In this episode Josh talks with Michael Kitces from XY Planning Network. They talk about XYPN’s model of fee-based financial planning aimed at Gen X and Gen Y and why there was a need for this.
Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisors Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.
In addition, he is a co-founder of the XY Planning Network, AdvicePay, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning.
In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” award for his dedication and work in advancing the profession.
In today’s episode you will learn:
- How to plan for a successful retirement
- What can you do if you are still in a cash flow world, not in an asset world
- The difference between a retirement plan and planning
- Small business owners challenge with business and household cash flow
- The power of being a nicheaholic
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, how are you today? This is Josh Patrick. You’re at The Sustainable Business podcast.
My guest today is Michael Kitces. If you know anything about the financial planning world, and we’ll probably learn a lot about the financial planning world today, you’re going to find out that Michael is not only a thought leader. He is the thought leader in financial services space. He is the most prolific writer I have ever run across. His blog entries go for pages and they’re always really interesting to read. Just at a podcast episode for his, we went on for, I think, about an hour and a half which was just a real lot of fun today. We’re not going to return the favor today because I know you’re driving to work and you want to get there and listen to the whole podcast. So, instead of me yammering on, which I have this really bad habit of doing, let’s bring Michael on.
Hey, Michael. How are you today?
Michael: I’m doing well, Josh. How are you?
Josh: I’m great. Thank you. Thank you.
When I was on your podcast, a couple of weeks ago – I think it was a couple weeks ago now, we were talking a little bit about XY Planning Network. For those of you who don’t know, Michael is Director of Wealth Management for Pinnacle Advisory Group which has about $2 billion under management. It makes them the top 1/10th of 1% all the financial planning firms in the country. We ended up talking about his serial entrepreneur stuff a bit. One of them is XY Planning Network. We’re going to start there. I love it when I get people who are business founders on the show because we can find out what happened. Michael, tell us a little bit about what caused you to start XY and how did you go about doing that.
Michael: XY Planning Network or we just say XYPN for short because it gets tiring saying planning network over and over again. We launched XYPN because, frankly, we saw a gap in the advisory landscape. In our context, as you mentioned, I’m a partner back to an independent advisory firm. We help affluent retirees that are approaching retirement transition, kind of do that transition, and then be successful in retirement. Done that for a long time. There’s a whole lot of retirees and 10,000 more turning 62 every day so it’s a good market to be in.
Our industry has long had a problem serving “young people”. I’m going to kind of put young people in quotes because young, in our industry, basically means anyone under the age of 50‑something. Because our industry has been so focused around helping people manage assets as a part of their planning that if you just have money questions, you just want to pay someone for financial advice about the money coming in and out of your household – your income and your expenses and what’s going on. It’s remarkably difficult to find an advisor to do that because so many of them either are with a company that sells a product or they have these asset minimums that don’t work if you’re still a working person that’s saving and accumulating and you’re not there at retirement yet.
And so, we saw this opportunity that advisors can do this. We tried to champion a new business model of doing financial planning for an ongoing monthly fee as the advisor charged $100, or $200, or $300 a month, depending on the person’s complexity, and give them ongoing financial advice. The industry said, “You can’t do that. It won’t work.” We said, “We’re students of business models. In fact, we know some advisors who have done this. We’re pretty darn sure it can. We’re going to make a network to make it easier for advisors to do this.” That’s what led to XYPN – XY Planning Network.
As we put it, we’re a turnkey financial planning platform for helping advisors launch these businesses. We tend to get advisors in their 30s and 40s who want to serve mostly their peers and the people that they know and work with in their 30s and 40s where they don’t want to have to sell them products and they don’t want to manage assets or can’t because there’s not a bunch of money available. They just want to give people personal financial planning advice about the money that’s coming in and out of their household that people sometimes need advice on particularly because there’s a lot of life transitions and stuff that happens to us in our 30s and 40s where we need that kind of advice.
Josh: Here’s a question I have for you. I have noticed, in my training as [inaudible 00:04:46], what sort of stuff do you guys bring to the party? Was this part of your thought process before you started XY?
