What to Do Now?

When you’re in the middle of a crisis, by definition it’s difficult to plan ahead to avoid the next crisis, but that’s exactly what the smart, growing, most profitable advisors tend to do, according to the experts from Investment Advisor and Moss Adams who conducted a day-and-a-half workshop in Washington December 2 and 3 designed to help advisors do just that. “When the recession is over, we will still have the same business issues as before,” noted Mark Tibergien, CEO of Pershing Advisor Solutions, in his opening keynote. He went on to address in turn the major issues that advisors must deal with now, such as how you keep disaffected clients from leaving, and how you maintain profitability when firm revenue has dropped anywhere from 25% to 40%.

Tibergien then asked how the profession is going to attract and retain good people, which he called “the new technology” when it comes to building an efficient and profitable business. One of the key strategies “coming out of this cataclysm,” he said, is for firms “to become the employer of choice” in their region. Forecasting a need for “9,000 net new professionals in the RIA community over the next five years,” Tibergien wondered where those professionals would come from, particularly if the perception among young people is that an advisor has a “sales” job, not an “advice” job. Every advisory firm must have a human capital strategy, he counseled, and he called for greater industry leadership on the people issue. “Are we dealing with the people issue as an industry?” he asked. “No,” but he called on the profession to build a systematic process for recruitment. As for advice on how to manage people you’ve already hired, Tibergien said he has “a fundamental belief that you can’t motivate people, you can only de-motivate them.” The question then, he argued, “is whether you can create an environment where motivated people can flourish.” He called on firm owners to build “career lattices” rather than career “ladders,” allowing talented people to take on other job responsibilities as they matured.

Rebecca Pomering, the Tibergien prot?g? who now heads Moss Adams’s wealth management RIA, presented the top line findings of the 2008 Study of Advisory Firms, which noted that a “people shortage is a bigger concern for future growth than client growth.” In 2007, growth occurred in every size and type of firm, Pomering reported, at a 20% clip. While that won’t be the case in 2008, the Study findings are instructive for any time: looking at the cream of the crop in the report, market dominators had more aggressive pricing of services, a more narrowly focused value proposition, and were more efficient in delivering service, which translated into greater profitability. She said the next stage in the development of the profession is attract, retain, and award talent, and for ownership of firms must expand.

On the issue of owners, Dan Inveen of Moss Adams pointed out that firms with dedicated management experience higher growth, though they do take a short-term hit to profitability.

Other Voices Heard

Angie Herbers’s session addressed how to recession proof your practice, something she learned when she started consulting to advisors in the last recession. Her numbers suggest that average advisor revenue is down 27% this year, but suggested a number of steps advisors can take now to ease the pain, including: motivating employees via a revenue-based bonus program, institute a client services program to manage client expectations efficiently and lowering the firm’s workload in the process, and instituting what she calls “practice management first aid.”

Former SEC Commissioner Roel Campos, who is now the partner-in-charge of Cooley Godward Kronish’s Washington, D.C., office and part of President-elect Barack Obama’s economic transition team, said the SEC must “do a better job” and be a stronger agency, admitting that in the reaction to the crisis the Commission had taken a back seat to Treasury and the Fed. He acknowledged that the major players in the financial crisis have been “bank-centric” and that there is a possibility that the SEC could get “carved out” and lose, for instance, its business conduct authority. This would not be wise, he said, because the SEC would thus lose its ability to prosecute fraud. “Fraud should still be the purview of the SEC” under any new regulatory restructuring, he said. There’s talk of consolidating the CFTC and SEC as well, he said, which he argued would be a positive development, since it could be given oversight of hedge funds and credit default swaps, for instance. However, he said an expanded agency should be self funded through fees on the entities it regulates, allowing the SEC “to bring in experts that understand these complicated products.” (For more on Campos’s remarks and the possibilities of broad financial services and advisor re-regulation, see Melanie Waddell’s column on page 70.)

In a lively session which pitted friendly rivals Tom Giachetti, head of the securities practice at Stark & Stark of Princeton, and John Walsh, chief counsel of the SEC’s Office of Compliance Inspections and Examinations, the two men agreed that when the SEC examiners come to call, it’s best to, well, tell the truth. They also agreed that when it comes to knowing a firm’s compliance exposure, it’s not just the CCO, but also the principals of a firm that should be informed and involved. Walsh further suggested that advisors should “build compliance reviews into the investment process” of a firm, so that when an advisor is looking at a potential investing vehicle, the compliance repercussions are considered at an early stage, not at the end of the process. Giachetti said advisors should be careful in the current market freefall not to say in writing to clients that they should “stay the course” when it came to their investments, and Walsh cautioned that “people under stress do crazy things, like favoring one client over another.” In the end, said Giachetti in his trademark restrained style, “Compliance is simple. What makes it hard is advisors,” who, he said, “get into trouble because they’re lazy and negligent and sometimes cheap.”