Benjamin Felix

August 20, 2020

Financial Advisors, Financial Literacy, Financial Planning, Goal Setting, Retirement, Safe Withdrawal Rates

Episode 112: Michael Kitces: Retirement Research and the Business of Financial Advice

Benjamin Felix

August 20, 2020

Financial Advisors, Financial Literacy, Financial Planning, Goal Setting, Retirement, Safe Withdrawal Rates

Michael Kitces is one of the world’s leading experts in financial services but is also a trusted authority in retirement planning research, and today he joins us for a brilliant conversation that covers both topics. Michael is the Head of Planning Strategy at Buckingham Wealth Partners, Co-Founder of XY Planning Network, AdvicePay, and fpPathfinder, and also hosts the much-admired Financial Advisor Success podcast.

In the first section of the show, we shoot our questions about retirement planning Michael’s way, exploring sequence of returns risk and the implications it presents for spending and portfolio management through retirement. Michael weighs in on three approaches to variable spending, why people can do what they love and still retire well, and his research on the ‘rising equity glidepath’. He also speaks about why it’s normal to start saving after you hit forty, and why withdrawal policy statements can help you have a better idea of when your portfolio is in the red. This leads us into the financial services segment of the show and we start out hearing Michael compare the assets under management model to the fee for service one, and how XY Planning helps those who can’t afford the first by implementing the second. From there, we dive deeper into the limits of more affordable AUM models, Michael’s thoughts on which draw on theories of human nature and also function as an advisor underwriting how-to for investors. Toward the end of the show, Michael does an amazing job of contextualizing the merge of the brokerage and advisory sides of the financial system and what this means for investors. For all this and a closing exchange about the incredible work Michael is doing to lift standards for the industry through his podcast and more, be sure to tune in!

Key Points From This Episode:

Introducing Michael Kitces, a leader in financial services and retirement planning. [0:00:15.7]
Market fluctuation and how early retirement affects sequence of returns risk. [0:03:25.1]
Different approaches to variable spending to deal with market fluctuation. [0:06:37.6]
Lifestyle and banking habits: Why retirement spending rarely increases. [0:17:55.3]
The rising equity glidepath: Inverting the conventional retirement portfolio. [0:20:57.2]
How withdrawal policy statements help you know when your portfolio is in the red. [0:27:35.1]
Why people don’t have to endure unhappy jobs for the sake of a good retirement. [0:34.42.7]
Beating ‘learned helplessness’: Start saving in your 40s, you haven’t missed the boat. [0:43:41.6]
Assets under management versus fee for service financial advisor models. [0:48:43.3]
Why cheaper AUM financial advisor models can’t meet investor needs. [0:55:57.4]
Limits to human sociability and how to vet a financial advisor by asking how many clients they have. [0:59:43.4]
How tech has merged the brokerage and financial advice sides of financial systems and the effects of this. [1:04:30.6]
Michael’s definition of success and his gratitude for the impact his work has. [1:12:02.2]

Read the Transcript:

Can you describe how in early retirement affects the sequence of returns risk that many investors worry about?

So sequence of return risk, comes against this mathematical phenomenon that when we talk about investing, knowing that markets are volatile and do crazy things from time to time, recent scenarios being good example, because the mantra in our industry has always been these things average out in the long run. And if you look at the research, they really do.

The range of what markets do from month to month is crazy big, what they do from year to year is huge, what they do every five years is not as dramatic, what they do every 10 years is even narrower, what they do every 30 years is really actually not that varying, right? Sort of like the rubber band effect. Even if the market snapped far one way, it tends to snap back to something that normalizes and so on the one end that's always been the comforting thought I think from the investing end and even from the retirement accumulation end, these things averaged out in the long run. So we say stay the course, stay invested, allow the markets to come back, right? Worst thing we can do is a bit dramatic sale because we're concerned at a market bottom. But that math of these things average out in the long run doesn't actually quite work the same way when you're taking money out of a portfolio, when you're in retirement.

When you're taking dollars out at the same time that markets are moving and volatility is occurring and so the logical extreme, you run the risk that you take so much out while things are down, that by the time the market finally bounces back, you don't have anything left to participate in the bounce back, or at least you don't have enough left that when the bounce back finally comes, you don't have enough gas left in the tank to get to where you were going.

And so this phenomenon that once we start taking withdrawals, the returns can average out in the long run, but if you get a bad sequence, you might not have enough money left when the good returns finally show up has been dubbed into the sequence of return risk phenomenon, and quite literally, I mean, it creates scenarios where if you just look at different time periods in history, I can take the same sequence of withdrawals and start in like the 1980s and finish with millions of dollars. Whereas if I do the exact same thing, but I started in 1970s, which in the US was a very difficult decade in the markets, I can go bankrupt starting in the 70s, with the same pattern of spending that lets me finish just like a multi millionaire in the 80s solely because the first decade, not even just the first year, it's like the first decade was so dramatically different in the US.

We basically didn't have a dime of appreciation for the span of 10 years through the 70s, while markets more than doubled through the decade of the 80s. And if you're taking ongoing withdrawals, that can be the difference between I've depleted so far, I can't recover, and I'm actually so far ahead in the good scenario that you can hit me with a horrible decade. I can't even run out of money at this point because I'm so far ahead.

Can you talk about some of your favorite variable spending rules?

It’s interesting when you think about the ways that you can deal with this as I kind of overgeneralize a little. There's sort of two/three ways that we can deal with this. The first, and we may talk about it more later, it's I can change stuff in the portfolio. Right, I can risk manage make adjustments, maybe buy and invest in different things, maybe invest more tactically as I'm going. I can change the portfolio in response to the markets to try to manage this.

Option two is, I can change what I'm spending in the first place to deal with this, right? It's sort of the proverbial like when times get tough, we'll tighten our belts a little bit. Now, what we find from the variable spending in particular, is that there really are a couple of different ways that you can go about this and even find some of the sort of rules of thumb that people think about as a way to deal with this aren't actually good ways to deal with this. So the most straightforward way to do this, frankly, is we just spend really conservatively. We spend so conservatively, even if something bad happens we'll weather the storm and if the worst case scenario is, if bad stuff happens, I'll call you in a couple of years and tell you can spend more. Which for some people, great.

Spending cut, bad, spending raise, good. So just tell me how far I got to ratchet down to be at a safe baseline level, and we'll figure out how to ratchet up later if and when the markets deal that to us. And broadly speaking, that's a whole body of research called safe withdrawal rates. We generally find this number around 4% of the starting balance. So like $20,000 per every half million, $40,000 per every million. You take that number, you adjusted for inflation, and even when crazy stuff happens, markets tend to average out in enough time that you have enough left for when the recovery finally shows up.

So option one is sort of it's not really a variable spending rule, it's all like, be so conservative, you won't have to vary at least to the downside, and you only have to make upside decisions when you get there, and you can even create sort of straightforward safety margin rules. I call these ratcheting rules. Look, if your portfolio ever gets up 50% from where you started, you have built enough of a margin that even if there is a pullback, you're still so far ahead you can have a raise.