Michael: Correct. There were a lot of gaps. It’s a very different kind of, I’ll say, planning process that’s a little bit to compare because for most people who’ve never been through the retiree planning process, because they’re not retired yet, you won’t really have anything to compare it to.
For those who have seen both sides, the retirement planning process tends to be very focused on, “Okay. We’ve accumulated these dollars. You’re either ready to retire. You’re almost there.” We need to do a lot of projections and analyses to figure out like, “Can you say you’re free to retire? Do you have enough? How are you going to wind these dollars down?” There’s a whole bunch of investment issues that crop up about how you’re going to invest your retirement savings. There’s a bunch of tax issues that crop up because usually by the time you got there, you’ve got some investment dollars, maybe some business liquidity dollars. There’s a retirement account that’s pre-tax. There might be a Roth account that’s tax free. We’ve got all these different buckets we have to mix together. And so, there’s suddenly these lot of really detailed long-term projections and analyses to find and try to figure out, “How do we make this pot of money last and do it in the most tax efficient manner we can?” And make sure we’ve covered the rest of the risks along the way like health issues, medical insurance, long‑term care needs, etc. That’s still our traditional business at Pinnacle.
When we talk about financial planning on the XYPN side. The XY is just Gen X, Gen Y which today is pretty much anybody under 50. When we talk about planning in the XYPN context, it really is, as I put it, much more anchored around your cash flow statement than your balance sheet. It’s all about dollars coming into the household and dollars coming out of the household as a central focus because the truth is, for most people, when you’re still in your working years, the single greatest thing you can do that has an impact on your long‑term financial future is lifting your income. It’s not getting another 1% return off of your investments. It’s not even necessarily changing your spending. Although spending way more than you can afford clearly is a problem that sometimes has to be changed.
For most people, the biggest driver of improving your financial future is lifting your income. It’s finding side hustles. It’s getting a new job. It’s going back to school. It’s retraining for something. It’s just getting some coaching to have the courage to go to your boss and ask for that promotion or that raise – whatever those things are that they take.
And then, if you do get some additional income. What do we do with that so we don’t continue to just live paycheck to paycheck? Fantastic, we’ve got a little more dollars. Now, let’s make sure we don’t immediately creep our lifestyle higher and spend all of it and still end up not having enough money left at the end of the month. Can we lift income, and not lift expenses, and create that little gap there that becomes known as savings or living within your means and beginning to compound that?
Josh: There’s another group that you didn’t mention that also live on a cash flow world? That’s the group I deal with which is business owners.
Michael: Yes. I deal with that as well.
Josh: Everything that you had just talked about is the standard stuff that we see with business owners on a regular basis which is they live in a cash flow world not in an asset world. My experience is that’s the main reason they overvalue their businesses by four or five times.
Michael: And also, it tends to lead to both misses on what’s happening on the balance sheet side. I think the friction that I’ve seen for a lot of small business owners that we’ve worked with over the years and frankly experience as a small business owner that’s now done the cycle a few times myself, our traditional financial advisor world is actually pretty terrible at serving us small business owners. If I’m setting up my small business and I might need a buy‑sell plan with my partner, I can snap my fingers and 42 insurance agents will be there to sell me the life insurance for the buy‑sell plan that goes with it. Anything that ties back to an industry product, they tend to be there very quickly. But getting actual cash flow advice and figuring out how to do that effectively is, I think, a gap largely in our financial advisor space exists for small business owners. Frankly, we found that it exists more broadly for just all the households under 50 that just want some financial advice about the dollars going in and out and maybe even one advice about a bunch of the other products that they’ve now accumulated from sales people over the years and don’t even know what to do with.
Part of our focus for XY planning network is everything we do is on an advice‑only, fee‑only basis. There are no product sales. There are no massive minimums. We literally don’t allow our advisors to do that. They have to be willing to just give advice, get paid for advice. That makes it much more objective because there’s no ulterior motive of getting your assets or getting your product sold or anything else and bring that advice to a marketplace that we just saw was so drastically underserved in the marketplace.
