken sandwich.” We probably wouldn’t think that was possible either and here they are.

Michael: Yeah. I’m very careful. I’m not going to say never. There are things I will say never to, but I ain’t saying never to that. But…

Brad: Very hard though.

Michael: …yeah, just even the mega firms in our industry don’t have a great track record at trying to turn advisors into widgets, which I don’t mean it in a negative way. But that’s how businesses that do that kind of national franchising work. The whole point of franchising is we boiled this down to a systematized process, just buy all the things and it works. And that’s not how we like to show up as advisors.

Brad: Yep, fair enough. Well, you gave me a little lead into number two. You made a reference to this.

Question #2 – If you had to choose to run a $50M, $500M, or $5B RIA, which would you choose and why?

Brad: A couple of these are hypotheticals that you need to take your Michael Kitces’ hat off for. I know you got your hands full, so it wouldn’t happen. But the second question is, if this wasn’t a capacity issue, this was not a money issue, this is a satisfaction question. If you could instantly be put in charge of either a $50 million RIA, $500 million RIA, or a $5 billion RIA, it’s your job to run it. Which one do you choose?

Michael: For literally me personally?

Brad: Yeah, so this is not, “Which will have the best economics for you.” This is satisfaction. Which one do you think you would enjoy the most and why?

Michael: Well, I’m back and forth between these two bookends because I’ve essentially lived back and forth between these two bookends.

I spent about 10 years very consciously running the Kitces’ platform. It’s the equivalent of a $50 million high-income lifestyle practice. I never had more than one or two team members. I drove a huge amount of revenue, almost all that drops to the bottom line. I had all the flexibility and control to do all the things that I wanted to do. And it was phenomenally lucrative.

Then I got a little hungry to have more impact because ultimately I’m one of those, impact people. I drive the same crappy car for 16 years and haven’t moved. I buy the same shirt 12 at a time. I don’t really have a lot to do with a high-income practice. I just like to bank the money and don’t know what to do with it.

I’m impact-driven, which is why I made a conscious shift several years ago to say, “No, I want to really make this bigger and grow a team.” And so, now, by the time this airs, we’ll be a 25-person team, which means I basically run the team of what a lot of billion-dollar RIAs run. And we’re growing very fast from here. And so, I’m living in that larger firm scaling up environment as well.

It’s just different. It’s different in what drives the satisfaction, right? The $50 million practice satisfaction was I make a really good income. I have complete control over my time and hours. I can balance it however I want between how much I work and how much time I spend with my kids, because I had very young ones at the time. And I make what amounts to a really, really good dollar per hour.

Growing and scaling a larger thing, I don’t do anything I used to do anymore. I don’t write as much content as I used to. I don’t speak as much as I used to. I don’t see clients as much as I used to. I spend my time running and managing a growing enterprise. I’m mostly in the people finding and people development and system building business, which is just a very fundamentally different job than it was when I ran a high-income solo practice.

And so, I’m a little bit weird in that I’ve done both bookends of this. And, I mean, if I put on the hat of XY Planning Network, and AdvicePay, and all the other companies I’m involved with, in the aggregate I’ve got about 170 team members across 5 or 6 different businesses, not including our advisory firm where I joined later (I didn’t make that.)

It’s just such a different job and drivers. I have found both satisfying, but for very, very different reasons. And they were both satisfying for me because I wanted different things to be satisfied at different stages of my own career.

I will say the one that’s probably the most challenging on that list is the one in between. Because you’re too big to be small and too small to be big. And that’s a tough spot.

Having done multiple businesses now over the years that I’ve grown to many millions of dollars of revenue for each business, there is a particular challenge point that comes in most businesses, when you get above 6 to 17 members and you’re not yet above 20, that’s just a super messy middle.

There’s a lot of stuff going on. You don’t really have a full management team infrastructure to do it. You don’t have all your leaders in place. You don’t have department leaders, and directors, and managers who can manage teams. Your org chart still looks like a starfish where everything sprawls off you, but there’s way too many people for you to actually manage.

You’re trying to delegate some things, but the people you’re delegating to are mostly doers, not managers. They’re not good when the organization gets more complex. There’s a lot of messiness in that middle that I can say, “It doesn’t get easy, but there are some things that get easier once you get north of about 20 to 25 team members. You get to a certain stability point where you’ve got all the teams and department structures in place, and a leadership infrastructure.”

The messiest is the one in the middle. I don’t know very many people that are happy to stay at the one in the middle. But I was very, very happy in the equivalent of the $50 million lifestyle practice for a decade. I did ultimately move, at least in the direction of the proverbial $5 billion RIA, we’re not that big by team yet. On the Kitces’ end, we are by all the things that I’m involved with.