If you get up 50% from where you started, take a 10% raise, every three years we'll check in. If you're still that far ahead, keep taking raises as long as you've got your safety margin. So one version is, spend conservatively, ratchet higher as we go, but try to keep it conservative enough that if bad stuff happens, I don't have to cut my live stocks. I don't have to cut my live stock.

The second version of this are what I call guardrails. Some people also call these decision rule approaches. Think kind of an If This Then That approach to how we're going to handle it. I like to explain this to people as, because I've got little kids, think bumper lanes at the bowling alley. We have them in the US, I'm presuming this is a phenomenon in Canada as well. I've got three little ones and so when we take them bowling, these little bumpers come up on the lanes so that the ball can't go into the gutter. When I was young, they actually had like giant inflatable tubes they put in there. Now it's all electronic. So these little gate barriers come up and block off the gutters and then the bumpers go down when the adults go, unless the adults want to be conservative and then you get the bumpers on the adult lanes as well.

So when my daughter goes to bowl the ball on a bumper lane, right? One of two things happens. She either rolls the ball fairly straight down the line, it rolls all the way down, it hits the pin, she gets all excited, does her little victory dance. Or she rolls the ball slightly askew, it drifts off to the side, heads towards the gutter, hits the bumper, bounces off the bumper, goes back into the middle lane, hits the pins, she is equally happy because she got the outcome that was desired couldn't care less that it happened bounce off a bumper, all that matters, we got to the end the way that we wanted to get to the end. And so you can do the same kind of approach with a spinning wheel approach in retirement.

So it says look, maybe I'm going to start by spending a little higher because if there are bumpers, I could start a little higher, I just might hit a bad bumper that makes me caught. So maybe I'll start my spending at say 5% of my portfolio. If things go really well, and my portfolio outgrows my spending, my withdrawal rate will get lower because the balance is going up more than the money that's coming out. It's like I might start at five, then it goes to 4.8, 4.5, 4.2. So if it drips under four, I hit the conservative bumper, which says I get a raise.

It's like if you start at five, but it drips down to four, you get a 10% raise in just real dollars effective today. You're $50,000 withdrawal was 55. Now we can put a bumper on the other end as well. So if you're spending outpaces your portfolio, you have a big market decline, so suddenly your spending is a bigger chunk of your portfolio. If your spending starts going up from five to 5.2 to 5.5 to 5.8, you're still within the bumpers, but if your spending rate goes over six, you have hit the bad bumper. The bad bumper requires a 10% cut. So your $60,000 spending gets chopped down to 54.

So I can't tell you which bumpers you're going to hit, right? I do not unfortunately have the fully function crystal ball to tell you which bumpers we're going to hit in the future. But I can in the most literal sense give you a plan, a set of variable spending rules that says, if you hit the 4% bumper, you get a raise. If you hit the 6% bumper, you take a cut. If you stay in the four to six range, you're in the lane, and you can roll the ball straight to the end where that you don't need a bumper. And so I don't know which bumpers you're going to hit. I don't know if you're going to do it like my little boy and try to like curve it off a bumper and wing it into a bumper and make it bounce a couple of times there to each their own.

But what I can tell you is that we put bumpers in place, so there's no gutter balls here, right? You're not going to spend so far off the tracks, that you're going to run out of money. At worst, you'll hit a bad bumper more than once and have to take more than one cut. But eventually your spending will come down. But we don't have to quite do it at the extreme of like, okay, the market was up 6% this year, so you get a 6% raise, then the market's down 12% next year, you get a 12% cut. Because if you just immediately translate all market changes into spending changes for most of us just it's a level of spending volatility we can't really manage, right?

I can't say like, Cameron, I know I told you two years ago that you could buy that dream retirement home, but the market's down so much the pandemic that you'll have to sell it. And then I call you back two years later I'm like, market recovered, you can buy the house back and then you go, well, I can't. I sold it to someone and they like living there now. I can't go get it back after a two-year temporary spending cut, I need a little bit more stability. And so the idea of guardrail strategies or doing bumper lanes is not just that we're setting where the bumpers are so that we don't veer too far off course. It's also actually so that we set the bumpers wide enough that we don't have to constantly be changing our lives and our lifestyles, we only make the adjustments when the magnitude is big enough that it actually matters.

The third adjustment I'd give quickly as another way to think about variable spending. One of the things that we see most commonly just I'm part of an advisory firm as well so I come across some clients for a long time. One of the things that we commonly see with people is, I think of it as the tighten your belt phenomenon. Where you're like times are tough right now, markets are down, I'm going to cut 10 or 20% out of my budget for the next two years until these things bounce back, and then we'll try to get back on track again. And I certainly can appreciate that. I think it's an instinctive response for a lot of us when times are tough, we tighten our belts.

The irony though, is that when you actually look at the retirement research, it doesn't help very much. When we're only spending four or 5% of our portfolio in the first place, and you cut your spending by 10% of that, you're talking about a spending cut that might be 0.4% of your portfolio. So if you do that for the next two years, and you shave off 0.8% of your spending, you can make that up in one good day in the market. It's just, the irony is its very impactful for us personally, and actually does almost nothing to get the portfolio back on track because it's not actually high enough impact over a long period of time. The alternative that we find that actually works better. So I call those large but temporary cuts.

Where I'm like I'm going to take a big cut, 10 or 20% out, but we're only going to do it temporarily. What we find actually works better is not large temporary cuts, but small, permanent ones. So think, instead of I'm going to cut my spending by 10 or 20% for the next two years and reverted back again, I'm going to just give up my inflation adjustment over the next year. So, I normally my spending goes up by two or 3% a year, I'm going to give up my two or 3% a year raise.

Now in general, we don't think much of that. I mean, in practice working with clients, we've never had someone that's like, hey, we live a great lifestyle with $10,000 a month but inflation just came out and it's 2.7% a year. So please change my monthly distribution to $10,270. We don't really do that. We spend what's in our bank account. Now, if we work with our clients and say, we're going to adjust your spending every year for inflation, if I increase their spending distributions, that's going to their accounts, because that's our plan, they spend the money that's in their account. And if we don't increase the distribution, we spend the money that's in our accounts. It's pretty straightforward.

But when I look at this over time, if I just trim like a 3% inflation adjustment out, not only does it mean you don't lift your spending this year, it means your baseline spending is now ever so slightly lower for every future year as well. But if I lift your spending up, that compounds. If I don't lift your spending up, that compounds. And so if I just take out 3% inflation adjustment writ large over 30 years, the impact of that is actually five to 10 times more beneficial for your long term retirement than doing that small but permanent cut for two years. And so the irony is, it's both five to 10 times better for the longevity of your portfolio and hurts far less. Like we barely even notice the inflation adjustment that doesn't happen.

10 or 20% cut from my spending for two years, I'm going to notice that. That's a lifestyle change. And so the third way I think, just to think about this overall, number one is we can set it so conservatively that we're just only going to ratchet higher with good news because I don't like cuts. Option two is guard rails. You got to be prepared for the bad guard rail and the good guard rail, but we can put guard rails in. I don't know which ones you're going to hit but I know we can't veer too far off track because we got the guard rails. And option three is more of a, we'll try to lift up our spending when times are good, but we're going to trim out inflation adjustments or more generally, we're going to make small but permanent adjustments when times are difficult, because those actually have far more benefit than the large but temporary anyways and they're easier to manage.