Josh: Planning for cash flow or doing cash flow planning, which I guess is what we’re talking about really, is something that’s not really taught much in the financial services business. What has to happen for that to switch? When I listen to people make presentations about how to work with business owners, I almost always want to go out and scream. I bet you the same is true for you when people are talking about serving millennials and Gen Xers.
Michael: Well, I kind of think it’s two-fold. Part of is just, yes, we have an education gap. Our planning curriculum has just course, after course, after course about insurance and investments because those are all the products that we had historically. And then, we teach a lot about retirement because retirement accumulates all the investments that we wanted to manage. It is that we do have a curriculum gap, I think, just in general. Not that there’s nothing about planning for cash flow and budgeting but there’s very little.
The secondary challenge though and, frankly, part of what we were trying to solve for out of the gates, in building XY Planning Network, is we don’t help with that stuff because we don’t get paid for it. When our industry is still tied to, “I only get paid when you buy the product, or I only get paid when you give me this pile of life savings money.“ Well, lo and behold, our advice tends to keep coming back to the products we sell, the particular areas that are tied to those products. I don’t help small businesses with their cash flow but I’ll help with their buy-sell because that fits my life insurance policy company or we get stuck back on the assets.
Part of why we wanted to focus on building not just a network to support the advisors from a business practice management sense, which we do, but literally championing a new business model is, when is the advisor – when you work with clients on an ongoing basis for an ongoing fee, your only incentive as an advisor is you better keep checking in with them and giving them good ongoing financial planning advice. That’s the only way you’re getting paid.
It’s a tremendous incentive to say, “All right. What do my clients really actually care about?” because maybe it’s not talking about all the investment stuff and maybe it’s not talking about all the insurance products. What actually matters to them? Oh, lo and behold, it’s their cash flow and the dollars moving in and out of the house. Well, now, I’m going to get good at that because I actually have a financial incentive to get good at that for my client.
For many of our advisors, they then go one step deeper which is they start forming even more targeted niches and specializations. And so, we have advisors who just work with doctors who run their own medical practices, or independent law firms, or lots of different professions. We have several that just focus in on small business owners, similar to what you do, Josh. All built around this idea that – it’s not rocket science but, from the advisors end, when we’re compensated for the assets and the products, we tend to focus on the assets and the products. When we’re compensated a fee for the advice, we tend to get really quickly to whatever advice that our clients actually need. That’s what our advisors are doing that’s part of why we’re having incredibly rapid growth at XYPN.
Josh: That’s been one of the things that I’ve been wanting about for a long time is that the incentives in the financial planning world. There’s also something I want to check with you about is that what I’m hearing you talk about is planning not plans.
Again, in that retirement context, I need to do a plan, sort of literally. Like, “You are going to retire. We have to figure out what the trajectory is the next 20, 30, 40 years. You’ve got all these dollars. You’re not going to work anymore.” In the very literal sense, we need a plan about where we’re going to go. There’s a whole bunch of assets, because you’ve accumulated them, that’s why you’re going to retire.
Frankly, I think that’s why that model historically works so well. I don’t want to be totally negative on the idea of having advisors who have a lot of focus on assets because if you have a whole bunch of assets, it’s kind of nice to have an advisor who’s really concerned about them. That’s useful. That’s very helpful. But, if that’s not where you are, if that’s not where your wealth is or, more realistically, that’s just not your stage of life, the focus begins to shift. We move away from assets and balance sheet and over to cash flow, income spending, dollars coming in and dollars coming out.
The secondary effect we find that goes along with that is when we get into those younger stages, planning also becomes much less the plan and much more of the ongoing planning and advice process because life comes at you pretty fast through those stages in the first place. We have lots of changes and transitions that happen in life. By the time I get to retirement, I usually really only have three – the retirement transition itself, a major health event that usually causes a lifestyle change, and when my spouse passes away – if I’m a couple. Those are the three primary life transitions that retirees have. They’re usually spread out over the span of 30-odd years of retirement. In between, there’s not a lot going on.
