Shoring Up Your Practice

Advisors are keenly watching the markets. Using all the navigational tools available to them, they're waiting for signs that the financial tide is turning, that recessional clouds are going to clear up, that their practice, or "boat" if you will, is sailing on to more favorable waters. Is your firm ready for a change in the economic weather? It's a question worth considering since rising tides and sunny skies mean nothing if your boat has a leak. Let’s examine your “boat” to make sure it's seaworthy; in this month's article, we take a look at some of the changes advisors made in 2008 to position their practices for that year's challenging economic environment and what they've done to be ready for better times ahead.

Services Offered by Advisors
The majority of advisors say that their approach to asset allocation has changed in the last six months. More than 35% of advisors surveyed said that their diversification approach remains the same. Twenty-four percent of advisors said they are increasing their allocation to income-oriented investments such as bonds, real estate and TIPs. About one third (33%) of advisors surveyed quickly reacted to changing market conditions by increasing their allocation to alternatives.

More advisors offered trust services in 2008 (15%) compared to only 9% of RIAs in 2007, while fewer advisors are offering charitable giving planning (42% vs. 54%)—the reason being that advisors aren't entirely comfortable with their level of expertise in these areas. Also, beyond the typical retirement income planning, several advisors in the study indicated they are providing health care and elder care planning to their clients.

Services Offered by Advisors (2007 vs. 2008)

Services Referred/Outsourced to a Third Party
Advisors were less likely to outsource in 2008 than in years past. Since most investment advisory firms were in a state of uncertainty, they brought some of their previously outsourced functions back in house. It’s interesting to note that younger firms tend to outsource more than their more established peers in order to gain leverage.

Most Frequently Outsourced Functions by Advisors (2007 vs. 2008)

Pricing Structure: Ways to Price the Services
Asset management fees continue to be advisors’ main source of revenue and most advisors (79%) have not changed their pricing structure. Only a few advisors implemented a retainer fee program to be compensated for providing additional support for more complicated investment situations such as ongoing stock options to be exercised, a small business, rental properties, or a need for regular income from investments, all which require extra effort and time. Most advisors have not moved aggressively to charge any kind of retainer or project fee or other kinds of non-asset management fee. We forecast that this type of fee structure will be increasingly popular going forward due to clients’ more complex investment demands.

Changes to Pricing Strategies (2008)

There are various opinions on the appropriate amount to charge for retainer fees. Amounts vary based on geographic location, level of wealth, project complexity and the advisor’s view of the services. Among those 25% of advisors who charge a separate fee for planning and asset management, more than half charge a fee for specific projects (61%) and/or an hourly rate (54%). We think that annual retainer fees are something investment advisors should consider if they are serious about providing ongoing progress updates to their clients. Advisors might also consider treating asset management and financial planning as two distinct services.

Preferred Retainer and Consulting Fee Approaches for Advisors who Utilize Such Fees

Just as boats need periodic maintenance in drydock to ensure they are prepared to set sail, you’ll need to make sure your practice is prepared to weather this unchartered economic environment. Take the time now to:

• Ensure that you provide your clients with the right mix of services that meet your clients' needs and reflect your expertise to give your businesses a steady and consistent growth pattern.



• Keep an eye on whether outsourcing makes sense for your firm. Can you ask your team take on a little more for a short time to weather the current environment with the thought that you can outsource later? Or does it make sense to offload so you can spend time on the most important areas of your business?



• Consider how a retainer or hourly fee approach might work for your business.