Those who fared best stressed financial planning over asset management.
Contrary to popular mythology, not every financial advisor survived the great bear market of the last three years. And those who did were put to a test that turned out to be more severe than they had ever expected.
A recent advisor benchmarking study conducted by Rydex Funds manages to quantify some of the pain. Between, 1999 and 2002, RIA firms suffered an 18.4% decline in their assets under management, falling from an average of $87 million to $71 million. Revenues dropped almost 12% to $795,000, profits dropped by 26% to $210,000 and profit margins contracted by about 25%.
But advisors' performance was uneven. While some were forced out of the business, others managed to grow. According to the Rydex study, RIAs saw their client base increase by 8.1% in 2001 and a remarkable 21.7% in 2002, as shell-shocked investors sought help in unprecedented numbers. Interviews with advisors who survived and with one who didn't reveal a lot about this emerging profession and which firms were built to last.
Gary Freiberg, a former registered rep now living in San Luis Obispo, Calif., remembers the markets of 2000-2002: "When the market changed [in 2000], I opted to stick with the fundamentals, to stay diversified. In previous downturns, markets recovered quickly and, this time, everyone expected the same thing to happen. At some point, I was sure it couldn't go down much more. I remember thinking ... 'I can't sell now because my clients will have all these losses,' so I didn't do major overhauls of my portfolios. I stuck with what I believed were good four- and five-star funds. I believed in the expertise of the managers I'd selected. As a result, I lost clients, some big ones. Maybe they were hoping someone else could get a better result or, in a couple of cases, they decided to self-manage their portfolios at Schwab. It was disheartening to talk to clients when I had nothing good to say. My credibility was irrevocably damaged when we did poorly ... along with the market and the entire securities industry."
Now the owner of a successful start-up business totally unrelated to financial services, Freiberg says he cared deeply for his 250 clients and respected the trust they'd put in him, but didn't see any alternative to selling his business. In 2001, when he first considered selling, Freiberg listed his business with FPTransitions.com, the industry's premier market-maker for financial advisory practices. David Grau, FPTransitions' president, explains that Freiberg wasn't ready to finalize a sale for about a year and a half after he initially listed. "By then," says Grau, "his annual revenues were off by about a third, and his initial listing price was down 55% reflecting the recent, sharp decline in his revenue numbers."
How could this have happened? Freiberg was certainly not the only advisor forced out of the industry by poor investment performance and dwindling client numbers. But at the same time, many other advisors not only stayed in the industry, but thrived during the 2000-2002 market. The answer may go back to the predictions made in the mid-'90s by of a small number of astute observers. What they said was that advisors gathering assets without providing a solid foundation of financial planning advice will suffer if and when a market downturn arrives.
Says Freiberg, "I viewed myself as an investment advisor. The label 'financial planner' had the connotation of working on budgets. I figured wealthy clients had reached their level of wealth without my needing to work on their budgets with them, and financial planning was unnecessary."
While Freiberg's perception may have fairly characterized his clients' own perceptions of themselves, some would argue that he nevertheless should have overridden his clients' possible objections to financial planning in order to create more stability for his business.
Says Jeffrey Hill, CFP with LPL Financial Services in Denver, Colo., "I've provided financial planning services through the market downtown and believe it's been integral to maintaining clients. I've lost only a couple of clients due to low returns, and they were clients with whom I didn't take a holistic approach. They were just money management clients with no financial plan."
Charles Foster, one half of Blankinship & Foster in Del Mar, Calif., can empathize: "We lost a number of clients in 1999 and 2000, maybe 14 out of 250, the ones who'd come in in 1997 and 1998 and didn't want us to do any financial planning."