Though some on Wall Street think a recovery may already be stirring in the embers of the collapsed markets, the financial landscape has been unalterably changed, for some people profoundly.

Not least of all for financial advisors, many of whom have been forced to rethink how they run their practices. In five critical areas in particular, there are huge changes taking place-in compensation, client communications, investments, staffing and compliance. And financial advisors must be ready to make practice management changes if they are to deal with these new realities.

One of the hot-button issues of last year's economic meltdown was executive pay. Though federal officials are focusing on the payouts in corporate executive suites and boardrooms, the new austerity has seeped down into all levels of the economy, and not surprisingly, advisory firms are reassessing their own compensation procedures.

In figuring out compensation, it's important to understand what kind of behavior you're seeking in your employees and how to align their pay to their specific roles and expectations, says Mark Tibergien, the CEO of Pershing Solutions in Jersey City, N.J.

This means finding the right combination of traditional payout methods, including base compensation, short-term incentives, long-term incentives, perks and benefits, retirement benefits and perhaps equity. "It's a lot like an asset allocation strategy," Tibergien says. "The more your job is focused on sales or business development, the higher percentage of compensation will be short-term and variable, tied to sales activity. The more it is service-oriented, the more it will be in fixed compensation."

Tibergien believes that when it comes to compensation, employers rely too much on benchmarks that are really supposed to be guidelines. "When you see what the average compensation is for a particular position, you should not assume the person you're paying is average. They may be less experienced, have fewer credentials and may not be performing at the optimal level yet. Ideally, when you use benchmark studies, you're looking at a range of compensation and matching that to the individual."

Tibergien acknowledges that money is the prime motivator for most employees. But it can't be the only motivator. Maybe it is a great short-term incentive that changes temporary behavior, but in the long run, "throwing money at unhappy people will not make them happy," he says.

Then of course there's the other issue of how you charge the client. Some advisors have begun to challenge the traditional business model of charging fees for assets under management.

Eric Lansky, the president of money management firm USA Mutuals Partners in Dallas, believes that the industry should instead charge for assets under advisement and that it should even incorporate cash balances, which advisors don't typically do, even though they're telling clients what to do with their cash.

Lansky believes that when advisors are compensated for all the assets, including cash balances, they're able to remove any questions about their asset allocation strategy. USA Mutuals recently launched a $10 million FDIC-insured account called the Insured Cash Shelter Account (ICSA) to provide an option for high-net-worth investors and family offices, and it offers compensation to the introducing advisor. "At the end of the day," he says, "clients want safety, liquidity and yield as relates to their cash balances, and there's no reason an advisor shouldn't be compensated for providing more of what they seek."

Client Communications
More advisors are veering away from traditional methods like printed quarterly newsletters or quarterly client meetings. The whole paradigm is shifting from print to digital, according to giant broker-dealer LPL Financial, based in Boston and San Diego.

Today, an advisor's tools of choice include YouTube videos; social networking tools like LinkedIn and Facebook; conference calls with portfolio managers; client appreciation events; and Webcasts, videos and Webinars.

Presentations like these new ones give a face to the expertise, says Dan Sondhelm, a partner at marketing consulting firm SunStar Strategic, an Alexandria, Va., company that offers marketing consulting to financial advisors and money managers. "You can do them in an interview style where you talk to the camera, or a high-energy, high-color piece that looks like a documentary that paints a picture of your business and expertise for your clients."  

Web sites as a communication tool are also moving front and center. No longer can an advisor get away with a Web page that looks like little more than a high-tech brochure, Sondhelm says. Instead, an advisor must post regular client and market commentaries, offer news coverage and dispatch e-mail notices that drive clients and prospects to the firm's Web site.

Social networking vehicles such as Facebook, Twitter and LinkedIn are also gaining momentum among financial advisors. "If your clients are using these technologies, then you need to be available through them," says Ken Gutwillig, an advisor in New York and the chairman of a new communications trade group, the Investment Managers and Advisors Alliance (IMAA).

Finally, it's crucial to use these media together, stresses Ruth Papazian, executive vice president and chief marketing officer of LPL Financial. After holding a Webinar for clients, for example, you can follow up with a "lessons learned" summary e-mail about the Webinar and incorporate those messages within more traditional quarterly and annual client update reports.