But it’s satisfying in a very, very different way that if that’s not what checks the satisfaction box for you, you probably wouldn’t enjoy it. Because it takes you away from clients, and a lot of the reasons why a lot of us get into the business in the first place.

Brad: I know you’ve talked a lot about that messy middle. And unfortunately, the phrase “lifestyle practice” sometimes is used in a derogative manner, but as you said, you can have a wonderful practice both economics and life balance with $50 million or 50 good clients. Not everyone has to push higher up the chart.

Michael: As part of the Kitces’ platform, we run an advisor wellbeing study. And I can tell you, directly from the numbers, the people who actually say they’re happiest when you get down to who says they’re happy and enjoying their life, it’s the $50 million people. It’s not the bigger firm folks. We see more happiness in the small firms.

Now, not very small. There comes a point where you’re doing too much work for too few clients, for too little money. And that’s not happy. The folks we see that are really happy are like $30 to $50 million practices. Thirty to 50 clients because they’re all million-dollar-plus a piece. They make hundreds of thousands of dollars. They’ve got a few dozen clients.

It does not take that much time. They work 30 hours a week or less, making many, many hundreds of thousands of dollars, supported by probably one person, maybe two if they really want to staff up a little more. It’s a three-person team. They’re netting a huge portion of their income. They don’t spend a lot of time at work because they make a great income and don’t have a lot of clients.

And they could grow further. It’s not like they’re probably half-assing their work. They’re providing a very high value to a very limited number of clients. When that adds up to the amount of money you need to achieve all your goals, why would you work more hours?

Brad: Yep, that’s why I hate when the term is used in a derogative manner as if, “That’s someone just not capable of growing more.” People strategically prefer that. So, great point.

Michael: The irony I would find, the ones that really run lifestyle practices are so intentional about their growth. All the people I’ve met who run really good lifestyle practices, I truly believe are capable of building billion-dollar firms because they have the mindset of intentional building that it takes to build that way. They’ve chosen not to because they make more money with less work doing what they’re doing.

The folks I find are unhappy are not good at being really focused about what they’re doing in their practices. And they accrue clients to become hundreds of millions of dollars, and maybe get to a billion someday, but they didn’t have a clear growth focus of what they were doing.

And so, it’s really, really messy getting there. And some of them stall out after $200 or $300 or $400 million because it gets so messy. The people who make really strongly structured high-income lifestyle practices, do it with the intentionality that you would need to make a billion-dollar firm. They just actually figured out they’ll make more money with less stress by not doing it.

I can attest that my take home was better with 2 team members than with 25. I have a bigger business, top-line revenue’s a lot bigger. But you have to do so much to invest in the business, especially when you’re growing fast. My economic net worth would’ve been better staying small because that thing was really high margin.

Brad: Well, selfishly, we appreciate you growing because that’s expanded the team and expanded the content. So, put a vote down for thanks for going bigger!

Michael: I’m not stopping now.

Brad: You can’t stop it now. It’s in motion!

Question #3 – If you were king for a day 20 years ago, and could change one thing about our industry, with no ramifications, what would it have been?

Brad: All right, question number three.

This is a question, but with a little twist at the end because I’m afraid you’ve been asked the question before. So I’ll tell you the question, but I’m going to give you the twist.

If you were king for a day in this industry, you’re the emperor. You get to change one thing about our industry, and there’s no ramifications from a regulatory perspective, reputational perspective, or whatever. You get to change one thing about our industry, what is it?

My fear is you’ve been asked that before, so I’m going to ask you, if you were the emperor 20 years ago, what would you have changed?

Maybe it’s something that has changed since then, but you wish it would’ve been all along or we’re still not there. And 20 years ago we would’ve been better and here we are still. So, if you could change something going back a couple of decades, what would it be?

Michael: I would have put a rule in place back in the 1990s when we were all insurance agents and stockbrokers, and decided we didn’t want to be insurance agents and stockbrokers anymore, and started putting financial advisor on our business card. And I would’ve made it illegal to do that unless you’re actually in the advice business. We still have the problem in present day.

The industry has a really big negativity on sort of salespeople in the aggregate that I actually don’t have. There is a role for salespeople selling products to fulfill needs, to take orders, to help people understand their choices when they want to buy a product, but they’re not sure which one to buy. That’s a meaningful, valuable service, and it’s good to have out there for people.

But we create all sorts of problems for the industry, and I think ultimately consumer harm, when salespeople are allowed to hold themselves out as being in the advice business, when in the reality they’re in the sales business.

Drug companies don’t get to run their own clinics that sell their drugs. In fact, you can’t even buy their drugs from them. You have to get them prescribed through a third-party doctor. Because we figured out a long time ago that there’s a lot of bad problems that come if the product manufacturers actually employ their own advisors.

