Michael Kitces – The Past, Present & Future of Financial Advice

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:48)
My guest this week is Michael Kitces, who is one of our industry's go-to experts on all things financial advice and financial planning.
We discuss the past, present, and future of financial advice, financial technology, and investing. If you are a financial advisor or use one, this conversation is full of great history and perspective. Please enjoy. I would love to begin with a sort of history, if you will, of the financial planning or advice model. If you could maybe tick the major stages of evolution that that model has gone through, and then we can begin by talking about where you think it might be going in the future.

**Michael Kitces** (1:25)
As I view just our world of financial advisors, I think we've essentially gone through three stages of the business of financial advice, and we're on the cusp of the fourth right now, which I'll talk about in a few minutes.
Stage one is our roots. If you were a financial advisor 40 plus years ago in the investment business, you were a stockbroker, which back in the 70s, like on a sizable trade, you could get paid as much as about 200 bucks a trade in 1975 dollars to execute a trade. It was a very lucrative business for the people who were good enough to get a book of clients to whom they could sell some stocks. That was the model. And it had continued that way for decades before, because all the trading fees back then were fixed. It was part of the rise of the SEC in the aftermath of the Great Depression and the crash of 1929, saying, geez, all these consumers basically got gouged during the bull market of the 20s and the crash of the 30s. We got to get control of this. So we're just going to set the trading fees, and then no one can get gouged because they're set by the regulator. The problem, of course, is you also have no price competition when it's all set by the regulator.
And so the first wave of financial advisors was essentially the financial advisor as stockbroker. And it changed in 1975
And for students of market history, you'll know 1975 was what we now know as May Day, which was May 1st, 1975, the SEC deregulated stock trading commissions. And allowed them to float.
And while the brokerage industry initially said, oh, this is awesome. Now we can charge $220 a trade. You know, we're not colluding. We just all happen to do it at the same time.
A startup firm in Northern California decided to use these newfangled things that were coming out called computers to see if they could scale stockbrokering better than the human stockbrokers. You may have heard of them. The founder's name was Chuck Schwab. So in 1975, immediately after May Day, Schwab was founded. Ameritrade was founded just a few months later. Scottrade and the predecessor to eTrade all came forward in the few years after that. And there was actually a massive wave of, what at the time was, tech innovation to disrupt the financial advisor business model of stockbrokering. And the computers won. In the span of 20 years from 1975 to 1995, the cost to execute a stock trade fell by 90%.
And stockbrokers went away. We talk about it historically as like, consumers in the 80s had changing preferences and wanted more from their financial advisors. It's like, no, technology nuked our business model. We all had to find something else to do. And so we did. We went into the mutual fund business. We said, like, anybody can sell you a stock, I will find for you a great stock picker.
Now, I would argue this was ultimately a higher value proposition model for consumers. We're at least a little better aligned to say, I'm gonna find you a great stock picker, then I'm just gonna sell whatever they're telling me in the boiler room to sell. This was a plus for consumers. They got access to better investment solutions. They had a less conflicted model. They got better recommendations. It began to change the entire model for financial services though, because once I don't need to sell my company's stocks, I don't have to work for a wire house or regional broker dealer with an investment banking division. I can join an independent broker dealer who's not directly tied to the manufacturing of product and just helps distribution of independent third party products. And so you look through the 80s and 90s, you see the massive boom of the independent broker dealer model. Most of the major IBDs today either got started or had virtually all of their growth in the 1980s and 1990s. And it was the boom of the mutual fund model. From 1990 to 2000 alone, the mutual fund industry went from half a trillion dollars to five trillion dollars. That was back in 1990s dollars, not 2018s dollars today. It's like the explosion of mutual funds back then, it was actually comparable, I think, even if you inflation adjust the math, more extreme than the shift to ETFs today.