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Taking the Good with the Bad

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It’s unfortunate but true that when the markets and economy are at their worst, advisors tend to see a rush of new business. The current financial crisis is certainly proving this point, as advisors are fielding a bunch of new referrals and new money from existing clients is streaming in. But along with this good news also comes some bad–advisors’ assets under management (AUM) have fallen in tandem with the markets.

To be sure, this market drop is different from previous drops in that clients aren’t busy deciding whether they want to rush to a wirehouse rep for help or an independent advisor. Confidence in the wirehouses has been eroded–if not completely lost–post the collapses of Bear Stearns and Lehman Brothers and Merrill Lynch being bought by Bank of America. Frank Armstrong, founder and CEO of Investor Solutions in Coconut Grove, Florida, says the financial meltdown has been good for independent advisors in that it “conclusively proves that the major wirehouses can’t be trusted to be stewards of your money when they don’t even know what they own themselves.” The turbulence that investors are going through, he says, “is bad enough without wondering if your wirehouse is going to be there tomorrow or if your broker is going to be there tomorrow.”

But Armstrong’s practice, like those of other independent advisors, has not come through the financial meltdown unscathed–AUM at his firm have dropped by $100 million. “Our assets under management have fallen with the markets proportionate to the equity loss, and that’s not improving my bottom line,” Armstrong says. But he’s optimistic nonetheless. “We’re encouraged by a lot of new business and we think the market will recover; I’m in this for the long haul as my clients are.”

A recent online survey performed by the CFP Board of more than 5,000 of its members bears out investors’ rush to independents. The survey, conducted in early October, found that two-thirds of the financial planners polled have seen an increase in potential clients “as the turbulence with the economy has increased over the past several weeks,” with 27% reporting a significant increase and 39% signifying a moderate increase.

When polled on how they’re handling clients’ financial plans during the economic upheaval, 78% of CFP respondents said they were “standing firm with existing strategies,” while 57% said they are “reviewing asset allocation,” and 48% said “reviewing financial goals.” Another 45% said they are “moving assets to lower-risk positions,” 40% said “taking advantage of investment opportunities,” and 37% said “rebalancing portfolios.”

Only one in 10 (11%) of the CFPs that CFP Board polled believe the $700 billion financial rescue package will “definitely” improve the economy. About four out of 10 planners (42%) think the rescue package will be “moderately successful in reviving the economy,” the survey found, compared to a third who say the rescue bill is “not the right approach to reviving the economy.”

At Edelman, Skyrocketing Referrals

Ric Edelman, founder of Edelman Financial Services in Fairfax, Virginia, has only seen assets under management drop at his firm by slightly less than 10%–from $3.6 billion in January to $3.3 billion in early November. “That’s partly because we are so highly diversified that we haven’t been subject to the troubles of the stock market to the extent others may have been,” says Edelman, who also hosts a national radio show and has written a number of best selling books on personal finance. The slight drop in AUM has “given us a lot of reassurance that the way we are managing the money is right, and that’s why our clients are so happy.”

Referrals at Edelman Financial “have skyrocketed,” Edelman says, and “existing clients have been sending lots of new money to us.” In a market like this, he says, “people discover they are not as smart as they thought, they’re not as good at [investing and managing their money], or they’re investing with far greater risk than they realized. So they are shocked at the size of their losses and the poor advice that they had been getting elsewhere.”

Indeed, Edelman says his biggest challenge now is just keeping up with new client demand, and that’s primarily why he created the Edelman Financial Network (EFN) earlier this year. After hosting his weekly national radio show, Edelman typically receives about 200 calls per week from consumers looking for financial help. Since the “panic” started in September, he says, calls have reached 500 per week. “Consumers around the country are scared and confused and don’t know where to turn,” he says. Edelman Financial’s 30 advisors scattered throughout the Washington, D.C. area just can’t keep up with the demand, Edelman says, so he launched a network this January that could pull together advisors from all over the country to service these consumers. “Many of these consumers want a local advisor,” Edelman notes.

Right now, 85 advisors have joined EFN, with another 15 applications pending, Edelman says. “Our goal is to get to 500 advisors because we think based on our analysis that’s the number we need to serve the consumer demand,” he says. Advisors who join get “substantial practice management training to help them manage these client referrals effectively,” he says, and “we have a series of two- and three-day training programs that advisors come to Virginia for and we provide them with substantial amounts of support [so they can] help the consumers.” Edelman also provides advisors who join EFN with marketing support.

There’s no fee to join EFN, Edelman notes, and advisors get access to the Edelman Managed Asset Program (EMAP), which the firm says is one of the fastest-growing money management programs in the nation, with $3 billion in assets. EMAP invests exclusively in the funds of Dimensional Fund Advisors as well as exchange traded funds.

Edelman says his “biggest problem is that I don’t have enough advisors,” and the ones that have joined EFN are sometimes overwhelmed by the number of referrals the network sends them. For instance, Edelman says EFN recently sent an advisor in New York “170 referrals in a month.” Those advisors who’ve joined EFN are also “very happy” with the quality of the referrals. “These are serious people who are genuinely looking for an advisor–they’re not just tire kicking or looking for solutions to get out of debt. These are people with hundreds of thousands and sometimes millions of dollars to invest.”

There is, however, an “elaborate due diligence” process performed on those advisors who wish to join EFN, Edelman says, because “it’s not enough that you’re a talented advisor.” Consumers who contact Edelman are very familiar with his approach to investing and money management because of his radio shows and books, “so when we refer them to another advisor, they expect that advisor to share our beliefs.” Edelman says his firm embraces long-term diversification with rebalancing–Modern Portfolio Theory–as most advisors do. So advisors who are keen on, for instance, market timing or options trading, would not be someone he’d be comfortable referring a consumer to.

Performance and Communication

Looking ahead to what we all hope will be a better year for the markets, Edelman says that those advisors “who are managing money correctly and letting that fact be known are going to succeed in the next decade.” It will require “both of those pieces” to succeed. “Some advisors know how to manage money, but you have to communicate that fact to clients and the public.”

Advisors will also have more success in building more solid relationships with their clients during these tough economic times if they ask for client feedback, according to Julie Littlechild, president of Advisor Impact, Inc. The economic downturn, she says, “has created an environment in which many investors need and want more frequent and reassuring contact with their advisors.” Clients want to know “that their advisor is there for them and the most successful advisors will take advantage of this opportunity to become better informed about the needs of their clients and demonstrate the value they deliver distinct from market performance.”

Getting client feedback is more than rating their level of satisfaction, Littlechild says, “it’s also a chance to understand what’s most important to them, what level of contact they expect, the kinds of communication they value, and the additional services they need.”


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