When I’m in my 20s, 30s and 40s like first job, new job, starting a business, failed a business, starting a second business, getting married, having kids, getting divorced, second marriage, new kids, new business, prenup. There’s so many different things and life transitions happening. Often, literally every one, two, or three years – on a continuous ongoing basis. You can’t make The Plan – capital T capital P. Like, “The Plan. Here’s what we’re going to aim for over the next 20 or 30 years.” It has to be more dynamic which, again, speaks to having an advisor on an ongoing basis and being able to go through a planning process with them of what’s going on now that we can help you with? What’s going on now that we can help you with? What’s going on now that we can help you with?
Josh: Yeah. I would submit, by the way, that the retirees actually have way more than three life events that happen. I also would submit that planning is a lot more important for that group than plans but I will agree with you that the XY group planning is what it’s all about just as is for business owners because, both groups, what’s going to happen three months from now is not especially clear today.
Michael: Right, particularly in the business world. That’s enough a challenge for us personally. I might find out, “We’re pregnant. We’re having a child. I’m changing jobs.” Something’s happening. At the personal level, stuff can happen pretty dramatically in a span of a couple of months.
In a business context, where we’ve got sort of the operational leverage of the business itself, these things can often happen faster and their consequences, when unexpected things happen, are much more magnified. The volatility of my businesses is cash flow is way more than the volatility of my personal household cash flow. Although if the business cash flow volatility gets too bad, that comes back to my household and translates straight through – that’s the challenge we have as small business owners.
Josh: As we start using credit cards as our bank.
Michael: Yes, unfortunately which I [inaudible 00:16:42].
Josh: Unfortunately. Not the best idea in the world but it happens.
Earlier, you were talking about some of your XY members are becoming what I would call a nicheaholic which is they’re working in very narrow areas. We have a few minutes left and I would love to drill down a little bit on that because when I’m working for fee for services – and I hope your people are not charging by the hour, I hope they’re charging a retainer fee of some sort.
Michael: Most are doing this like ongoing monthly retainer fee structure. We do have a few that charge hourly as well because there is a segment of folks out there that say, “Look, I’ve got a pretty good handle on my situation. I want an advisor to give me a second opinion.” Second opinion kinds of arrangements are fine for hourly arrangement if that’s what you’re looking for.
The whole anchor of what we do is ongoing monthly retainer fees for ongoing advice. Not that you literally will sit down with them every month. Like, I pay my insurance so I can see my doctor anytime of the year but I don’t actually go to my doctor every month of the year. I go to my doctor when I’ve got a problem. Our advisors operate in a similar manner but it’s built around being on a retainer, having an ongoing relationship and an ongoing planning process that you can work with.
Josh: When you’re doing that ongoing relationship sort of thing, my belief is you can’t do it profitably unless you create a niche you’re working with it. The reason for that is very simple – I’m interested in your comment on this, is that when I’m doing one-offs, I have to spend all this time I can’t really charge for learning about what you’re about. If I’m only dealing with thoracic surgeons, for example, I will tell you that 90-some odd percent of the issues all thoracic surgeons face is the same thing.
Michael: Absolutely. To me, it’s actually twofold in the advisor world. Part of it is, when you’re a knowledge worker, in the first place, having some kind of specialization where you deeply know a particular area. Once you learn it, you can then apply that knowledge for all the people you work with in that area just dramatically increases the efficiency in a knowledge working business. And so, having some kind of niche or specialization, granted it takes time to build it, but the— call it the operational efficiencies – efficiency of your brain working on this information, the operational efficiencies are tremendous.
