There really is some good news in the recent market decline/disaster. For instance, I believe the turmoil is really encouraging advisors to take a closer look at their businesses-how they are operating, how they are structured, how they are investing, what their plans are for the future. In good times, it is easy to get complacent. We don't need to work that hard to get new clients, or to keep the clients we have happy. We don't have to work that hard to be profitable. When the market is good, this business is easy.
But then sometimes the market is bad. The clients are not laid back. The economics are not simple and rosy. Was it more fun six months ago? Yes! But will this market downturn ultimately benefit the businesses of financial advisors and how they are being run? I believe so.
The other great opportunity I see in this market is the chance for advisors to grow in different ways than the ones they expected. In years like 2008, when organic growth isn't positive for many advisory firms, we refocus on the need and opportunity to grow externally. And what's a better environment to compete for new clients in than the one we have seen over the last six months? We might forget, as we struggle to comfort our clients and staff and re-examine our business economics, that the recent market is exactly why many of us chose the wealth management model to begin with. All the firms that marketed themselves as wealth managers should now be able to eat up the market share of those firms that sold themselves primarily on investment returns. By contrast, those that had a long-term plan in place for their clients all along should take a deep breath and find renewed faith in the philosophy they embraced. It's still the right one. Integrity and independence, after all, can raise most wealth management firms above the mayhem on Wall Street.
Just ask the clients what they want. When asked what attributes they cared most about when selecting an advisor, almost 70% of consumers chose trustworthiness while less than 10% wanted a top performer (according to a report by State Street Global Advisors and Knowledge@Wharton called Bridging the Trust Divide: The Financial Advisor-Client Relationship, May 2007.) According to another report, 31% of affluent households say that they are loyal to an advisor according to his level of knowledge and the quality of the advice he gives, while 22% say "trust, honesty and dependability" determine their loyalty.
Only 18%, meanwhile, say their loyalty hinges on investment performance. (Source: Phoenix Affluent Marketing Service, Financial Advice-The Next Commodity? September 2006.)
This is not to say that we can disregard investment performance altogether. But if your philosophy at this point is that you must chase performance for the client, you're moving in the wrong direction. The real opportunity for you as an advisor now is to position yourself strategically against those who have been trying to sell performance yet don't have a long-term plan and balanced approach.
As we move into 2009, many advisors are evaluating their business strategies and setting their goals and objectives for the coming year and beyond. When most organizations do their strategic planning, they evaluate the strengths, weaknesses, opportunities and threats facing their business. The latter two will be important (and hard) to anticipate in the new year.
Some of the threats that come to mind, for example, ones we have talked much about in recent months, include a highly volatile bear market for stocks (at home and abroad), underperformance in most asset classes, declines in U.S. real estate values, a U.S. recession coupled with inflation, and the uncertainty that attends a new president coming into office (among other things).
The opportunities, which I don't think we are talking about as much, include the turbulence at the largest financial institutions, which is causing many clients and some talented advisors to wonder if they're in the right place. There is also general unease among Americans. And then there's the opportunity of having a new president coming to office (since change at that level is probably both an opportunity and a threat).
I get the sense in my everyday conversations with people that they feel as if their financial lives are out of their control and they are struggling to understand what the current economy means for their future. There is much unrest among the clients of firms mainly touting their investment returns and not their comprehensive, long-range approach, and these customers are looking for a new approach-a new advisor, in many cases. Is there a better time for independent wealth managers to strut their stuff?
Pershing Advisors Solutions' report Uncharted Waters: Navigating the Forces Shaping the Financial Advisory Industry, examines how consumer demand is created. Before consumers will hire an advisor, says the report, they have to 1) understand that they have a need for advice; 2) decide that their current direction is not good enough; and 3) identify those advisors who could offer them a better one. The recent market turmoil has triggered hundreds of consumers a day to start taking these steps. Advisors can and should help them frame the issues by:
Helping consumers identify problems. Books, Web sites, tools, presentations, events, and one-on-one conversations can all help a consumer start a search for a new advisor-as can any other form of communication that helps consumers understand their needs.
Educating consumers about how they are different from each other. Clients don't all look alike, and their problems are unique. One of the strengths of independent advisors is in their ability to create unique solutions for a certain group, and to explain to clients that the problems of some people cannot be tackled by generic solutions.
Educating consumers about what you do. Talk about what you do, and how you do it. Tell stories about your client relationships and the positive impact you have had. Empathize with them. Let them know you understand how hard the current market is and talk about how you are helping other clients deal with the turmoil and uncertainty.
In this kind of environment, the mindset of many advisors is to mourn, retrench and protect. What they should be doing is competing, capitalizing and growing. Whatever their strategy, it should come as no surprise that they are already good at generating new business. Even during the much rosier economy of 2007, most advisor firm growth did not come from market performance. In fact, they experienced 13.5% growth from new assets in 2007 and 6.4% growth from new assets gleaned from existing clients. The average asset growth from market performance, on the other hand, was only 4.3% in 2007. (Source: 2008 Moss Adams Financial Performance Study of Advisory Firms, sponsored by Genworth Financial.)
And it won't be news to you where advisors find these new clients. Most wealth managers find their new faces as referrals from existing ones, and that will be the case in the new environment as well. You are likely in constant contact with clients right now, and you should reiterate to them that the comprehensive, independent, long-range approach you've chosen is the right one, and that it makes you different from what most of the providers in your community are doing. You can meanwhile offer counsel to your clients' friends and loved ones when they would also benefit from such an approach.
This is also a great time to re-evaluate our business strategies and make sure we aren't just talking the talk, but also walking the walk and building the comprehensive model clients need. The services they need haven't changed, but some might be more top-of-mind right now. We already know that most of today's investment offerings are commoditized. So we add value and distinguish ourselves from competitors with such strategies as wealth preservation; risk management and hedging; and tax minimization. As we know, many people are in their prime saving years. The ranks of retirees are swelling, and placing complex demands on you to manage their risk so they won't outlive their assets-and these demands are increasing in intensity after several months in which clients' portfolios have taken a battering. Market uncertainty has certainly dampened investor enthusiasm for "going it alone," and the need and demand for advice continues to rise.
And though I believe this is a critical time for independent advisors to differentiate themselves, I also worry that the window of opportunity is closing. The things that distinguish independent advisors-open product architecture, asset allocation, fee-based pricing, financial planning and multiple services-are no longer the exclusive domain of the independents, or at least they won't be for long.
Right now, Wall Street is licking its wounds and restructuring its economic model and client offering. With greater responsibility being placed on individuals to provide for their own financial futures, the opportunity for independent advisors will increase, but so will competition as the large firms re-emerge with platforms that look and feel (and perhaps are) more like the independent model. So timing is of the essence for independent advisors to pursue market growth now while they are perceived to be unique.
I know the past several months have not been fun for many of us. (Believe me. In a display of excellent timing, I personally took over running a wealth management firm in July, so I can relate to the challenges of the past several months.) But as we look to 2009, let's stand up, brush ourselves off and look outward to the thousands of clients that need our help, that can benefit from independent, comprehensive advice and a long-range approach. They need us right now, and we need them too. This is an industry of professionals that have worked hard in building their businesses over dozens of years, and will continue to work hard to expand and compete in whole new ways in this whole new world we are entering.
