Will RIAs adapt fast enough to compete? Joe Duran, Michael Kitces debate

Technology is improving advisers’ ability to better serve their clients, but independent advisers will need to be aware of a larger paradigm shift toward technology in order to survive in a digital-advice world. 

That was the message from industry luminaries Joe Duran and Michael Kitces who spoke at the InvestmentNews’ FinTech Virtual Summit on Thursday debating technology trends and the future of AUM fees. 

“When I look at what firms like Morgan Stanley are doing and what we’re doing here at Goldman Sachs, we realized that the competitive advantage we have is we can do planning, we can do better investments for most firms at a fraction of the cost with better managers, with alternative managers and everything else — which is very hard for an independent firm to have the resource to do that.” 

The theme of the event hinged on how technology can improve the customer experience for advisers and clients. For advisers, that means reevaluating your process and value proposition before allocating your tech stack, Duran, head of Goldman Sachs Personal Financial Management, said. 

“Don’t start with your tech stack, start with your process,” he said. “The basics matter because if you’re going to spend money on technology, it needs to reinforce a process, not the other way around.” 

For Duran, the shift creates a problem for independent advisers to be able to compete in the future. “Will the independent adviser adapt quick enough to compete? The industry is in such an inflection point, I worry deeply that the independent adviser needs to commit enough resources to think about their business in a way that allows them to stay competitive,” he said. “It’s my biggest concern for the industry as a whole.” 

Kitces had an opposing view, saying the industry has evolved to a place where the RIA is on the rise. “We’ve had 20 straight years of independents continuing to grow,” he said. “I don’t see anything in that landscape that says suddenly independent advisers are in trouble.” 

To be fair, Kitces said he does share a concern for the individual adviser to survive. “Earlier, Joe said there’s challenges for advisers of how they’ll differentiate and I share that concern,” he said. “There’s a challenge for reinventing advisers to differentiation, my view is we’re going to go down a road of a lot of niches and specializations to get there for the average practitioner.” 

AUM VS. FLAT FEES

While Duran and Kitces had opposing views on one industry trend, they concurred on the hot topic of whether or not AUM fees will eventually be replaced by flat fees or subscription models. 

“When you actually put it to pen to paper, it is really hard to make the math work on a fixed-fee model,” Duran said. “Second, percentages are the casino chips of our industry. And I don’t mean that in a pejorative way, it’s very different to say I’m charging you 1% versus I’m charging you $25,000.” 

As a personal anecdote, Duran said when asking clients which model they prefer, they respond preferring to pay an ongoing management fee as a percentage. “So again, I suspect there will be models to try this, I don’t know how they’ll ever make money.” 

However, there is potential for more segmentation with smaller clients that could prefer subscription fees, according to Duran. “As you get bigger, the complexity just becomes great enough and the value that the adviser adds goes beyond the measurable subscription model.” 

Kitces agreed, saying subscription models will probably live in a space of people that have a couple million dollars. 

“If you do a sizing on the marketplace, there’s 200 million households and only about a third of them have at least $100,000 of investable assets, and only about one in 10 of those have at least a million dollars of investable assets,” he said.

“So when we talk about the AUM model, we’re basically talking about a model that serves about 4% of the population,” he said.

However, Kitces said he wouldn’t be surprised if the dominant model ends up being subscription fees — not because it displaces an AUM model — because it makes the observable pie of clients so much bigger. 

“I would envision a future where AUM does fine with AUM clients,” he said. “But it may no longer be the dominant model simply because subscription fees grow with so many other clients we don’t even serve yet.”

Missed the show? Tune in to the InvestmentNews Fintech Virtual Summit On-Demand sessions by clicking here

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