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.”