I don't know if you're getting some of these studies in Canada yet, where researchers are starting to dig into big data sets of consumer spending, right? This is kind of the age of big data.

There are some national government studies that have interesting consumer spending tracking for individuals over time. And ironically, some of the banks and credit card companies are doing this research. So they have 10s, or hundreds of thousands of people so they can actually look at aggregate spending habits of people and map it over time or directionally. And so what we find in practice is that in the real world, on average, people spending doesn't keep pace with inflation in retirement, it lags. Now, it's not always steady, I find at least with our clients, it's more event driven.

We lived a more active lifestyle, but then someone falls unfortunately breaks a hip six months of physical therapy. They just don't like doing the big long trips anymore. So they do shorter trips, which are less expensive and then like pop pops, cataracts get worse, and so what used to be nice dinners are now like blue plate specials at 5:00 and just discretionary spending starts reining in as our worlds adjust as we get older, but the net result is that spending doesn't actually keep pace with inflation and it often is much more level dollar where inflation is actually, means you can buy a little less but it's okay because your life shifted and you're buying a little bit less.

Anyways, the secondary effect I do see for some people though, is that we manage sort of the intermediate term impact of inflation with just basically the bank and checking account. The money from my investment account to my bank account stays consistent for years but I used to keep like a $30,000 average balance in my bank account, and then it's like 28, and then 25, and it's 20, and then it's 15, and then it's eight and I call you up Cameron and I'm like, could we do a quick 10 or $20,000 distribution just to build the cash back up. And just really what's happened is, it's like five years worth of cumulative inflation adjustments that I take in one big infusion because I didn't really adjust the ongoing distributions, I just did the catch up with my bank account as sort of the regulator valve along the way.

So we do see that with some clients as well, where inflation actually is creeping, they're spending higher, they're just handling it in chunks as their bank account kind of builds a reserve and then winds down. Whereas as we get older lifestyle slows down a little bit, and spending actually isn't increasing as much in the first place.

Can you talk about the concept of a rising equity glide path? Which is contrary to what most people think about when they think about retirement portfolios.

Yeah, absolutely. So, Ben, I think you hit it on it well, right? The traditional view is as we get older, we get more conservative, and we dial down the risk in the portfolio. We have sort of rules of thumb, own 100 minus your age in stocks or 120 minus your age, and just sort of a general view of the older people get, the more conservative their portfolios would become.

So the problem with this really goes straight back to the discussion earlier about sequence of return risk. So overgeneralizing a little, markets go up and down, or they go down and up, right? I know they're going to be volatile, they're going to move up and down and generally they move up more than they move down, which is why we get growth in the long run, but they do it in a volatile uneven pattern, but what we know from the sequence of return risk research is that it actually matters a lot whether they go up and then down or whether they go down and then up.

If they go up and then down, you actually get so far ahead during the up years while taking moderate withdrawals so by the time the down comes, you've compounded so much extra money that it doesn't even hurt that much, right? That's why if you retired in the 80s, or 90s, you got so far ahead, that is tough as the 2000s were. You already have built up so much additional wealth in the 80s and 90s, that that wasn't going to ruin your retirement at that point.

If markets go down and then up, it's different, right? If I retired in 2000, or the eve of the financial crisis, I was sweating it pretty hard in the first few years there. Watching how much my portfolio dropped while I'm taking ongoing withdrawals and going I hope this recovers soon, because if it doesn't, I'm going to draw it down so far that when it does recover, I won't have enough left. That's the sequence risk.

So if you imagine these patterns, right? It goes up and then down where I'm far enough ahead, it doesn't matter. It goes down and then up and I got to really sweat it that I get the recovery in time and then you overlay on this, changing your equity exposure over time. So the traditional view is we start more aggressive and we get more conservative. So if I get the scenario where markets go up and then down, this works fine, I just make more money aggressively in the early years when the market goes up, and then later, I get more conservative by the time the market goes down. But the reality is I didn't actually need that. Because the reality is that you could be conservative all the way through, if you get a great bull market at the beginning, you're going to be so far ahead by the later years with compounding, that just mathematics your retirement will not be in danger.

It feels scary when you say, hey, the market might go down a lot in your 80s. But if you actually start running some of the numbers, you get so far ahead, it's just not actually a risk of depletion. Now, if you get the bad sequence, markets go down and then up. So if you envision the traditional approach, we're going to get more conservative then we go, it's like so let me get this straight. You're going to take all the risk while the market goes down, and then when it's finally ready to recover, you're going to own less in stocks that recovered. So you bear all the pain, and then give up the recovery. This is not good, and quite literally, in bad sequences, the traditional approach of decreasing your equities as you age amplifies the sequence problem. You bear all the pain and diminish the recovery, which actually just puts you more at risk in the first place.

Now, when we flip this formula upside down, we say, well, what if we got more conservative at the beginning and more aggressive at the end? So in the good scenario, markets go up and then down. As long as you don't go hog wild like 100% in equities in my 80s or anything, you still got some participation in stocks in the early years, like we're going conservative but not out of the markets, you still get the growth in the early years, and while markets might pull back in the later years, if you get a little more aggressive, it's still not going to ruin your retirement because you actually just bull markets in early retirement compound extraordinary amounts of wealth to get you ahead.

But if you get the killer, right? The bad then good scenario, the sequence risk scenario. If we start out more conservative and we get more aggressive later, then you actually reduce the pain in early retirement, and you benefit more from the recovery that follows. So you get less pain and more gain in the one scenario you're at the greatest risk of needing less pain and more gain. That effectively is why it works. Now, I know for a lot of people, it feels counter-intuitive. There are some things to clarify just about this research.

We didn't publish it saying, hey, start out with your balanced portfolio and then go to 100% in stocks by the time you're in your 80s. This is more of like if you're comfortable with a traditional balanced portfolio, with I don't know, 50% in stocks or 60% in stocks, it's like how about you own just 30% in early retirement, and then by later retirement, you just go back to the 50/50 portfolio you were going to own in the first place. We're not talking about dialing people above what they're comfortable with in the first place. It's more of the point that wherever you're comfortable, that's where you get to after you've been in retirement for a while, but you're more conservative at the beginning, so that you don't get derailed with the badly time sequence.

The other way to think about this that I find actually for most people is just more intuitive is to think about this in reverse, right? So my stock exposure is also essentially 100 minus my bond exposure. So by thinking about this in terms of bonds, here's basically how it plays out. Because you're at most risk early in retirement, instead of owning 50% in bonds, we're going to own 70% in bonds. So we're going to take an extra 20%, and we're going to build you a little tent for safety. I actually call it a bond tent with some people.

