For investors and those who advise them, 2008 was like a massive forest fire-nearly everyone got burned. But like a forest fire, it could ultimately be a cleansing experience that rejuvenates and strengthens the industry.
That's cold comfort to clients whose retirement assets sank like the Titanic, and to financial advisors whose revenue base is tethered to those declining client assets. But for advisors, the awful downturn is a time for soul-searching about who they are as professionals, how to best serve their clients and how they can position their business going forward. And given the financial turmoil-wirehouses in disarray, investors upset about their shrinking portfolios and, in some cases, the performance of their advisors-there could be a lot of new business had in the near future.
"There are two types of advisors in this market," says Mark Tibergien, managing director at Pershing Advisor Solutions. "Those who are paralyzed by fear and those who see this as an opportunity to retrench and see this as the next wave of growth. There's no question that every firm is under profit and revenue pressure."
Solid numbers are hard to come by, but the anecdotal picture painted by a handful of advisors is that assets under management last year declined anywhere from 20% to 40% for the average advisor. That hurts, particularly since Cerulli Associates' latest data shows 56% of advisor revenue is driven by AUM. "Given market devaluations of 35% to 40% for most assets under management, which contributes 56% of your book, that translates into revenue declines of 15% to 25%," says Cerulli analyst Scott Smith.
It especially hurts those advisors who have a lot of overhead or whose client service M.O. is to provide market-beating investment returns. "What do you do when investment returns are no longer the solution?" asks Joe Duran, CEO of United Capital, a consolidator of advisory firms based in Newport Beach, Calif. "What do you do when revenues aren't growing organically by 8% to 10% because of the markets but your expenses keep growing? Many advisors are waiting for the markets to recover, but what if they don't?"
For some advisors, the existential question centers around what's next for the business. "I think there will be an identity crisis in the next six to 12 months in the advisor community," says Michael Dubis, a certified financial planner in Madison, Wis. "We as advisors need to ask not only what we've learned from this, but what's in the value chain for the client. I think advisors need to question whether they should be offering investment management, because I don't know if that's what they wanted to do in the first place as advisors."
Who Am I?
Advisors often get religion during bear markets--it happened after the tech crash earlier this decade, and it's happening after the global rout of '08. The market dynamics are different, but the business impact on advisory firms is similar. "Any situation where advisors see revenue go down at the same time that their work efforts and client needs go up will result in a squeeze," says Rebecca Pomering, a principal in charge of Moss Adams' advisory business and a practice leader at the firm's business consulting group. "These downturns are really good for the industry in terms of getting people to refocus on running their businesses well," Pomering says, adding that many advisors got a little lax with business management during the boom years between downturns.
Pomering jokes that it's during times like these that people actually start listening to her about managing costs, establishing appropriate pricing structures and setting a sensible staff size (one that's not too fat, yet big enough to handle growth).
She says advisors now have to focus on financial management, business strategy and sales and marketing. "Strategic planning isn't just about how you grow," she says. "It's also about how you convey your value in the marketplace."
But "value" can vary among advisors. "We talk about planning as financial advisors, but how many actually are doing strategic planning for their own business?" asks Michael Haubrich, CFP, founder of Financial Service Group in Racine, Wis.
In 2007, Haubrich's entire staff took its annual three-day retreat in Phoenix, where he keeps a second office. Here, he says, they put together a road map to move away from fees based on assets under management. "We feel handcuffed to the AUM model and all of the conversations that revolve around that," Haubrich says. "If the Dow snapped back to 14,000 in 2009, this decade would still be worse than the decade of the '30s. So it's understandable that people would ask what's the value of paying someone just to manage my money."