The bigger issue, though, and the reason why I love this term. I’m going to have to use it now. The reason I’m a nicheaholic – I’m Michael and I’m a nicheaholic, and advocate it so strongly for our XYPN advisors is it’s also just a competitive business marketplace. There’s about 300,000, financial advisors out there. More and more and more of them will say, “I’m a comprehensive financial advisor with years of experience and CFP certification as credentials. You should work with me to get a customized individualized personal financial plan just for you.” There’s a pretty good value proposition to that but we all say it. We all basically say it the same way with very little differentiation from one advisor to the next.
And so, if you are a leading expert in thoracic surgeons about how to negotiate your hospital contracts, when you’re trying to go through surgery rotations and you know how to give that advice to the surgeons that are going around the local hospitals, you now have a very unique and differentiated value proposition that you can now can use to compete much more effectively against 300,000 other financial advisors trying to do the same thing and what are still a lot of very large national brands that run Super Bowl commercials for seven-figure ad budgets that no individual financial advisor is going to [inaudible 00:20:17].
I don’t think that’s unique to advisor role. In almost any small business realm, one of your first questions becomes, “How are you going to differentiate for the people you serve over what are inevitably a set of other competitors that do what you do and a bunch of mega national firms in your industry that are trying to squish the little one all the way down?” And so, that effectiveness of differentiation by specializing or forming a niche of a particular target clientele or customer you want to serve – I think it’s equally relevant in all businesses.
We literally did it at XY Planning Network. We took the least served generations and our profession, took a non-existent business model, and then threw everything else out the window about how advisors typically do business and made all of that once. If you drew the Venn diagram of who we were going after, it’s almost no one overlapping, with almost no one overlapping with almost no one but it meant we became super effective at the particular target clientele we were aiming for. Three years later, we show up on the Inc 5000 list for fastest growing.
It’s amazing what happens when you get hyper targeted. And so, we do it in our business, as XY Planning Network, and strongly advocate our members doing the same thing down the line. It gives you efficiency and it differentiates you in a world that’s increasingly difficult to differentiate in.
Michael, unfortunately, we are out of time.
Josh: Yeah, I know. It goes by really quickly.
Michael: Yes, it does.
Josh: I know that some of our listeners are going to find out more about you Where do they go to do that?
Michael: The two quick places I can give you. If you want to learn a little bit more about my crazy world and all the stuff I write about our planning industry and trends, Kitces.com, K-I-T-C-E-S. That’s my name. That’s the website as well. As you can go there, you can see more about my writings, and musings, and comments on the industry, and catch Josh’s podcasts when it comes out shortly. For anybody who’s interested in learning more about XY Planning Network and just seeing what that world is about, xyplanningnetwork.com.
Josh: Just one more question about XY Planning. Do you have an age limit for how old somebody has or can be before you don’t let them in?
Michael: We don’t. By design for the network, we are targeted to support advisors doing financial planning for Gen X and Gen Y which, if you pull out your official demographic tables, is actually about age 54 and under. We’re not going to police anybody’s clients if they want to work with people across a wider spectrum. That’s just who we target.
From a practical perspective, advisors tend to work with people around their own age. We just have natural rapport with people kind of our own age plus or minus 10 years. Our youngest advisor is mid‑20s. Our oldest advisor is 73. We actually had a 78-year-old but he left us to go join a startup.
Michael: No age limit.
Josh: I don’t feel so bad. I was just at a meeting last week where I was the oldest guy there. Now, I don’t feel bad about that.
Michael: Yeah, so no age limits. We do tend to attract advisors who are young at heart but no age limit to the network. We welcome anybody that wants to support the growth of financial planning.
I also have an offer for you. We have a thing we call the Core Value Analysis. Core value is our way of examining nine internal drivers you have and nine external drivers you have in your business and say, “Where are the gaps?” It’s free. It’s going to take you 10 minutes to do the quiz. You’re going to get some high value information. If you want, I’m happy to talk with you about it afterwards. All you’ve got to do is click on the link below this podcast and you’ll get it.
This is Josh Patrick. We’re with Michael Kitces. You’re at the Sustainable Business. Thanks a lot for stopping by. I hope to see you back here again really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around a hundred years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an email at firstname.lastname@example.org.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.