So we're going to shelter in the bond tent for the next 10 years, and over the next 10 years, we're going to spend the bond tent down, and as you emerge out of the bond tent, you'll go from 70% in bonds back to 50% in bonds, because you used your reserves to get through the early sequence risk, and by the time you get to back to normal, you're just going to move forward with the portfolio you were going to have in the first place. Now again, build a 20% bond tent and spend it down is actually just the same thing as get more conservative in stocks and own more later. It just feels a little more natural to say we're going to spend down the bond tent as opposed to saying we're going to buy more in stocks. It's really mathematically opposite sides of the same coin. But I find that sometimes it's helpful to think about in those terms, just you build a bond tent in early retirement, and once you get through the sequence danger zone, you can come out of your tent.

Do you also recommend some sort of withdrawal policy statements so someone can decide what works best for them, so it gives them their own guide going forward on the draw down side?

I am a fan of the withdrawal policy statement approach, and I'll admit I recently changed firms in the industry. I've not gotten us to implement this in our firm yet so on my list of things to work on, but I'm very much a fan of the approach. I mean, the idea of it at the end of the day is, and I'll knock our industry a little bit. I love my financial advisor world but I got a knock us for a moment here.

We love to talk about financial plans and having a plan. But I find at the end of the day, the plan for a lot of us is stay the course, stay invested, meet with us on a regular basis, and we'll tell you if anything needs to change, which it's a fine thing to do. It's great to have someone who's along with you on the journey, who can give you guidance about how to make adjustments along the way, where you're like ships going through stormy seas have always had a navigator who's separate from the captain because it helps just to have someone else who's looking at the big picture to make sure that we're steering in the right direction. So I'm all for that navigator kind of role. But in the most literal sense, it's not really a plan.

It's just a, I'm going to be here to help you make the decisions when the stormy seas calm. We don't actually have a plan for the stormy seas. I'm just going to be with you to help you when the stormy seas come. I'm increasingly a fan of withdrawal policy statements because of their essence. A withdrawal policy statement is a plan, is an actual plan. We're going to put you in guardrails, here's where we're going to draw the guardrails. If something happens, here's what adjustment will make in response to the guardrail. Now, we frame these as policy statements because at the end of the day, it's kind of like there were a series of policies that we will implement depending on what happens. I still don't actually know which policies we're going to run. I don't know what guardrails you're going to hit or if you can hit any of them.

But we have in a very literal sense, a plan, a written plan. We have both made sure we're on the same page about of how we're going to handle this, and I think what you're going to see in the coming years is more and more advisory firms adopting this kind of approach. Because again, I think just it's actually much more comforting at the end of the day from the retiree end just to know there's a plan. Not just a navigator to help put a plan in place, and frankly, from the advisor end just it's easier to make the evaluations of what to do in the moment when we're dealing with these situations because we have a plan and everyone's bought into it, right?

I don't have to give you the bad news that, hey, markets are down enough that you're going to need to trim your spending, you know that because we have a policy statement with math that anybody can do. Now I'll help you figure out, how are we going to express that spending cut? And do we need to make a little bit more of a spending cutters or is there exceptions to why we might do a little bit less, because you've got mitigating circumstances, and here's another factor to this that you're not thinking about? So I still think there's absolutely value for the advice that we're going to infuse into that process as well. But, at the end of the day, just I think everybody sleeps a little better at night having a plan.

Not that plans don't change as the world happens, but it's still easier to have a plan than to not have a plan, and the withdrawal policy statement to me is the essence of what a plan is. I can't spell out exactly what's going to happen because I don't know the future but I can set a series of policies. If A happens, we'll do B, if C happens, we'll do D, and then I'm going to go along with you on the journey, and we'll figure out whether A or C happens when the time comes and how we're going to address it on the spot.

Markets get volatile, and I mean, I'm thinking of a particular client's situation we went through in my early career days in the 2000 to 2002 bear market. His name was Jim, and so we had this series of calls for a couple of weeks right around 9/11 and the market volatility that happened, our markets closed for an entire week. And so, I get a call from Jim, I'm really freaked out about this stuff, do we need to sell? Do I need to make any changes? Like no, Jim, it's okay.

He calls back a week later, markets down a little more, he's like, do we need to do anything? No. I told you it's okay. We're okay. It didn't move that much. The market drops a couple more points. Jim calls back eight days later. Now, do we need to do something? No, it wasn't that much of a move from where we were. And I didn't see the series of four calls with Jim over the span of six weeks, and what I realized was going on was everybody gets at some point, it will be so bad.

The markets have fallen so far, the world has changed so much that Jim is going to make that call and he's going to say how bad is it? Do we have to change? I'm going to be like, oh, Jim. Oh I'm so sorry. It's awful now. Your retirement plan's toast. The vacations are gone. You're probably gonna have to sell your retirement home. This is awful, man. I'm so sorry. We're like at some point, it'll be that bad. We hope it never gets that bad. But at some point, it could be that bad. And the problem that we were stuck with was Jim had no idea where that line was.

So we did what any rational normal person would do. He just kept calling like, are we at the line now? Are we at the line now? Are we at the line now? Are we at the line now? And I had never really figured out and had a good conversation with him of like, here's the line. Look, you have $800,000. Frankly, as long as you're above 600, your spending is fine. So this bouncing around from 720 to 750 back to 700. You're still way above your line. I mean, I know it doesn't feel good to watch the bouncing around but you don't need to keep calling. Here's your line. You're way above your line. And frankly, even if you hate your line, we can write it in the withdraw policy statement, what are we going to do? 10% spending cut. Let's even talk about how you would do that.

Okay, we'll cut a vacation, we'll rein in the restaurant budget, whatever it is. And so I think part of the challenge that we have in that withdrawal policy statements help to solve for situations like this interaction with Jim is just, we finally know where the line is about what's bad and what's not bad because most of us just we don't intuitively know this. There's nothing obvious that says, here is the magic line of your portfolio where your life has to change versus not. And so withdrawal policy statements help us encapsulate that, and the traditional approach, I don't want to knock it too much, it's what I've done for most of my career, but it's like I feel like the traditional approach just a lot of I so promise I'll be there when we have to make adjustments but Jim never knows when the adjustments are coming. So he just keeps calling me and everybody is stressed.

What about the non-financial errors that people can make when they're doing their retirement planning? Can you talk a little bit about that?

One of my, I was going to say pet peeve, but that probably understates my frustration or aggravation with this. I feel like we've set up this thing where retirement is this like swan dive all or nothing one time, irrevocable extreme life changing events that we build up to, and we build it up so much that we basically say, you should make a bunch of sacrifices in order to get there to the point that I mean, I've seen this in practice.

People that just stay in miserable jobs for years and years for the sole goal of trying to accumulate enough dollars to actually get to the point where they can tell their boss off, drop mic and exit and be done because they got enough money that they don't need to work anymore. I see for just one client after another, after another, having done this for 20 years now is that for a lot of people retirement is not a natural state of being.

Human beings, we need something to do when we wake up in the morning. Otherwise, we become kind of listless and aimless pretty quickly, it can outright lead to things like social isolation, depression, divorce rates rise when retirement happens. There's actually a lot of negatives that can happen if we don't have a support system or at the most basic sense, a plan of what we're going to do, not just what we're retiring away from but what we're retiring towards. And often we don't get a fully fleshed out vision of what we're going to try our route towards, right?