When I go to a nutritionist, they don’t run a butcher shop, and I don’t rely on them for objective red meat advice. Because if you run a butcher shop, I know that everything’s going to be a recommendation for red meat at the end of the day because you run a butcher shop.

I like that they are butcher shops. Sometimes I want to get a nice cut of meat. I love my meat. I might even take the meat against the advice of my nutritionist. But I want to be really clear when I’m engaging my butcher and when I’m engaging my nutritionist, because they have different roles and purposes, and there’s a lot of problems when they get mixed together.

To me, the fundamental challenge that our industry has right now is that the sales side of the industry uses the advisor title, while the advisor’s side of the industry uses the advisor title.

Consumers can’t tell the difference between not even just the good and bad advisors, but who’s actually an advisor and who’s just operating as a salesperson.

The regulators can’t figure it out, which is why we keep doing all these regulatory contortions, Reg BI, DOL fiduciary. It all comes back to the fact that the regulators are saying, “There used to be salespeople and advisors. Now, they’re all in one bucket. Well, we have to figure out how to regulate y’all now that you’re doing the same thing.”

I’m actually very much against all of these uniform fiduciary regulations that have been coming out, which are essentially saying, “If all the brokerage insurance companies are calling themselves advisors, we’re just going to regulate them all as advisors.” Because it does actually screw up some very important things that brokerage companies and insurance companies do that just are not fiduciary advice activities.

Sometimes you want to buy a product and you need someone to sell it to you. We’re all clear, this is not fiduciary advice. I know when I go to the clothing store, and the rep says that the pants look good on me. I understand the nature of this relationship. I’m not actually going to them for fashion advice, but it is helpful for you to help me understand my choices of the clothes that are on the rack. So, there is a meaningful value that salespeople provide in that context.

I think it’s very problematic that we’re trying to regulate them all as advisors, but it’s because we lost the fundamental distinction between advisors versus salespeople. I think we need it back.

So my answer to what would I change today, I would put that line back in between advisors and salespeople, and just say, “Look, if you’re going to put advisor on your business card, you’re a fiduciary through and through, you’re subject to all of those standards, you’re subject to all the compensation restrictions that go with it, period. No, ifs, ands, or buts, and no removing the hat. And if you don’t want to be that, that’s totally fine. Put an insurance agent or stockbroker on your business card, and go do insurance agent and stockbroker things, and we’re all clear about the nature and scope of this relationship, and do your thing.”

What I would change today is to put that line in place. And what I would change in the past is prevent that line from having gotten blurred the way that it did over the past 20 to 30 years.

Brad: And let’s hope 20 years from now that question is not still unaddressed!

Good perspective. I love the analogies, the butcher analogy, and everything. Appreciate you sharing that.

Question #4 – What do you think the RIA model will look like 30 years from now?

Brad: Speaking of predictions, question number four.

You’ve been known to make predictions in your time which I applaud you for. A lot of people don’t want to make predictions, or they make them so vague, you know, a market strategist says, “The market’s going to go up.” That’s all they say. Well….

Michael: Yeah, it’s a market strategist speak, never give a price and a date in the same prediction.

Brad: Yup! You got job security as long as you don’t do that.

It’s probably been 10 years ago now when robo-advisors came out, you were early in the game when people said, “This is going to put financial advisors out of business.” You were quick to say, “That’s not at all what’s going to happen. It’s just going to make…”

Michael: I mean, we wrote they were DIY solutions whose primary competitors were Vanguard and Schwab, and then literally three years later, the first two people to launch competing services were Vanguard and Schwab.

Brad: Yep, that bore out.

You’ve made a bunch of predictions. So, number four, I’m not asking you to make a prediction for next year. I want you to look out and consider, what do you think the RIA model will look like 30 years from now?

Will it be fundamentally different from what it is now? Will it just be marginally different? And by the way, you and I will long since be retired in 30 years, so no one’s going to fact-check this, but what do you think?

Michael: I might still be around health-willing. I’m going to be one of those die-with-my-boots-on types.

Ironically, I would say that I think much of the RIA landscape is going to look surprisingly similar in 30 years to what it does today, with a couple of big asterisks to that I have to qualify.

For much of the past 20 to 30 years, RIAs were kind of this unique breed relative to the rest of the industry. They were sort of the proverbial pioneers who left big firms and supported environments and went out into the wilderness, staked some ground, cut it down, built their log cabins with their own two hands. In about the most pioneering of analogies that you can get. That was the RIA space for much of the past 20 to 30 years.

