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Kitces Part 2: Where advice went wrong and where to now

Introduction to Michael Kitces (MK), interviewed by Graham Hand (GH)

Michael Kitces is recognised as the publisher of the #1 financial planning industry blog in the United States, based on awards and surveys. His website, kitces.com, is also home to the popular Nerd’s Eye View. He speaks at 50-70 conferences a year, consults widely to financial planning groups, and is a Partner and Director of Wealth Management with Pinnacle Advisory Group (Washington DC).

I met with him at The Portfolio Construction Forum’s Finology Summit 2018, where he presented two keynote addresses including ‘Robo-advisors are NOT the future (but technology is)’.


To give some context before the interview: In Australia, the Future of Financial Advice (FoFA) reforms implemented in 2013 required financial advisers to act as fiduciaries and put the best interests of clients ahead of their own. The reforms also addressed conflicted remuneration and banned commissions paid to advisers by product manufacturers (such as asset managers). Similar legislation has yet to be passed in the US, and some of Michael Kitces comments should be viewed in this context.

However, in a report called 'Financial advice: vertically integrated institutions and conflicts of interest', issued in January 2018, ASIC reviewed the quality of personal advice in the largest licensees in the four major banks plus AMP. While the conclusions have been criticised by parts of the industry, ASIC found that clients were invested heavily in in-house products after receiving advice, and the quality of advice was often non-compliant, as shown in the graphic below.

We give this background to the interview with Michael because many financial advisers will argue that FoFA fixed the main problems, that much of the Australian advice industry has moved to fee-for-service, that advisers are leaving the large institutions and that his comments relate only to the US. ASIC's research suggests many of these issues remain relevant in Australia, although clearly many financial advice firms have adopted high standards.


GH: How do you see the changes brought on by the ban on financial advisers accepting ‘conflicted remuneration’ or commissions from fund managers?

MK: I wrote an article maybe five years ago with predictions on how the Australian market might play out under FoFA based on what we’d seen in the US. A major theme was the expansion towards more independent advisers and platforms because it’s much less compelling for large vertically integrated firms to provide wealth services when they just get paid for the advice. They cannot be vertically product distribution channels any more. I hear now a few of the large firms are spinning off their wealth management businesses.

GH: Why can architects and lawyers charge $10,000 to do a job but most people will not pay a financial adviser such amounts?

MK: We’re terrible as financial advisers at explaining our value proposition. We don’t target well. Clients say, “What are you going to do for me?” We say, “I’ll help you with whatever you need.” That sale only works with people who think they are so incompetent at managing their own personal finances that they need an adviser. Most people have not become so destitute about their own competency that this is a valid value proposition. And then we make it worse with impossible brand promises.

Surveys in the US show there are two primary ways financial advisers differentiate themselves. Number 1, my ability to understand the needs of my clients. As if anyone would ever say they don’t understand. Number 2, 72% said they differentiate on the breadth of my expertise. NOT the depth. So my marketing brand promise to clients is that I know more about everything than anyone else, which is not even believable. And it’s not possible for 72% of advisers to be above average. The math doesn’t work. We struggle to make any differentiating statements, they are barely table stakes.

When the product goes away and advisers have to sell the advice itself, they are still figuring out how to do that. The worst paid people in any knowledge profession are generalists. Specialists get paid more. That is the evolution we are making. For example, I know what a brain surgeon does. When I’ve got that problem, I’ll pay a lot of money for that solution.

GH: So if you have an adviser client who has this communication problem, what do you tell them to do?

MK: Advice should be about deeper niches and specialisations. That’s the evolution of the next 15 to 20 years. Down that road, you can market and differentiate more effectively. You can create more tangible advice outcomes relating to the exact type of people you are working with, and better client experiences. It’s easier to do when all your clients are the same. You gain efficiencies because you don’t need to look up new things about how to handle the next client. You become the leader and expert in that niche. You can sit across from people and give $500 an hour advice off the top of your head. Right now, you can’t do that so you have to price in the time it takes to research, and the time it takes you to market and find clients because you’re not recognised for any expertise.