I hear things like I'm gonna play more golf. Awesome, with who? Oh, I got a couple of buddies who are retiring around when do, great. So after you've played with the same foursome three times a week for six months, and you've done 75 golf outings with the same guys and realize that you're going to be golfing with the same foursome another 400 times in the coming decade, and all the jokes are really old already, and it's like okay, so what are you going to do with the next 29 and a half years of your retirement? We see a lot of people start having second thoughts, right?

We build up retirement in this version of like, it's a 30 year vacation, and vacations work because they're vacations. It's like, we vacate away from something, then we come back. Permanent vacations are not as fun as we think they're going to be in our heads. Just the good and bad news of human beings, we are remarkably adaptive. So when times are bad, we can actually adapt our way down and when times are good, we adapt our way up and then we become dissatisfied from the thing that we wanted, so it's kind of cool. It creates human drive and productivity and progress and advancements and all sorts of cool things. It also can make retirement really boring and miserable if you don't have something to focus on.

Now, some people find a passion in hobbies. My father retired and immersed himself into family genealogy. He's always been the family genealogist. When he retired, there were like 5000 people in the family genealogy tree. Now there's like 25,000 people in the family genealogy tree going back hundreds of years and branching forward across multiple countries, and he just hangs out in his days looking online archives of foreign cemeteries. He loves it, it's this thing, more power to him.

Now others will retire, and maybe they'll find passion in charitable work and nonprofit work and somewhere where they give back to just a community or a world where they want to. Maybe that's giving back to a church or a synagogue, maybe that's giving back to leadership development, community development, there are a lot of different ways that we can do it. But the interesting phenomena I find is for a non-trivial number of people, the thing they end up doing in retirement has economic value and they make some money. One of my early clients that I worked with had a version of this. She spent way longer in an unhappy job than she really wanted to. She finally managed to retire. She was a former engineer. Six months in retirement she got bored, she decided for a new creative endeavor. She started making window treatments. It's a hobby.

Debbie likes making window treatments, and she actually got so good at it, that she started making about 15 to $20,000 a year selling handcrafted window treatments. Now, she made a nice six figure income as an engineer, so this was a lot lower money than she was used to. But adding $20,000 a year to her income for the better part of 10 years of retirement is essentially like an extra $200,000 in her nest egg. If she'd realized she was going to add $200,000 to her nest egg, she could have stopped five years earlier.

Five years of a job she couldn't stand, trying to get to a point of her retirement that she realized six months in, she was bored and found something productive to do that ended up making money anyways so much that she didn't actually need to build up the way that she did. And it's a pattern that just, one of those things like once you see a pattern, you see it everywhere and you can't stop seeing it because you're watching for it. It's a pattern that I see play out so often today to the point that when we talk to a retiree say, or even just people are thinking about retirement, the question I will always ask is just, what would you do with your time if it didn't matter how much you made?

I'm not asking what you're going to do in retirement because retirement is a loaded term of like, I don't work so I guess I lounge around, and maybe I donate time or travel a lot or whatever, and hey, if that's your thing more power to you, but what would you do with your time if the money didn't matter, and for a lot of people, they would still do a thing. It might be a productive thing that makes a little money, it might make a small fraction of what they made before, sometimes it actually makes a decent amount of money compared to what they made before.

Maybe you're a professional and you're going to consult to your own industry, maybe you've always wanted to do something entrepreneurial, and you're going to go make a little side business, maybe you're just going to take up a completely new career and second vocation that you're just not going to work the hours you did before but you'll do some, maybe you would even stay at your current company or job, just transfer into a completely different permission, you know if I gave you permission to ask for an internal transfer to any job at your current company making only a third of what you make. Is there anything where you currently work that that might actually be enjoyable?

You can make a third of what you make and work a third or less the hours that you do. Is there anything you might want to do if you could craft that job for yourself? And what I find for so many people, the answer is actually, yes.

They may have to sit down and think about it for a while, because the gut impulse is like, what would I do if I didn't have to work? Tell my boss off and never go back there again, right? There are certainly plenty of people who live in that situation. So you got to free your mind a little to really say like, okay, so you did that it feels better but seriously, you got like 20, 30, 40 years to go on this earth. What are you going to wake up for after you take three or six months to chill out? And is the thing you might do actually have some economic productive potential.

And what I find so often is that it does, and when you might do that for five or 10 or 15 years, even at a limited capacity, it's a non-trivial, often hundreds of thousands of dollars economic impact, and can be the difference between retiring today versus fighting it out for another three or five or 10 years in the first place, and so I think just it's crucial to be thinking about, and asking that question is what would you do with your time, if it didn't matter how much you made? I'm not saying you don't make anything. Just doesn't matter how much you make. If it turns out to make something, awesome. If it turns out you pick a thing that doesn't make any money, that's okay, too. But sometimes it does turn out to be a thing that makes money and that actually changes the trajectory and the timing in really meaningful ways.

You wrote a paper in the Journal of retirement 2018 about the non-constant growth rate of employment income or earnings over the life cycle. How does that impact the amount of someone's income that they should be saving throughout their working life?

The traditional view of our working years is kind of we do our job, we earn our income, we get our cost of living increases, maybe every now and then I'm going to get a raise. So not necessarily I want to count on it but hopefully I'll get that promotion. But we largely project, your saving for retirement as though like, here's what you earn, you're going to save a percentage of that, and just as we chug along, we're going to keep saving that percentage, and I'll guesstimate my retirement lifestyle based on the inflation adjusted changes to my salary over the next five or 10 or 20 years, or whatever it is.

What we actually see in practice though, if you look at the broad based economic research is the idea that our income just lifts with inflation is not actually representative of what happens, and there's a couple of different cross effects that happen. The first is we get far more in earnings increases in our 20s and 30s than we do in our 40s and 50s. Great, it sort of makes sense when you think about it. Just like formative years of my career, I'm getting established in my job or my industry, or whatever it is. I make a lot more when I'm 10 or 20 years experience, particularly in a lot of professional services jobs than I do early on. Even a lot of traditional blue collar jobs, we might go from worker to manager, there's a lot of promotions that tend to come in the early years, which means our income growth is disproportionately higher in our 20s and 30s than it is in our 40s and 50s.

We usually at least keep the cost of living adjustments in our 40s and 50s. But big income growth that often happens in the early years. The significance of that is on the one end, we have this tendency in our industry to these rules of thumb like you should save 10% of your income or 20% of your income or whatever it is, without recognizing like that's fine if your income is just going to go in the straight line path over time, but if your income is going to ramp up quickly, and then the income growth is going to slow later. The reality is trying to save like 20% of your income in your 20s when you're barely making enough to make ends meet in the first place and you haven't gotten the income lift to yours yet, it's just kind of a preposterous thing to suggest.