In some ways, that’s sort of how the RIA space is still portrayed. This is where the pioneering entrepreneurs go. But I see an RIA space that’s very much different in flux.

I look at the RIA space today, I still see some of those folks doing their thing, more power to them. But I see the rise of a whole slew of support platforms and infrastructure that’s emerging around them. The Dynasty’s of the world. We do a version of the XY Planning Network where we’ll give you the compliance and the technology and the practice management support and all the rest around your firm, so you don’t have to be totally alone.

You see the rise of super OSJ models supporting increasingly independent RIAs out of the broker-dealer channel. You see whole brokerage firms like Commonwealth that are basically framing themselves as national independent RIA platforms with the legacy broker-dealer attached. Repositioning their whole business.

At the same time, I see mega RIAs rolling up creating employee roles where the firm brings in clients and provides them to the advisors to service. I look at this like we got national scale independent RIA platforms, that’s what the broker-dealers used to be. We’ve got growing national scale employee model RIAs. That’s like the Ameriprise, Raymond James, and the rest that have employee models.

We’ve got some mega RIAs that are going after the ultra-high net worth and bringing in a diverse range of other services. That’s basically reinventing wirehouses.

And to me, the whole landscape of all the different channels of advisors that we’ve had, that of which RIA used to just be one because we had RIA, independent broker-dealer, employee model, national wirehouse, every single one of those is being reinvented in an RIA package.

You can be solo, you can be affiliate, you can be tie-in, you can be tuck-in, you can be employee model. Because really to me, all it comes down to is we’ve got a framework where there’s some advisors that just want to do their entire thing autonomously. There are advisors who just want to work at a firm where it all works out of the gate, and they can just see their clients and not have to worry about anything else.

There are folks in the middle that want to have various affiliation packages. And to me, the RIA model is just reinventing its flavor on all of those structures that have existed for almost 100 years.

So when I look 30 years forward into the future, I’m like, “What does the future look like?” We’re going to have big RIAs and we’re going to have small RIAs. We’re going to have independent models, we’re going to have affiliate models. We’re going to have employee models, we’re going to have self-employed models. Which is basically all the things that we have today, because human beings are just wonderfully varied.

Advisors are wonderfully varied. Some of us want each of those things across the spectrum. And the space is so darn large, we can support all of those. Aside from the fact that some of those options have not been as available in RIA formats in the past, we had to get them from the wires and the IBDs and such, and now we’re increasingly having them with an RIA wrapper.

I don’t think the space actually looks that different because that’s just the representation of the landscape of what consumers want. Some people want to be in big firms, some people want to work with small firms, some people want close touch, some people want national brands. And as advisors, we all have choices and preferences about affiliating across that spectrum as well.

Brad: Yep, I think it’s going to continue to evolve. I don’t think the trend’s going to reverse anytime soon.

Michael: The striking thing for me, all this discussion right now of you have to be huge to survive, you have to have scale to survive, the solo RIA is doomed. And to me, it’s just comical that, on the one hand, the mega RIAs that have $10, $20 billion under management are one-one hundredth the size of one wirehouse.

If you need scale to survive, the entire channel is screwed up, down, left, right, and sideways. Every RIA in the aggregate, all of them are about the size of Merrill, Morgan, Wells, and UBS. Four wirehouses is the same as 30,000 RIAs. Except we’re split across 30,000. So, if you needed scale to survive, all of us are doomed.

Now, the secondary irony to me is, the RIA was born from anti-scaling.

Twenty five years ago, wirehouses dominated the landscape even more than they do today. RIAs had no size, no scale, no systems, no infrastructure, no technology providers, no service providers, no nothing to provide scale in any way, shape, or form. And they’re the most thriving channel for 20 consecutive years. So, why that would suddenly be different now that there is more systems, more support, more service, more infrastructure, and more capabilities than there ever has been at any point in the past, just blows my mind.

There has never been an economically better time to be a solo practice than there is today. When I started, you didn’t even talk about going solo RIA, unless you had $50 to $100 million dollars, then it was $40 million, then it was $30 million, then was $20 million, then it was $10 million.

The majority of advisors we see that start with XY Planning Network, they have no clients, no assets, and $10,000 in the bank. They start a firm, and it grows.

And so, to me, the biggest thing that is sort of, ironically, misunderstood in our space, particularly around RIAs, is RIAs were literally born from the fact that you don’t need scale to compete. They grew because you don’t need scale to compete. They have more systems tech and infrastructure and service providers around them now to provide scalable external support without needing to scale yourself than at any point in the past 20 years when we already had all the growth and success to get to where we are today. Even the biggest RIAs aren’t vaguely, remotely slightly close to actual national scale companies like wirehouses.

