Weathering the Storm
How advisors are adjusting their practices in a changing environment

These are challenging times for everyone. Many investment advisors are experiencing revenue declines as well as declines in assets under management (AUM) and, consequently, are trying to do more with less. In this month’s practice management article we will provide critical market trends and insights advisors need to navigate the current environment and to benchmark themselves against their peers.

Under pressure but optimistic
For the first time in the last six years, the advisory industry suffered a drop in assets under management, with assets decreasing 16% in 2008, according to the preliminary results of the Rydex SGI AdvisorBenchmarking survey conducted in March-April 2009. Negative stock market performance, of course, drove much of the decrease in RIA assets. However, RIAs have weathered the stock market decline much better than the stock market itself, likely through raising new assets, as well as their asset allocation and investment management skills. While the S&P 500^® was down 37% in 2008, RIAs’ AUM decrease was half that—an 18% decrease for the same period.

Median Advisor AUM Change vs. S&P 500 Annual Return

To put the asset slide in perspective, advisory firms, on average, now manage approximately the same amount of money today as they did in 2005, when the stock market was at a much higher level. However, since advisors’ most important goal is to increase AUM (according to 33% of advisors), the industry as a whole is pretty optimistic about meeting this goal – almost half of the advisors surveyed (44%) expect that they will grow their business as measured by AUM growth more than 30% annually over the next five years.

The more important question is: How do advisors plan to regain their assets? What top client asset sources are advisors relying on? As advisors look to the future, 82% say the key driver for growth in the next five years will continue to be referrals from existing clients–marking continued reliance on the same source of growth as they did in the past. Almost half of the financial professionals believe that organic growth from existing clients will help them hit their asset goals. With an opportunistic outlook, about 30% of advisors surveyed believe that organic growth from the stock market will propel their firms’ growth in the next five years.

So, what are advisors doing to survive the crisis? Most advisors (63%) are sticking to their guns, and not making any changes, maintaining the same infrastructure and compensation structure in 2008 as in past years. Only 14% said they reduced principal compensation and only 7% of the advisors surveyed were conducting staff layoffs. Also, only about 15% of advisors surveyed have reduced administrative and support compensation. On the positive side, one fourth of the advisors surveyed said that they added new services versus the 5% of firms that decreased their service offering.

Major Changes RIAs Made in 2008

The Rescue Plan
So, how can firms increase their value and revenues, getting their financial plan back on track?

A majority of advisors gained clients in recent months, according to the Cerulli report The Cerulli Edge. How did they do it?  These best-practice advisors benefited from the recent market downturn since many investors seek financial advice during a bear market as opposed to a bull market. Here are some ways advisors can weather the storm:

• If your practice revenues aren’t going to grow from where they are currently, focus on operating within the current environment, making cuts and adjustments as necessary to get your expenses under control.
  
  
• By increasing your number of services in the wake of the market downturn and by focusing on non-investment advice, you can help strengthen relationships with your clients.
  
  
• Work on adding a manageable number of new clients.
  
  
• Ensure that you—and your staff—are not stretched too thin by automating or outsourcing routine tasks and making sure you focus your efforts on tasks that are tied to assets under management or client relationships.
  
  
• Communicate proactively with your clients—those advisors who have solid relationships with their clients are more successful and have better client retention rates.
  
  
• The best use of your time is to spend it with clients and prospects.

By continuing to focus on relationships with your clients as well as keeping expenses under control and keeping your efforts focused, your firm will continue to operate efficiently in today’s environment and be positioned to grow when the economy recovers.