Now, in practice, that's why most people don't do it, and most people in their 20s have very little savings. What really aggravates me about it though is we beat people up in their 20s and 30s, and we make them feel so guilty about it that what I see is a lot of clients who will hit my radar screen by their 40s, who don't have a lot saved, who are ashamed they don't have a lot saved, who feel bad they don't have a lot saved, and may have even given up on the possibility of retiring and saving. I know I've been supposed to be saving, but I'm 42 and I've barely got anything saved after 20 years. I'm probably a lost cause at this point. I appreciate Ben you taking me as a charity clients, and the truth is, you know what it means if you don't have a lot saved in your early 40s? You're normal.

Almost no one could save a significant portion of their income in their 20s and 30s, unless they happen to come out of the gate in a very high income job from the start. And so, there are a couple of problems that come from this, right? I said I think unrealistic expectations for saving in our 20s and 30s. We beat people up about not doing it in their 20s and 30s. We can even teach people some kind of like learned helplessness, that by the time they're in their 40s, and the income actually gets a little better and their life stabilizes they don't get excited about saving now that they've actually got the means to do so. Because hey, if I'm doomed anyways, I may as well buy the new car and the fancier house and the rest because apparently my retirements already screwed. It's like, no.

Now you're getting to the point where you've got a decent car and a decent house, and now when you get a raise, save all that because you already got like a decent car and a decent house. Save all of that. And just in general, I try to encourage people to think less about save a percentage of your income. You got to save 10 or 20% of your income and more like as your income grows, how about trying to save 50% of each raise.

I'm not going to beat you up for what you're not saving now, but it's like when you get the next raise, when you get like the next $3,000 raise, just spend 1500 of it and save the other 1500. And if you do that through your 20s and 30s, if you approach it with that philosophy, by the time you get to your 40s, you'll notice you're saving a ton of money, not because you saved money you couldn't save early on but because as the income went up, you didn't get into this learn helplessness state of well, I guess I can't figure out how to save 10 or 20% anyways, I may as well just go ahead and keep spending. But say no as I'm getting raises that's going to form my future spending base so that by the time I'm in my 40s I'm saving a lot even though I wasn't saving a lot in my 20s because hey, it's hard unless you get a really good job right out of the gate.

How do you think investors should choose between a fee for service model or a fees based on assets under administration model when they're seeking advice?

It's an interesting split, right? We've got sort of the assets under administration, assets under management model, and as we broadly label it fee for service models. Sort of what does that means in practice? Think like, monthly subscription fees, financial planning advice for one or two or $300 a month or whatever the advisor charges, or maybe it's an annual retainer, but not tied to portfolios or assets at all. It's sort of like, here's a list of services, here's what I pay you on an ongoing basis on that, whether that's monthly or quarterly or annually, or whatever it is.

So, I'd kind of answer this in two ways about how consumers should think about this because I really tend to actually start this from the advisor and about how advisors should think about this. And over-simplifying a little, the way I encourage advisors to think about it is, look, the assets under management model works fine for people who have assets to manage, right? If I've got a retirement nest egg, and I need some advice, and part of the advice includes someone to help me tend this nest egg that is crucial for my retirement, the assets under management model works great.

Our interests are aligned, I want your portfolio to do well, because it's how I get paid, you want your portfolio to do well, because it's how you live and survive. I want to retain you as a client to charge you an ongoing fee, which means I am highly incentivized to provide you lots of ongoing service and advice, and just there's a lot of just intrinsic positives to that model, which I think is why we're seeing it become certainly a dominant model here in the US over the past 20 years. And then we're seeing it broad broadly around the world. Just sort of like it's not the perfect model, there are caveats to it, there are challenges, it's sort of like the, I think it was the famous Churchill saying about democracy. Like it's the worst form of government except all others.

There are problems with the assets on our management model but it still at the end of the day is remarkably good at aligning, we all want your assets to do well, we want your nest egg to do well, we want to keep servicing on ongoing basis, we want to keep giving you value on ongoing basis, because otherwise you will and should fire us. And frankly, that's kind of what I want from my service provider. I want you to always feel like you got a fire under you to keep giving me service, to keep giving me value and keep tending that nest egg I've given you to be responsible for. So I think it's very positive, but, and there's a huge but it kind of doesn't work for like the 70, 80, 90% of the population that doesn't have enough assets to hand to an advisor to get advice in the first place. And I know this is a huge frustration and challenge that we see in the US marketplace.

I believe it's similar in Canada as well. That AUM a lot model works fine for people who have some A to M. They've gotten to that point. But if I just want to pay someone for some dog on advice, often it's difficult or outright impossible because many of the firms that do that model actually have minimums. If you don't have this much in assets, we can't work with you. We're not built to work with you. And so there are plenty of people who would happily pay an advisor, if only there was an advisor who would just bill them for advice, and that to me is really the growth and the evolution of the fee for service model.

I don't view it so much as a choice model, hey, you've got a pile of assets. Do you want to hire a fee for service advisor and an AUM advisor? Certainly if you've got assets, you have that choice, but I see the growth and opportunity around the fee for service model for the other 70 or 80 or 90% of people who are like look, I want advisor and I value advice and I need advice but like I just, either I don't have a pile assets to manage. I don't want to give them to you because I'm actually comfortable with that part, I need advice about other things, or my money is in other places. I do real estate, I'm a business owner, I make new businesses.

So like, I got a lot of financial advice needs, but I'm not selling my businesses and giving the money to you, I'm selling my business, so I can make the next one because that's what I do as a serial entrepreneur. And so I think the opportunity around fee for service models and why I'm so excited about them, you just said, frankly, from our end at least as advisors, and ultimately, for the benefit of consumers, it makes the pie of advice bigger.

I don't think the AUM model is broken, but it is by its nature, very exclusionary to only the people who not even just already have wealth but already have wealth accumulated in a certain manner. And not that those people don't need advice, they do. But there's a lot of other people that need advice as well, that just literally get excluded by the assets under management model and models with asset minimums. And so, we built a business called XY Planning Network that specifically champions this around financial planning for Gen X and Gen Y, that's the X and the Y and the XY Planning Network name, we'll have to be XYZ Planning soon, now that Gen Z is coming into the workforce, right? But just recognizing that there's a huge swath of people in their 20s, 30s, 40s and 50s, who maybe don't have significant retirement assets, or don't have them available in a manner that an advisor could or would be able to manage. But they certainly have a lot of advice needs.

It's not like our lives are financially simple in our 20s, 30s and 40s, and 50s. We just need a different model to be able to serve a wider range of clientele, and I think that's ultimately what we're creating with a fee for service model. And in the US we've taken as far as not only do we build XY Planning Network to teach advisors how to do this, and we now have almost 1200 firms that are doing this model in the US but we also built a FinTech company, a financial technology company called AdvicePay, that actually facilitates the payments. Because if advisors are going to do ongoing fees like just, you actually need a scalable way to collect and manage fees. As consumers, we don't like writing checks, and as business owners, we don't like handling a high volume of checks, it's a pain in the butt.

Did you send the check? Where is it? I got to process the check, I got to deposit the check, I got to reconcile the check, it's a very, very expensive manual process if you're going to do it for a lot of clients, but it's something that's eminently automatable with technology. And so the other thing that we actually did at least in the US market is we built this tech platform called AdvicePay just to handle the financial planning fee processing and tie it into existing financial planning software systems. And what we're finding is that is greatly expediting the growth of the new models.