The opportunities are phenomenal in the independent space right now. But to me the most persistent myth is that you need size, scale to survive and you just don’t. It does help though to have infrastructure to plug into.

A few of us like to build our cabins with our own two hands, and we’ll do that. But to me, the biggest thing that’s shifting, and you live this very well on your platform, Brad, is all the different choices that are out there now for people that don’t quite want to be entirely from scratch and want to attach to some systems that give them some of that scale, and that makes it easier to run this model.

Brad: I think a safe 30-year prediction is that the $50 million RIA will still be around. Just even more efficient than it is today.

Michael: Yeah, even more efficient and higher-income.

Twenty years ago when I was getting going, I spent a couple of years in a firm that was 3 producers, about $1.3 million in GDC, 13-person team to support that firm. Today, those three advisors would probably need two or three support staff. The backend office staffing needs are down by about 70% to 80%.

We had a woman whose sole job was to take all the mail that came in every day, open all the envelopes with the duplicate paper statements that came in, and file them in each client’s individual paper file folder so that we could do all of our regulatory compliance documentation. That’s all electronic and automated now. That was a full-time job. She had a full-time job doing that. We got that much mail because we were $1.3 million GDC with many, many hundreds of clients. There was a lot of mail that came in. Someone had to open the envelopes every day because we couldn’t accidentally sit on a paper check for more than 24 hours.

All that stuff’s vanished. We were so ludicrously inefficient back then.

Brad: It’s interesting because 30 years from now, there’ll be things we’re looking back on today, and which are kind of normal for us today, like…”Man, you had to check your inbox every single day, all day long. Your email inbox.” Maybe that won’t be a thing 30 years from now.

Michael: Yeah, “You had to call your clients, see how they’re doing, your cybernetic brain implant, didn’t just communicate it to you automatically. Geez, that seems so inefficient. Where was your optical overlay with their background information when you were doing your discovery meeting? You had to just ask them questions. That’s awful.”

Brad: Yeah, write it all down and enter it in the CRM.

Question #5 – If you were a mutual fund wholesaler today, how would you try to work with RIAs?

Brad: To keep us moving along, number five.

You are obviously no stranger to industry conferences. You told me the other week how many dozens you do on average every year, and as impressive as the number was, you used to do even more.

A mainstay, of course, at industry conferences for decades now, are mutual fund wholesalers. They’ve been around forever. I remember when I first started going to industry conferences a little over 20 years ago. I don’t know if “glamorous” is the right word, but wholesalers seemed to be quite happy with the job. They made good money. The business was not easy per say. They had to travel a lot, but the role was fairly well received.

That job has got significantly more difficult, whether too many people calling on advisors trying to pitch things, the shift to ETFs, whatever the case is.

So, if you were hypothetically a mutual fund wholesaler, and there could be some listening here along, how would you best try to work with RIAs nowadays to be able to build a relationship? What would the expectation be from an RIA to even take a phone call?

Michael: First of all, my heart goes out to you guys that are in that position. It is rough.

I’ll say it from the advisor end, I get like 10 to 20 emails a week from wholesalers, no joke. I get so many, I couldn’t possibly take the time to politely decline to everyone because it would take me a few hours a week. Even if I just spent five minutes per email to politely say, “I’m sorry, I’m not interested.” The volume is sort of unimaginably overwhelming.

And just practically speaking in the modern world of what we do as advisors, if I’m looking for a solution, I’ll call you. I don’t develop my systematized models for my clients with random phone calls and email solicitations that come in. No offense to the folks that are in the position of trying to get their foot in the door, but that’s just not how it works now.

I will form an investment thesis of what I want to go after. I will do my investment research and due diligence. I will get down to a shortlist. And if your company is on that shortlist, I will call you. And if you’re on the shortlist, I call you, I expect you to know absolutely everything there is to possibly know about your product. But short of that, I’m probably not even that interested in talking to you. This is sort of the practical reality.

For folks that are trying to get their foot in the door or make the difference, here’s what I would say. Number one… really, really, really know your product. I don’t need you to be my call router. If I’m calling you, and you say, “I’ll get you that answer. Let me get the resources internally.” All I’m thinking as an advisor is, “Cool. Can you also just give me their number so next time I don’t have to call you?” I don’t need you to be my call router. If I’m calling you, I expect you to be the answer person.

So, how well do you know your products and solutions to really be able to talk? If I do call and I want to have that conversation, you can talk shop.

Still today, one of my good friends in the industry is someone that I got to know 20 years ago when he was a wholesaler calling on our office. I spent time with him because, this was in the annuity days, he knew everything there was to know about his annuity contract. He knew all the fine print stuff because he’d actually read the prospectus that nobody reads. He read his own prospectus that sadly no one reads. And I read prospectuses, so I could actually ask him hard questions about the prospectus and he knew.

