Hill compares two of his clients who both lost a lot of money in the market. "One couple was freaked out, so they just cashed in [and left me]. The other cashed in too, but is still with me as a planning client. He's now beginning to go back into the market."
And this is the crux of the issue, most survivors say: Simply managing money doesn't allow the advisor to develop nearly as high a level of understanding and mutual trust with his client as does the financial planning process. Done right, planning leads to the cultivation of a deep friendship with far deeper roots than are possible with money management alone.
The irony of this realization is that many survivors have remained successful in spite of using a fee structure-percentage of assets under management-that doesn't obviously credit them for the planning work they do. In many cases, advisors who kept their clients still lost significant revenues, because the income was tied solely to investment performance. What saved them, many say, was the falling market motivating many do-it-yourselfers to seek out advisors, resulting in large inflows of new clients to offset revenue declines from existing clients' diminishing principal.
Even before the markets began their decline, advisors were experiencing another threat-client greed. Says Foster, "In 1999, after realizing AUM increases of 25% a year, growth slowed. Clients were becoming less satisfied with their investments, increasingly expecting us to recommend aggressive stocks, which we refused to do. Although many other advisors I talked to were [financially] injured during this period, we mainly got our egos hurt because clients didn't believe us and challenged our philosophies." In 1999, his company's assets under management growth rate dropped to 7%; in 2000 and 2001 it dropped to 3% and 6% respectively; but by 2002 it was trending back up again.
As a result of the 2000-2002 market and the client mania that preceded it, many advisors, including Foster, took deliberate survival measures. "What we did in 1999 and 2000 was to cut back unnecessary expenses," Foster says. However, like so many optimists, he and his partner believed the worst was over in 2001, and they hired two new planners. That year they experienced their biggest-ever down-year for revenues, along with their biggest ever jump in expenses. They got through the hard times by dropping their client minimum from $1 million in assets to $500,000, thereby attracting new clients who's work they could feed to their new hires.
Likewise, Hill took some extraordinary measures to bolster his business during 2000-2002, and to stabilize it even further should a rocky market challenge him again in the future. "I used this brutal period in the financial markets as a lesson to learn and move forward from," explains Hill. "First, I performed more services for existing clients, so they could get some value-added. A client in Mexico (Hill has many international clients), for example, might be traveling to the U.S., so we would book him a hotel room."
Second, he began testing out a partnership with several associates. "I'm going from being a sole practitioner to building an ensemble practice with partners, which is lowering overhead and allowing me to work on the structure of my business." Hill has teamed up with two other LPL reps who, like himself, have 20-plus years of experience, in what he calls a "courting" period, to see if they want to combine their practices. At the same time, they're adding a new practice focus-real estate-something Hill says, with the exception of a few REITs, hasn't been an asset class for his clients. "We believe the sizable generational transfers soon to take place will have a large real estate component, so we've gotten involved in 1031 exchanges, spending a lot of time on education and due diligence," says Hill.
Not only does Hill hope clients will find his additional expertise a reason to stay, but he reasons that having a larger organization should also help with client retention. Alan Goldfarb increased the size of his organization, as well, by merging with the 50-year-old regional CPA firm of Weaver and Tidwell LLP in Dallas-Ft. Worth to become Weaver and Tidwell Financial Advisors. Unfortunately, just like Foster's optimistic but ill-timed overhead additions, Goldfarb's timing led to problems initially.
He explains, "We merged our fee-and-commission RIA, Financial Strategies, into the accounting firm in 2001 with great expectations and a viable business plan, only to see it shattered by the market ... to the ire of the accounting firm." But what he did to turn around the situation is instructive.
"We liked the idea of our clients having access to top accounting people, and the principals of the CPA firm wanted to be able to offer financial planning services to their clients. We expected to create an RIA subsidiary of financial advisors and to acquire assets. We brought most of our own clients with us, representing about $22 million of assets when we merged, and our goal by the next fiscal year was to have $100 million under management from all sources," says Goldfarb.