Because it's easier just to administratively to do it. So that the advisors who want to do it just have to go give advice and get paid for it.

How do you articulate the difference between a service like Vanguard Personal Advisor Services and something like Buckingham?

So I'd answer that in probably two primary ways, essentially coming down to service and expertise. I love what Vanguard built and the service that they're offering and the people that they're reaching, but I'm also a business person. I've built a number of businesses over the years. I can do the math of how this works. This model only works when one advisor has hundreds of clients. And when we just get down to sort of brass tacks on numbers, there's roughly 2000 working hours in a year, right? 40 hours a week times 50 weeks a year, with a little bit of vacation. I can't actually be productive, game on with clients I'm working with for all of that. At best, I probably get like 50 to 60% of those hours that are really productive. So maybe 1000 and 1200 hours.

So if I get 300 clients and 1200 productive hours a year, like best case scenario, I get maybe four hours per client total. That's like meetings, in between meetings, quick phone call, hot emailing, whatever it is. Like, hey, you want to sit down and do an annual review meeting that takes an hour and a half because you've got some stuff going on with your life, that meeting plus the prep for that meeting, plus the follow up for that meeting, you probably blew out 70 or 80% of your advice service opportunity in one meeting, one thing that came up. So I really hope nothing else happens in your life this year.

Now to be fair for their service, they don't literally cut you off at three or four-hour mark. They try to average this out across a large number of advisors, but they're not exactly built to give a whole bunch of proactive phone calls and outreach and service support because if they do it and you say, yes, I need your help. They don't have the hours to do it. When we look at what happens in firms at the other end of the spectrum, so Buckingham, firms like PWL, I don't know your numbers exactly. But what we see for most firms in that context are things like 80 clients to an advisor, 100 clients to an advisor, some firms do 120, some firms that are even higher touch might only have 50, or 60 clients per advisor. And so now suddenly, instead of saying, you got three or four hours a year with me, including all meetings, all prep, all between and everything. Now, suddenly, we're in a world you get 20 to 30 hours per year with your advisor.

So, you got a complex situation with your family where you need advice, and we got to go back and forth and bring the lawyer in and deal with all this stuff about how are you going to carve up the family business amongst your kids, two of which want to be in the business and one doesn't, I got the time for that. We're here for that. And so just the service and very literally how service hours translate into how many hours of time you get engaging with an advisor for advice, and sort of the I know everybody always thinks, dude, I'm guilty of this as well. Anytime I call my attorney or accountant, it's like I got a quick question. It's going to be simple, right? Because we always say that because I want to manage down my hourly rate, but most of our problems don't actually try out to be that simple.

If it was that simple, I would have solved it with the internet and not be calling my attorney or accountant. By the time it gets that phone call it's usually actually complex, and it's going to take some time. And so having an advice relationship where you can get the time you need to solve the problems when they happen, really matters.

What are some of the tips if you're listening now and one advice that they should be looking for in a new financial advice relationship?

So there are a couple of things I would suggest. One that I actually think is a good one is how many clients do you work with in addition to me, and depending on who you talk to, and they might be newer or kind of gearing up. So, how many clients do you plan to work with when you're at capacity? Because they might not be full yet. Technically, if they were full, they wouldn't be talking to you. So presumably, they're adding more, which means they're not at the end of their journey. How many clients do you plan to be working with the capacity? Right? The people that answer two to three to 400 are going to have a very different level of service and focus than the people who say 120, 180 60, 50, I mean, there are some firms that work with ultra high net worth folks I know, where one advisor is completely booked, because he has eight clients.

So, how many clients will you be working with when you're at capacity? And there's really sort of two things to note with this. One, you can sort of do the rough math in your head. Divide their client count by 100 into 1200, and you're going to get about how many hours of service you're going to get out of that firm for the year, give or take a little, but it's actually a decent rule of thumb approximation. The second thing you'll find around it and just sort of the reality of humans. So an interesting line of research out there by a guy named Robin Dunbar, who found that he was species of all types, humans and others. We all assemble in some kinds of groups, essentially our herds, and you can actually predict the size of a herd by a particular part of the brain, like a particular physiological section of the brain. And so species that have smaller sections of this brain might only commonly organize in groups of 10, or 20, or 30.

Species that have really large portions of this brain might organize in groups of three or four or 500, like a giant flocks of birds. The particular size of this brain for human beings correlates to a herd group of about 150. It's essentially the number of relationships our brains can hold before we just lose track of who's who and you're the one that retired recently, you're the one with the kids who went off to college. When you get one step closer from distance acquaintance you're getting like when I say I know that person, you can only keep track of so many. That limit appears to be around 150. And it's why even when you look historically, there are remote tribes that the anthropologists study that consistently break apart into new villages when they get to about 150 people. But that was just when they found their social system starts to break down.

The military units have had a common unit size of about 150 to 160 going back for literally 2000 years, and even when you look at the research, the average person on Facebook has something like 162 friends. It's just kind of how our brains are wired of how many people we can keep track of. So the significance of this in the context of the financial advisor world is, if you really want a relationship with an advisor, they who know who you are, they remember your situation, right? Because I don't want to keep re-explaining myself and my own situation and the stuff I'm going through. I hired you, and I pay all this money because I want you to know who I am.

First of all, they better not be over 150 clients per advisor because their brain just slid around and can be able to hold it unless they're one of the super people who just happens to be particularly good at this. And realistically, it's going to get hard if they're over 100 because clients aren't the only people they know. They probably have friends, family, personal relationships, all of which occupies some of the space in that brain. And so, in addition to just understanding kind of, how many clients will the advisor work with from sort of a capacity, and how many hours of service will you get, there's a very real breaking point that if you're talking to an advisor we're full is materially higher than about 75 to 100 clients, the odds they actually fully know and remember who you are is going to drop off very significantly.

Not impossible. Some people are kind of savant at this and they can have giant networks. But your odds are not good once they're getting a lot higher than about 75 to 100 clients per advisor.

From the consumers perspective, financial services industry trends, do you think that the average investor, the consumer of financial services should be aware of that you see coming over the next whatever, decade?

So I think the most fundamental shifts that's happening are across our entire financial services industry, and even really happening globally, although different countries are getting there in a slightly different way in a different pace, the truth at the end of the day, so almost every developed country around the world, their financial services system has two segments of people. One, are the people that make the financial system work? Like at a brokerage firms, investment banks, the companies that make like the traditional financial system capital formation thing happen. If I'm a company and I need to raise $10 million, then we go back like 100 years ago, if I need to raise $10 million to build a railroad out to the western side of the country, and I don't know a person who can lend me $10 million. That was a lot of money back then, what do I do? I go to a brokerage firm, an investment bank, and I say I need to raise $10 million.