And not only had he read his own prospectus, he’d read everybody else’s prospectuses. He knew all the fine point details of every competitor. And not just because he was sniping at them. He could even acknowledge, “Yeah, they’re better than us in this area, but we’re better than them in that area.”

He was the most knowledgeable person in that space. And so, anytime I had a question, I called him because I knew he was a resource. He was a real resource. He was the resource. He wasn’t just connecting me to resources in his firm.

So, number one, I would say is an opportunity to be there because then I really know you, and trust you when I do need to call. I really do want to call you because I know I’m going to get the answers that I need.

The second thing that I would say is just realistically to differentiate in this environment today, the number two thing I still hear and I feel myself and see it for all of my advisor friends… if I’m not asking you about products, I’m asking you what other advisors do.

One of the things I know about all of you in the wholesaling world is you see more of us than we see of each other. So, I want to know and understand, I want you to teach me about what other people are doing that’s successful that I might be able to bring to my practice.

The asterisk to that is most wholesalers I find don’t really actually understand how advisory firms work and what our pain points really are. They come with the wrong ideas, they come with the wrong stories, they come with the things that are about sales strategies to sell their product, not to solve my actual problems in my business that would help me grow. And if I grow, then I might actually use your product when I gather more assets and grow. But that’s not my primary problem. Now, my primary problem is other things.

A lot of wholesalers I find put us in too many big broad buckets around, “We must have these problems because we’re in this firm, or we’re this type, or we’re this channel.”

Most of our problems are not determined by channel. It’s determined by the size of the practice, how many team members we have, which dictates a whole lot of management-related and infrastructure issues. How many clients I have, which dictates my busy work, by ratios of revenue to clients and revenue to staff and clients to staff, which speaks to how service intensive I am or I’m not.

That to me becomes the second opportunity. The industry saying goes, “You can talk to advisors about practice management and it’s a plus.” And I do believe that’s true. I really, really do believe that’s true. But most wholesalers don’t understand enough of the differences between our practices and where our pain points actually are. And so, we get tips and advice that isn’t actually really relevant.

Brad: I think that’s great advice. It’s a long game though. You can try to become that expert, but that doesn’t immediately turn into business the next day. You have to demonstrate that. And it often takes years to build that reputation. But there’s no other way. So, I think that’s good advice.

Michael: And the third thing I will just note quickly from a very practical perspective because our product decisions increasingly in this advisor world, first and foremost, come down to I do my research and due diligence and I’m going to find you.

Pick a company that’s got a solid lineup. I’ve met a lot of wholesalers over the years. Like, “Dude, you are really good at what you do and you know your space well, but my friend, you are representing a company that just probably doesn’t have a snowball’s chance.”

For some of you, you know who you are. I’m not going to call out any companies in particular. But some products are a lot more competitive than others.

My advice, I would give my wholesaler friends when I hang out with them, if it’s that hard getting your foot in the door and building relationships with advisors because the company just doesn’t have a great lineup, spend less time trying to figure out how to get your foot in the door with advisors, and more time trying to figure out how to find a better company to represent. That will give you a better shot and better conversation.

But, you still have to be awesome in all the things that I said to create the rapport and the connection when the advisor calls or when you can make the breakthrough. But I do see a lot of wholesalers that just my, career advice would be less time trying to figure out how to sell your not very saleable thing, and more time trying to figure out how to work for a different company that has something that’s more saleable in the first place.

Brad: That’s good advice, but that’s going to be hard for some folks to…

Michael: I know. That’s easy to say and very hard for do for lots of family and lifestyle change and income change and territory change, and lineup change, and all sorts of other things. But, you know, if it was easy, it wouldn’t be hard work that pays well.

Brad: And eventually you’re going to die off with the wrong product. So, you might as well shift course.

Question #6 – If you were asked to help invest $100M into the industry, how would you deploy the capital?

Brad: We’re almost done here. Number six, and this is going to be another kind of hypothetical, so you don’t need to worry about, “Michael Kitces is the one that did this.”

If you were given $100 million, maybe some rich person came to you and said, “Michael, here’s $100 million. I want you to invest this in the RIA industry for me.” Where are you putting that kind of money to work?

Michael: Whoa.

Brad: Yeah. I’m trying to keep you on your toes.

Michael: Wow, where would I deploy $100 million into the RIA industry? So, two thoughts to me that come off hand.

One, there’s a lot of newer small technology companies starting to crop up that are building some really cool new things for advisors to solve really meaningful challenges in our businesses. Just from a pure investor end, I think there’s a lot of money to be made in investing to some advisor tech startups.