GH: Why can I go into a Ford car dealer and accept that he will only sell me a Ford, and nobody questions that? But if I go into a financial adviser, and they sell me the in-house product of the vertically integrated wealth business, that is unacceptable.

MK: Because Ford does not market itself as a comprehensive automotive consultant. They are Ford car salesmen or women. I know what I’m going to get. Here’s an analogy: if I go into a butcher’s shop, they will sell me meat. Everybody understands that, they don’t advertise themselves as dietary nutrition experts who happen to always sell meat. The problem is not the nature of the product sale. The problem is we’ve attached the label ‘advice’ to product sales. Technology is making it easy to sell products so we can’t get paid for products. Now we get regulatory conflicts when sales people give advice. It’s a global issue as countries define a fiduciary rule.

GH: What’s wrong with saying, “I sell my own products, and they are high quality and competitive”? We simply accept it’s sales, not advice.

MK: It’s the label problem. If we said, “This is my annuity sales person, would you like to talk about our annuity product?” then all of these problems go away.

GH: So why don’t we do that?

MK: Because advice sells better. You can sell more annuities or investment products or insurance or whatever proprietary thing you want under the guise of advice. The industry did their marketing studies and found when you put ‘financial consultant’ on the business card, people buy more. But the sales industry took it too far, consumers complained to the regulators, who said they will now regulate advice.

I would prefer not to see uniform fiduciary standards across financial services, I prefer a ‘truth in advertising’ control of titles that says ‘sales person’ on the business card. I know when I go to The Gap and they say the jeans look good on me, that they work on commission. I know how to judge that advice. We understate how knowledgeable consumers actually are about basic relationship dynamics like advice versus sales. The dilemma is that the regulators have come in and said if those are the titles you’re going to use, we’re going to regulate you.


Graham Hand is Managing Editor of Cuffelinks.


Roboadvice's role in financial advice’s future

Kitces Part 1: How robo misunderstood the advice model

Lessons for roboadvice in Centrelink debacle



March 02, 2018

Excellent opening summary in this week's email Graham!


March 01, 2018

Regarding Graham's physio analogy in the newsletter email: I am a physiotherapist and am interested in your comments. Soft tissue healing time is 6 weeks, so I guess you put the pressure on the Physio looking for the ‘quick fix’. All the solutions that were offered to you were perhaps appropriate under the circumstances but time, (healing time), exercise and restraint from aggravation were the essentials from my point of view. Guess I understand what your analogy was.


March 01, 2018

It seems like there are two potential solutions to the vertical integration problem. One is to ban it. The other is to ensure truth in advertising, as Michael suggests.

If we took the truth in advertising option seriously it would mean no employee or authorised representative of CBA, Westpac, AMP etc could call themselves a financial planner or adviser. It would also mean financial advice groups with "independent sounding" names that are actually owned by product companies would have to use their parent's brand name. Some examples would be Count & Financial Wisdom (CBA), Securitor & Magnitude (Westpac), Charter & Hillross (AMP), Shadforths & Bridges (IOOF) etc.

If this happened, I don't actually see a problem. Plenty of consumers are happy to buy a CBA product from a CBA salesperson or an AMP product from an AMP salesperson. As long as they know this is what's happening. The problem at the moment is that many consumers don't realise their "adviser" is ultimately a product company sales rep.

Graham Hand

March 03, 2018

Hi Dean, I agree I don't see much of a problem with the 'truth in advertising' solution. I was a GM at Colonial First State when the advice problems started (and of course, I must stress I was not involved in the advice side of the business). I said that if a CBA customer came into a CBA branch to talk to CBA staff about a CBA product, there would be no issue with in-house sales. BUT, it came with a proviso. We should issue the customer with a promise that the product would be competitively prices (note, not the cheapest), and it would be managed by a market-leading team with strong credentials. All above the table, explain what we were offering, and 95% of CBA/CFS clients would have accepted it.