So I'm going to issue $10,000,001 shares, and y'all got to find individual investors to sell my 10 million shares at a $1 apiece, so that I can get the money to go build the railroad. The purest sense of public market capital formation that makes the economic system work. And in order to do that, I need a brokerage firm, an investment bank that could underwrite that, get the stock sold into initial investors and then facilitate a secondary market. Well, we just now call the stock market because if I buy your stock initially, I need a way to sell it someday, which means I need other investors to sell it too and a marketplace to sell it in. And so, we have the side of the industry that essentially facilitates capital formation, the operation of public markets generally like broker dealers, banks, investment banks, we have slightly different labels in different countries, but that segment, then there's a second group.

The second group are broadly the people who get paid to give advice. Historically in most countries, they gave advice by managing portfolios, and they usually derive from investment management advice divisions, although these days they've gotten much broader and the advice increasingly is more holistic than just the portfolio, but it's one of the reasons why that AUM model is so dominant. But in essence, we had two groups. The ones whose job was capital formation and the distribution of investment products, they were salespeople, because if my railroads going to raise money, someone has to actually sell the investor on buying my railroad stock. And then on the other side, we have the people who are in the business of advice, and we're regulated as advisors. And the challenge that's happened over the past 30 to 40 years or so, is technology has increasingly automated all the stuff that the brokerage side of the world used to do, right?

40 years ago, if I wanted to buy or sell a stock, I called a stock broker, who I'll hopefully if they were a good broker had a buddy on the trading floor who could execute my stock at a slightly better price than someone else. Now, if I want to buy a stock, I go to a .com website, I click a button, magic happens and apparently I own a stock because of an electronic screen tells me I do. We've completely decentralized the process away from the humans, and just made it all happen with technology at your 1/1,000th of the cost of what it used to be. And what's happened in the process is that a giant swath of the people that used to be in the business of selling investment products no longer really get paid to sell investment products, because you can buy all this stuff, basically through the internet.

And so, what the brokerage industry has largely done around the world, as they've said, well, consumers want more from us. We're going to start giving advice. You can get the products anywhere, I'm going to give you advice, frankly, the advice is usually pretty helpful in convincing people to buy the products anyways. It's like, I'll show you why you need a product and then I'll sell it to you. But that's kind of a conflict and if I go to the butcher, it turns out he always thinks meat is the best thing to have on the menu, right? I might give advice about which cut of meat to buy, but I know I'm going to get a certain recommendation when I go to the butcher about what my dinner should be.

The challenge now, the tapping around the world is the broker capital formation side of the industry has largely vergenced the advice side of the industry while the actual advice side of the industry is still doing advice as well, and the two are mashing together, because technology forced them to converge, and it's creating, on the one hand, an absurd amount of consumer confusion, right? People that write financial advisor on their business card, and some are literally in the business of advice, and some are legally in the business of product sales and happened to figure it out that advice is as good at selling products, but it's not objective advice because it's there to sell a product. And now we're even seeing a regulatory backlash of regulators that are coming forth in one country after another and saying, wait, wait, wait, if y'all are going to call yourselves advisors and give advice, regardless of what portion of the industry you're in, we're going to regulate you like advisors, regardless of what portion the industry you're in.

And so you see, fiduciary rules, best interests rules, at least new disclosure rules. The UK and Australia have put full fiduciary rules in place. I know you guys have legislation called CRM too. We have a version of it called regulation best interest. Neither of ours have gotten quite to this full advice regulation yet, but we're all moving in this direction because of this convergence. Now, in the near term, the problem for consumers is, it's not enough that someone says they're a financial adviser, you actually have to clarify like, do you represent a certain company's products? Do you get paid because of the implementation at the end like the butcher when they sell the meat? Or do you actually get paid to give me the advice like the nutritionist who just tells me what's healthy for me to eat because they're getting paid for nutrition advice, not getting paid to sell meat?

The Good News of it though, is I don't think we're going to be fighting this fight much longer. The regulators have largely noticed these channels have converged, and the truth at the end of the day is we've only ever regulated advice to the highest standard. It's sort of in the definition of advice. It has to be for the person you're giving advice. That's what makes it advice, not a sales pitch. So, right now, I think there's kind of a mess of this in a lot of countries around the world.

I do think we're structurally reorganizing it. A lot of people in the brokerage firms in practice are already doing it because giving good advices good business. But I think the good news for the average investor is that you're going to see the quality of advice lift a lot over the next 10 years, because the regulator's increasingly irregulating everybody of advice, which means higher standards of care, higher standards of conduct, higher standards of just education, and in the US, the actual bar to be a financial advisor requires no degrees, no designation, no education, just a very simple two-hour regulatory exam, and that stuff I think, is going to change dramatically in the coming decade. And just ultimately, that lifts the bar for our industry, which I think is long overdue, and ultimately lifts the bar and quality of advice for consumers. It means when you hire someone who says they're an advisor, it will be increasingly likely they actually are.

How do you define success in your life?

So, success for me is really kind of an impact drive. I guess some people sort of frame it as leave the world in a better place than what it was when you came to it. Marc Andreessen is a famous venture capitalist, talks about entrepreneurs who try to make a dent in the universe. You can't reshape the whole universe. Maybe if you have a really good impact you can actually make a dent in the universe. I view what we do as financial advisors as a sacred duty, and I don't say that lightly or to be campy about it. I remember when I first started 20 plus years ago with basically no training and experience whatsoever, I was a psych major theater minor who landed in a financial advisor job because someone would hire me. Giving people advice about their life savings, and I didn't know anything about anything at the end of the day. And for me, frankly, it scared the heck out of me. Like in about 40 minutes of that advice, I can destroy someone's 40 years of hard efforts and accumulation. We should treat that as a sacred duty.

I mean, down to the fact that the harm we can cause from bad advice, just the actual reality, money is a leading cause of divorce, is a major cause of depression and suicide, the stuff we deal with has really weighty real world ramifications when you do it wrong, as well as huge benefits when you help people do it right. And so, on the one hand, that's part of why a lot of my passion is around lifting standards for the industry overall, and I spend a lot of time on those sorts of issues as well as teaching training advisors. We have a whole website, kitces.com, that's just built for teaching and training advisors and trying to advance the profession.

But what it comes down to for me is you as we said earlier, a good financial advisor at capacity has maybe 100 clients, right? It's hard to do more than that. You'll lose track of them. And so when I look at our platform, and I see 10s of thousands of advisors that come to the site every week to learn how to be better, that gets me really excited. That's a couple of football stadiums full of people that we're directly impacting every week, and because they each may have their 100 clients and we get that 100x multiplier, it's not just that we might reach 50 or 60,000 advisors in a week, it's that what we taught them could positively impact 5 million people.

And I will literally try to envision 5 million people in my head, which is a lot of people, and it's kind of hard to wrap your head around. But that's actually the point. That's what gets me sort of up and excited in the morning to do the work that I do. And ultimately, I define success by the reach and impact we have in moving that needle. How many advisors are we reaching? Which is easy to measure, and how much impact are we having lifting standards and the quality of advice across the whole industry? Which is a little harder to measure in practice. But when we look at just new models we've created, with XY Planning Network, shifting in models with AdvicePay a lot of what we do in just teaching and training advisors, the sheer number of continuing education credits we give to advisors every year, which is 10s of thousands of hours of education. That's the kind of impact stuff that gets me really excited and how I look at success for the work that we do.