Advisor tech in our space does not get a lot of love. Because when you pitch this to a venture capital firm, they see there’s 300,000 advisors. There’s 300 million people in the country. Why are you selling to advisors? Make this direct to consumers. Sell it to a bajillion people. And they try to talk advisor tech companies out of building for advisors because just the consumer marketplace is so much larger.

The problem is consumer marketplace is a really hard nut to crack, and they don’t like paying money for things. Whereas advisors run businesses have certain business needs they need to pay for. There’s actually a lot of opportunity in the advisor tech space.

So number one, I would say is I’d be looking hard at some advisor tech companies to be investing into.

And number two, I would be trying to find advisory firms that have organic growth engines, and take a minority stake in them, and buy a piece of them, and give them some cash to do the organic growth marketing thing they’re doing, and just pour more fuel on the fire.

Most capital that’s coming in today is going into firms that just buy other firms. They don’t really have an organic growth machine. So, using the money they have to buy other firms, which is not particularly cost-efficient, and is capital intensive. You don’t really create enterprise value by just mashing a bunch of things together.

I would be hunting for the subset of advisors that have actually figured out a marketing pipeline. They know who they’re going after. They know how they reach them. They’ve got a process of marketing, nurturing, and sales. And I’d be applying a lot of money into them because the economics of advisory firms that have good organic growth engines are just ludicrously insanely profitable.

A single million dollar client at a 30% profit margin, $10,000 a year of revenue at 1%, $3,000 of profit on the client at a 30% profit margin. Most of us have 95% plus retention rates. So, 20-year average tenure. One client could be $60,000 of profits.

Now, I don’t say that lightly, you gotta work your backside off for 20 years to actually get and keep that client. But one client is $60,000 of lifetime profits. So, if you’ve got a systematized marketing process, where you can spend thousands of dollars to get one client – fine, if it costs you $3,000 to $5,000 to get one of those clients – my long-term ROI is just ginormous. So, I would be looking for those investment opportunities.

Brad: I remember you had a guy, and unfortunately I forgot his name, on your podcast a while back and he’s no longer with the firm. I remember, he was a marketing guy, and the stories he told, they got it down to, like, bird watchers are good clients and they would market specifically to them.

It shows you if you really look at the science behind it. But easier said than done to be able to pull that off.

Michael: Yes. Most of us cast too wide of a net, trying to be interesting to everyone and don’t attract anyone in the process.

Question #7 – If you had more capacity, is there a business in our industry you would try starting, and perhaps others should be trying themselves?

Brad: Ok, final of the seven questions, and then we’ll go to the scorecard here shortly.

There’s a podcast called “My First Million.” It’s a great podcast. I don’t have anything to do with it, so I’m not giving a shameless plug.

It’s two guys that are both successful in their own right. They’ve started businesses, have built up a good amount of wealth as a result. They love talking about other businesses that they think should be started. They just don’t have the capacity or desire to do it themselves, but they think it should be done.

So, potentially with some entrepreneurs that are listening along or aspiring fintech folks, is there anything in our industry that if your hands weren’t as full as they are and you had more capacity, you might tackle it yourself? It’s not going to happen because you don’t have capacity, but you wish someone else would pursue? Please share it, and someone might hear this and run with it.

Michael: Man, my thought goes back to where we just were, the economics of advisory firms growing clients.

Spending money to get clients is so ludicrously profitable in the long run. To me, there’s so, so much opportunity to just pick a target market you can go after that’s sizable enough you can build and scale a bit, and just get hyper-focused in the marketing to them, and go at it.

As excited as I am about a bunch of the different businesses that are out there that support and build infrastructure around advisory firms. The darn advisory business is still more profitable than all of them. Advisory firms are more profitable than all the support structures we’re building around them.

But many firms struggle because we try to be everything to everyone because we are trained in a world where you just work with anybody who can afford your products or services, instead of really getting clear on target markets, and pursuing them the way that businesses classically get built with strong business plans.

And as crowded as the advisor space is, I think there’s still huge gaping opportunities to go after particular client segments. Young doctors, young lawyers, rising architects, people making partner at their firm, there’s so many.

There’s an advisor I know in Indiana, his niche specialization is ophthalmologists that run independent practices who are within five years of retiring and thinking about selling to a PE rollup.

Brad: Wow.

Michael: Just that.

Brad: Good for him.

Michael: And he’s got more flow that he can handle, a waiting list, the number one podcast for independent ophthalmologists. Every time one of them gets a call from one of the rollup firms – because they got apparently a rollup thing going on in their space the way that we do in our RIA space – he’s the guy to call, he’s the go-to.