March 01, 2018

Advisers have a conflict of interest. They market advice but they make their money through sales. Look at Storm Financial and these were all qualified people.
If I go to my GP and he diagnoses my problem through his expertise, her "advice" becomes very suspicious if she then gets a commission from the medication she prescribes.
In the Ford example, the buyer clearly understands that the sales person's job is to sell product. No one is under any delusion that the sales person has taken the trouble to clearly understand my needs and the product he is selling is the the most appropriate for me. Let the buyer beware.
Problems arise when we get to the bait and switch. Advisors offer "advice" but what the client gets is the "sale" with the most profitable commission. It is then not surprising that so many clients end up with the same advice/product.
Can advisors survive by marketing advice alone? If not, let's call it as AMP does - Advisers are their distribution network


March 02, 2018

Professional financial advice has progressed significantly since your day Jack. There are now a great many advisers who make their money purely from non conflicted advice, just like doctors.

As the article states "The reforms also addressed conflicted remuneration and banned commissions paid to advisers by product manufacturers".

Conflict does still exist where an adviser is employed or licensed by a product manufacturer. In this case methods other than commission are used to drive product sales. This is the next big reform challenge for the government.

However there are plenty of professional advisers out there who are not employed or licensed by a product manufacturer.


March 05, 2018

Less than 100 truly independent advisers (check super guide website) out of 22,000 does not equate to "a great many". There are many more that think they are independent but come up short under scrutiny.


March 08, 2018

Nearly all professionals have a conflict of interest. It is unavoidable. The main issue is ensuring those conflicts are properly disclosed, understood, and managed.

In the medical field, surgeons encounter this conflict all the time. In many cases the need to operate versus using other treatments is not clear and obvious. In weighing up the pros and cons of surgery for any given client, the surgeon needs to manage the conflict between operating and getting paid, or turning the client away and foregoing potential income.

In licensed financial advice there are now very strict controls around disclosing and managing conflicts. However this is not yet the case in unlicensed financial advice.

The classic case is accountants recommending SMSFs. Most accountants are not actually licensed to provide superannuation recommendations. In spite of this many do. They recommend SMSFs that are often unnecessary because accountants get paid for SMSF implementation and administration. It is their "inhouse product". Just like a smaller scale version of AMP or HostPlus.

Martin Mulcare

March 01, 2018

Some very insightful observations from Michael and I would like to pick up two:
1. The Ford analogy is apt and I suspect that there are many people who are happy to talk to a Westpac banker about a Westpac home loan or an AAMI rep about an AAMI insurance policy. The conflict arises when people are seeking objective advice and don't receive it.
2. It is not surprising that financial advisers are generally not good at selling (or pricing) advice. The tradition and culture of the industry has been that the majority of advisers' revenue has not come from clients explicitly paying for advice. Advisers' selling (and pricing) muscles have been weak and this is a great time to exercise them (and many advisers are doing so).


March 01, 2018

Great article, with some really good points. The problems identified with financial planners/advisors can be skirted by using an independent financial adviser. They should have no ownership links with product manufacturers, no commissions or incentive payments from manufacturers and no asset-based fees. Asset fees, although authorised by the client, are incentives that prevent an adviser from being impartial.


March 01, 2018

Advice firms in Aust charge advice fees PLUS product fees (asset based fees called ‘money management fees’, or MER on internal product, platform fees etc). All advice firms must decide if they are selling product or advice, because they get paid for product sales and asset size and not enough for advice. I agree that advisers tend to be lousy at selling their ‘advice’ services


March 01, 2018

Lousy would be applicable in some cases but not all – it’s just hard to do, particularly to the younger demographic. It really is not that hard for someone to understand the fundamentals of building wealth over time (assuming this is the goal). Even if you do not have the formal education, a bit of self-education goes a long way. I don’t want to pay thousands of dollars for an adviser to put down on paper what I already know about my circumstances, to put me in a product that will probably, at best, track the index (before fees) and then additional $$$’s for ongoing service which might include a newsletter, a seminar and an annual review. What I will pay for though is a more complex, specialised need which will probably occur later on in life.


March 01, 2018

Some advice firms charge a flat advice fee and no asset based fees. Some charge asset based fees and no advice fee. A small number charge both.


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