New Investment Approaches
The turmoil over the last 12 months has caused advisors to revisit even their most basic assumptions about investing.
Today, advisors have become more flexible with their long-term asset allocations, using tactical adjustments when
conditions dictate.

According to Jerry A. Miccolis, a CFP in Madison, N.J., and the co-author of Asset Allocation for Dummies (Wiley, 2009), advisors are using economic and market indicators to trigger tactical adjustments-cutting back or increasing certain asset classes or sectors, for example-while still being faithful to the investment strategy the client wants.

Advisors are also designing portfolio protection strategies (such as custom puts) to kick in when certain asset classes decline dramatically, Miccolis says, pursuing such strategies through structured notes and other products.

Advisors are also demanding more alternative investments, and not just real estate and commodities, says John Moninger, a senior vice president of advisory and brokerage consulting services at LPL Financial. "We've seen a tremendous amount of growth in the alternative strategy mutual fund space, with five of the top ten selling funds year to date through August falling into this definition," he says. "The leaders in this category are very diverse in their strategies, which range from long-term strategies, managed futures and covered-call writers to global alternative allocation funds."

Advisors are also readjusting client portfolios using more market neutral and absolute return investments. One recent example is San Francisco-based Forward Management LLC's new Forward Tactical Growth Fund (FFTGX), which will use long/short strategies to manage risk and enhance alpha. Another emerging opportunity is hedge fund replication strategies offered through exchange-traded funds. Such products have the look and feel of hedge portfolios, but offer daily liquidity and lower expenses, unlike a hedge fund. One company specializing in these products is Index IQ.

Last year's market maelstrom caused upheaval not only in compensation, communications and investments at advisory firms, but also in staffing. Many firms were forced to lay off talent, even if it wasn't the best option. A lot of good people were in play, talent that could have been grabbed to position firms for the upturn to come over the next 12 months or so.

Tibergien estimates only about 10% added staff. Roughly 50% maintained existing staffing levels, and the rest laid people off.

Sal Zambito, senior vice president of business consulting for LPL Financial, says that advisors must clearly define office functions and assign the right people. The best way to streamline duties is to automate, delegate and eliminate.

Younger, tech savvy staff are a great addition to most teams, Zambito believes, but equally important, he says: "It is imperative to find a driven person, outline their job clearly and pull them in to success with the right combination of salary and contingent pay [bonuses]," he says.

Technology should complement staff and make them more efficient, not necessarily replace them. "People provide service, not machines," Zambito says, "but the machines are required to free people up to listen to, speak with and help clients achieve investment goals. Today's technology can really streamline an office and create the extra time needed to do the rainmaking and develop deep, long-term relationships with their best clients."    

In the wake of the Bernard Madoff and Robert Allen Stanford scandals, advisors must be prepared for new scrutiny. And a stronger and more thorough compliance infrastructure can become a selling point for concerned clients.

David Scott, a managing member of D.E. Scott & Associates LLC in New York and a former examiner with the Securities and Exchange Commission, says that advisors should be careful about what they promise to current and prospective clients. Making unrealistic or unattainable promises is one of the most common routes to an SEC complaint or some kind of litigation. The best way to avoid regulatory problems and ensure your own longevity is not to raise client expectations-but to manage them.

Scott also stresses that advisors must disclose, disclose, disclose. Another way to run afoul of regulators is by failing to reveal any material conflicts of interest you have when advising clients about products or services. If a registered investment advisor has any monetary interest in client transactions outside of normal advisory fees, those interests need to be clearly set forth in client disclosure forms. The simple existence of a conflict is not as likely to stir regulators so much as your failure to talk about it to clients.

Finally, Scott says that advisors must understand technical compliance requirements. It's sometimes a problem for advisors who have recently switched from commissions to fees. RIAs fall prey to myriad compliance requirements generally not supported by the compliance staff at their parent broker-dealers. So it is up to each firm to build and maintain its own appropriate compliance programs and meet any other technical requirements of the Investment Advisers Act of 1940 and similar state regulations. Small steps you take today to obtain training or qualified assistance can be invaluable in helping you avoid larger problems down the road, perhaps during a regulatory examination.

Bruce W. Fraser, a financial writer in New York, is a frequent contributor to Financial Advisor magazine. He can be reached at [email protected]. Visit him at