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April 01, 2008 at 04:00 AM
As we’re all painfully aware, it looks like the four-and-a-half year Bush bull market came to a dramatic and abrupt end in the final quarter of last year. On October 9, 2007, the Dow Jones Industrial Average reached its all-time high of 14,165: as of February 28, 2008, the DJIA had fallen to 12,582, down some 11.2% in just under five months.
Even worse, the end doesn’t seem to be in sight, and probably won’t be until the subprime mortgage mess is cleaned up, and global oil prices begin to stabilize.
In the universe of independent advisors, once folks realized they were experiencing a major change in the financial markets, and not just an October surprise blip, the reaction was predictable. Most advisors battened down the hatches in anticipation of a drop in revenues from fewer assets under management and clients who were being forced into tightening their belts, and possibly even some client attrition. They started scrutinizing their expenses (with an even sharper pencil than usual); put a hold on capital expenditures such as upgrading their technology (who these days isn’t constantly planning to upgrade their technology?); and canceled their plans to expand their practices with additions to their staff, such as bringing in a young professional or two.
This was the reaction of the majority of advisors, that is, except the most successful, those who have enough experience under their belts to know that independent advisory practices get the substantial part of their long-term growth during down markets. Those advisors who are prepared for new clients will be able to use the coming turbulent months to take their firms to the next level. Those advisors who aren’t prepared for growth will likely see themselves and their staffs slowly sinking in the quicksand of new business from which they–and their practice–may never recover.
From Whence They Came
To understand why independent advisors actually attract the bulk of their new clients during bear markets, we have to start by taking a look at where their clients come from in the first place. Since independent advisors typically don’t market (they usually don’t need to), they tend to attract the financial consumers who were at one time susceptible to over-the-top marketing hype, which is to say, almost all financial consumers.
It’s usually only after a painful experience with a broker or agent/broker (or two, or three…), that it starts to dawn on these “clients” that their “advisor” might not actually be in the business of giving objective advice. That’s when they start looking for a better source of financial advice; if they’re lucky they stumble upon an independent financial advisor. (In fact, an advisor I know won’t even take new clients who are under 50 and who haven’t learned what the financial services game is really about from a broker experience or two.)
Now, even after the light is beginning to dawn on the more perceptive brokerage clients, as we all know it generally takes some kind of event to overcome inertia, and motivate a clients to change advisors, even if they aren’t happy with their current advisor. When we’re in a major bull market, as we have been since ’03, where anyone with the skill to fill out a trading ticket can make money, it’s hard for clients to bring themselves to make a move because things are going so well. But when the market changes, and the flaws in their “diversified” portfolios begin to show, that’s often incentive enough for clients who are beginning to “get it” to start looking for an advisor who gets it, too. So in a bear market, brokerage clients in numbers larger than any other time will be looking to make the move to an independent advisor.
Avoiding Chaos
On the receiving end of this client migration are likely to be independent advisors who haven’t done anything different to attract these new clients, and if they aren’t experienced enough to anticipate that these clients are coming, can be pleasantly surprised. Unfortunately, in a small business, even pleasant surprises are not always good things. As we’ve seen time and time again, in the independent advisory business, practices that aren’t prepared to handle an unexpected volume of new clients can quickly slip into to a precarious downward spiral, which I call Chaotic Growth.
