The sharp, sudden correction in last year's fourth quarter didn't just throw some cold water on clients. It was also a wake-up call to advisors, according to TD Ameritrade Institutional CEO Tom Nally.
He estimates that the lost revenue for the RIA universe could have been close to $500 million.
How does Nally, who was interviewed yesterday at TD's annual LINC conference, arrive at the number? If one figures the average RIA firm bills the average client 74 basis points annually, as TD's 7,000 affiliated advisors do, the decline in revenues from the bull market peak on September 20 to Christmas Eve would have been about $530 million.
Christmas Eve was a unique day and not many investment professionals were working besides a few hedge funds and a lot of computers. Markets recovered quickly and a strong rebound continued into January.
But the experience should be a warning for the RIA business. Had the markets remained at Christmas Eve levels with the S&P 500 near 2,350 for 12 months, Nally estimates the loss in revenues could have approached $2 billion.
That estimate represents an extrapolation across the entire RIA universe, not just those affiliated with TD. But this correction, like almost all the others during this 10-year bull market, was remarkably brief and most RIA firms are built to easily withstand thse hiccups.
Does anyone really think it is impossible that at some point there will be a more severe bear market that will keep equities down for a 12- to 18-month period? At some point, it's inevitable.
Nally is well aware that the reason advisors exist is to instill the idea in clients' minds that they are playing the long game. But if they are going to be able to service clients through downturns when the demand for counseling often reaches surge levels, they need to "future-proof" their businesses.
"It's a good time to look at technology," he said. "Embrace all the technology you need so you aren't consumed with administrative functions" in times of market stress.
Another bear market could renew questions about the AUM model that are always lurking beneath the surface. Nally noted that most RIAs offer a comprehensive suite of services, but they bill clients only through "the AUM sleave." It's clean, simple and easy for clients to understand, but the model can cause advisors problems in a prolonged downturn and prompt clients, especially new ones, to perceive an advisor's value proposition through a narrow lens.