Niche financial planning seen as the next frontier

As the financial planning industry continues to grow, evolve and consolidate, the best way to stand out from the herd might be to focus on a specific target market. The more specific the target, the better, according to a new research report.

“Niche is a necessity because the future of the advice business is a niche business,” said Michael Kitces, head of planning strategy at Buckingham Strategic Partners.

“Look at virtually any profession and you’ll see that the generalists struggle, while the specialists are the ones with the most successful businesses,” he said.

Kitces was among more than a dozen industry experts who contributed to a comprehensive report from Inside Information and Dialektic Consulting called New Frontiers in Wealth Management.

In addition to the importance of developing a specific niche, the research addresses achieving authenticity through something called pro-personal marketing, bringing in professional leadership and rebuilding your technology from the ground up.

“We asked people to suppose they could redesign a firm of the future, and tell us what that would look like,” said Bob Veres, founder of Inside Information.

The general message of the research is that firms enjoying peak levels of profitability today will have to travel through a valley of rebuilding to reach a second, higher peak as a means of staying competitive. Transversing the valley could include some practice reengineering and steps that might temporarily take the business backwards in order to move forward.

“You often need to go through a valley to get to higher peak, which means you could be required to essentially unlearn what you’ve learned and go back to basics,” Matthew Jackson, co-author of the report and founder of Dialektic

When it comes to niche strategies, the report finds the typical advisory firm is missing the mark with a business strategy that is “vaguely defined and the target client is determined largely by asset level.” Geography, which was once a key element of gaining market share, is also overly leveraged by some firms even though technology has made location mostly irrelevant.

As Kitces explained, one of the original niche strategies was being a fee-only planner because it was distinct from commission-based sellers of investment products.

“If you talk to a lot of RIAs today about how they got big, it was by being fee-only,” he said. “But fee-only firms are struggling to grow so they’re acquiring left and right. What changed is fee-only is not a differentiator anymore.”

As the report details, reaching the next peak toward a specific niche means traveling through the valley, and “placing a bet on a dedicated client segment requires a cultural transformation.”

It takes considerable time and effort to build a specialized proposition, “and it might fail,” according to the research.

Niche planning is easier for advisers who are just starting out because it doesn’t mean screening out some existing clients.

“The most difficult transition in the initial stages, particularly for the older, more experienced advisers, will be psychological,” the report says.

In contrast to the traditional model of gathering assets and building scale, committing to a specific type of client while having to “say no to others, may take years to feel comfortable,” according to the research.

“This is completely upending the way people will select their advisers,” Veres said.

A niche practice is also an opportunity to migrate away from serving clients based on their assets and net worth.

“When a firm commits to clients within a target group, it must serve the members of that group regardless of their current net worth,” the report states. “The ability to pay fees is of course a must, but the ability to pay asset-based fees is not.”

While some might avoid niches for fear of shrinking their market of potential clients, Kitces said that “a niche for 50 clients can be pretty much anything.”

“Giving advice instead of selling products is not a differentiator anymore,” he added. “Really, we’re just going from niches to niches.”