Brad: That hits near and dear to my heart. You’ve been messaging that for a long time, the niche approach. I know you’ve said that a lot with XY. A lot of that went into the vision for what I created with my firm of being hyper-focused on one thing.

Michael: Yeah, you’re living it.

Brad: Near and dear to my heart. I agree, it makes it 10 times easier for how you market your services, the time you can spend on being an expert on something. I think that’s wonderful advice.

Michael: In the purest sense, if you can figure out a systematized method to spend $3,000 to $5,000 to get a $1 million client, that you can do repeatably, you are minting millions. Just do that system and repeat it and scale it up with more people. You’re spending $3,000 to $5,000 for something that is $60,000 in lifetime client profit.

The numbers are just off the page good. That’s why so much PE money is pouring into our space. The numbers are so off the charts good, but very few of us even approach with the mentality of, “I’m going to try to build a scalable business with a client acquisition costs under $3,000 for a target market with more than $10,000 of revenue per client.” That’s the business economics framing of it. You gotta get clear on what those KPIs are to build it that way. But nobody’s really building that, and the numbers are just absurdly good.

Brad: I hope this has influenced someone listening to this or hopefully multiple people to be motivated to pursue that path.

Bonus question – What was the topic of the very first blog post on the Kitces blog?

Brad: Before we go to the scorecard, I have a bonus Michael Kitces’ trivia question for you.

In case I didn’t go seven for seven, which I want you to be honest if I didn’t, but the bonus might give me an extra point. So, this is a Michael Kitces trivia question.

I’ll take you back to November 6th, 2007. I don’t know if that date rings a bell, but if it doesn’t, or for the listeners that don’t know, that was the day that the Kitces’ blog went live.

I was going to ask you what was the very first blog post you made. I went back and looked, turns out you made two on that day. The first one was a welcome to the new blog kind of general thing. So, that’s too much of a softball for you, so I’m not going to ask you that.

I want to know, what was the subject of essentially your very first blog post, beyond just that welcome one? I know what it is, I looked it up. Do you know what it is?

Michael: That was back then I was super deep into taxes and retirement tax law. So, it would’ve been some revenue ruling or IRS notice or private letter ruling that came out.

My challenge at the time was I had started publishing our newsletter, the Kitces’ Report, where it was these long-form articles on continuing education, big 10-15 page whitepapers. I had this stuff that I was researching around tax law, and I wanted to write about it. I needed a place to put it, but it wasn’t long enough to fill a newsletter or it wasn’t long enough to fill a whitepaper. So, the original version of the blog was because I needed a place to put all these old, tax notices and revenue rulings that were coming out.

So, I’m going to guess it would’ve been one of those, but I don’t know what it would’ve been at the time. I want to say there was a bunch of changes going on with the Pension Protection Act and, non-spouse beneficiary rollovers, and a whole bunch of stuff on that. So, I would guess it was something tied to that. But, I don’t really remember quite which revenue rulings came out when. I’m just trying to remember, ’07 relative to the Pension Protection Act of 2006.

Brad: I don’t know what the total number of posts are (on the Kitces blog.) I assume it’s in the thousands now. I just asked you to go back thousands of posts, and at the very end there you nailed it perfectly. It was some IRS changes around non-spouse beneficiary rollover rules.

Michael: Oh, there we go.

Brad: I give you credit, you didn’t come out soft. It was a very wonky, detailed topic that you dove into on that very first post. I did not think you would remember what it was!

Michael: That’s only because if you asked me anything like 6 to 12 months after that, I would’ve been stuck. That was a lucky moment in time because that was the post-Pension Protection Act. I remember when I was stuck on it when I launched the blog.

Brad: Well, amazing. I did not think you would get the Michael Kitces trivia question. You got it.

So, with that, we’ll wrap up. Thank you for all your time. But for the scorecard, how did we do? Out of seven, how many do you think was your first go at it?

Michael: You were original on six out of seven. I have had a couple of conversations over the years with wholesalers and the wholesaling community about other pathways to try to get the door open with financial advisors. We wrote a couple of pieces about it a couple of years ago as well, the changing landscape. So, I have had the wholesaler conversation. The rest was new.

Brad: That was probably too broad. I should have seen that one coming. I think it’s still good info to share, but fair enough, I’ll take my six out of seven.

Michael: Well, the other angle for that is now there are a bunch of wholesalers coming into the financial advisor business. That’s actually one of the biggest shifts that we’re seeing now as well.

Brad: Well, thank you very much for your time. This has been a fun conversation. I appreciate as always you sharing all your wisdom with everyone, and I appreciate you coming on to be part of this show.

With that, we’ll sign off. But thank you very much, Michael.

Michael: My pleasure. Congratulations on 100.

Brad: Thank you.

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