I believe that the single biggest mistake that wealth management firms can make today is to allow themselves to panic and stop investing in their business. Reducing staff or delaying necessary investments can endanger future growth, kill the momentum firms already have and most of all, create the danger of missing the wave of recovery. The practices that will catch that wave (whenever it occurs) will be those that have the capacity and the people to pursue opportunity when it arises.
During October, I spoke to many advisors who weregetting ready to switch their practice to "bunker mode" and make dramatic changes in their staffing. With AUM down dramatically, it is easy to see why advisors were thinking of what happens if their revenues decline by 25% or more. Considering that the normal profitability of a practice after fair owner compensation is 25%, this would mean that all profitability will be wiped out, and that the owners face a drastic cut in their personal income. Regardless of the market though, now is a good time to invest in your practice; failing to do so means you are likely to miss the biggest opportunity of your career.
Today, the market shares of competitors in the investment advisory industry are as unsettled as they may ever be. The largest firms are being bought, sold and restructured. Their millions of clients are likely watching the process wide-eyed--wondering what this means for their investments. Advisors servicing these clients are wondering what it means to their careers. Over the next five years, those market shares will shift, reshuffle and then stabilize to a new status quo, but right now, every firm has a chance to dramatically improve its market positioning.
Based on surveys done by research firm Advisor Impact, in a normal market--say 2006--only 5% to 7% of clients express any dissatisfaction with their advisor. For large institutions the numbers may be somewhat higher--reaching 10% to 15%. Regardless, this means that normally an advisor has a "shot" at no more than 2% to 3% of all potential customers since more than half of the clients never act on their dissatisfaction. This has changed dramatically. An Oct. 4 article in The Wall Street Journal, "Rich Investors Blame Advisors," suggested that 89% of clients are dissatisfied with their advisor, meaning that an advisor may have a "shot" at as many as half of the total client base. During the recovery from the last down market a similar wave of opportunity forged the success of the fastest-growing RIA firms.
"Fast Forward," a 2007 Pershing study, found that independent RIAs grew AUM by 40% in the recovery year 2004. This big year accounted for nearly half of the growth firms experienced since the bottom of the market in 2002. Firms that captured this opportunity did well in the period between 2004 and 2007. Firms that missed the big year fell behind their peers and only grew in the single digits--poor performance in an industry growing at a rate of 20% to 25%.
Notice the timing of the big year--about 16 months since the bottom of the market. First, the market returns had to turn positive and stay positive for nearly a year before the wave of money came out from under the mattresses where it was hiding. Firms that capture opportunities like this have capacity to react quickly. Firms that have strained their capacity to the limit, waiting for the storm to blow over, tend to miss out. When an advisor is short on administrative help, delays hiring a junior advisor or has laid one off; puts off installing the new performance reporting system or updating marketing materials for years, the firm won't see as many prospects and will catch even fewer of those they see. Advisors should ask themselves today: If they had a chance to add 20 new clients in a period of six months, could they do it?
Before jumping to a quick "yes," consider that adding 20 new clients probably means pursuing 30 to 40 prospects. It means meeting with those prospects--and often with their accountants and other advisors. It also means performing preliminary planning and analysis of their existing portfolios and creating proposals. Quite likely, every prospect will take three to 10 hours to pursue, meaning as many as 400 hours spent on prospecting and selling in a period of six months. This is more time than any advisor has today--not to mention a practice that is short-staffed and "lean." The practices that can jump to such levels of new business activity are those where:
?There is a well established client service process that utilizes service administrators and\or service advisors, freeing the lead advisor(s) to develop new business.
? There is a systematic service process that allows for the involvement of the administrators or juniors.
? Existing clients are comfortable with the involvement of the staff and know them well.
? The scheduling of client work is predictable and manageable.
? There are few emergencies requiring immediate attention--meaning strong operations staff and good partnerships with broker/dealer and/or custodian(s).
In other words, we are describing an experienced and well-organized team--not a bare-bones structure.
That's why I believe that right now is a great time to recruit. People are a bit like stocks--in good times their prices soar and everyone is rushing in to get them. In bad times they can be had at bargain prices, but buyers are few. I would suggest being a contrarian and playing Warren Buffett with staff: Invest in them when everyone else is rushing away. This will give your practice a much needed talent infusion and, importantly, time to integrate the new staff into the practice.
This is tougher to do when many owners are seeing their personal income possibly decline by half. The average practice in the latest Moss Adams survey seemed to be generating about $400,000 in pre-tax income to the owner, and some advisors were spending that much in their personal life. If there is any asset that's worth investing in right now, it's the advisor's own practice. That said, we cannot ignore the decline in revenues and need to reduce expenses. Some that can be reduced without endangering the practice are, in order of magnitude and priority:
Staff bonuses--Bonuses are not guaranteed income; it would be more than ironic if you pay bonuses to some people while laying off others.
Poor performers--If there are people in the practice who have performed poorly, now is a time to either cut the position or find a replacement.
Unused physical space--Many practices have more space than they need. Sublet space or reduce leased space to cut the cost.
Unused contracts--Subscriptions to rarely used research services, phone services and trade magazines [Wealth Manager excluded].
Personal expenses in disguise--Items advisors pay for through the business, such as cars and phones that tend to confuse the real profitability picture.
Excessive client entertainment and appreciation events--Chances are that clients will understand if you don't throw your usual opulent party in the middle of a recession, or if you don't take them to the college football games as often.
Other--In all surveys I have seen, as much as 5% to 10% of total revenue goes into a category labeled "other"--a catch-all bucket for expenses that don't fit anywhere else.
When working with Fusion advisors on their 2009 budgets, I find that even a well-run practice can reduce expenses by as much as 10%. For a typical Fusion practice this is often the difference between keeping and losing a full-time client service person.
I want to be clear that I am not advocating reckless spending on people or systems the practice cannot afford. However, with careful budgeting and within the limits of affordability, there are great chances to invest in your practice.
Extraordinary success is only possible under extraordinary circumstances. In my native Bulgaria, they say that "you catch the biggest fish in the muddy waters," and the water here is as muddy now as it will ever be. At the same time, to capture these opportunities we need to act decisively and with determination. We advise clients to invest and persevere through the cycles. There is no reason why the same should not be true of the one stock in which we are most invested--our own businesses.
Philip Palaveev is president of Fusion Advisor Network. He can be reached at ppalaveev@fusionadvisornetwork.com.
