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February 01, 2009 at 02:00 AM
One of the most important elements of 2009, I tell the advisors I work with daily, is to contact each of their clients, and revise their financial plans in light of new realities created by the mortgage meltdown. Even when the conclusions are bad news–having to delay retirement, cut back current spending, revising the estate, or even re-entering the job market–knowing exactly what they are facing and what they have to do about it almost always offers more peace of mind than vague fears and being left to the mercy of one’s imagination. Working to face down the crisis together also not-so-subtly reminds your clients that you are on their side when they need you most: at time when many of their friends will probably be re-evaluating the value of their financial advice.
An equally important part of my advice to my advisor/clients these days is that they revise their own financial plans, as well. Like most professionals, financial advisors aren’t particularly good at using their expertise on themselves, often doing little or cursory planning for their own retirement. All my clients have plans–mostly because I make them do one, and revise it at regular intervals, usually every two years or so.
Just like you, they don’t really have the time to do this, but they take the time anyway. Their whole practice management strategy is based on it. But regardless of when you last revised your plan, or even if you don’t have more than a vague notion of your exit strategy, it’s essential that you take time that you don’t have right now, and take a very hard look at how the down market of 2008 will affect your retirement plans–to determine what steps you need to start taking today to be in the best position for an all-too-close tomorrow.
As a starting point, it’s hard to imagine that your practice revenues aren’t down substantially, like virtually every other advisor on the planet. In some practices, client portfolios are down as much as 40% or more. While profits aren’t all that meaningful in small, closely held businesses, with revenues down, and most expenses such as staff salaries and rent fixed, chances are advisory practice owners are taking home a lot less, too. And since many of your major expenses at home are fixed as well–the mortgage, cars payments, tuition, etc.–that means many advisors will be putting less into their retirement plans.
Advisor Portfolios Have Been Hit Too
Unfortunately, that’s not the only negative effect on advisors’ retirement plans that we’re seeing these days. As with your clients, your retirement portfolios have probably taken a substantial hit as both the equity and bond markets fell during 2008, which means that just like your clients, there’s a strong likelihood your financial projections are way off, too. Of course, as the markets recover, which they always have done in the past, hopefully those paper losses will be recovered. But if you’ve moved out of some of your original asset classes, you’ll have to decide to buy back in to benefit from the ride back up. And
even if you are able to stick with a buy-and-hold strategy through the meltdown, the recovery will undoubtedly take time, reducing the compounding effects of dividends, interest, and asset appreciation.
The bottom line is that for many advisors’ retirement portfolios, the time horizon of your projections will be extended out, at the very least.
What’s more, these days many owner/advisors’ exit strategies are based on the projected value of the client assets under management in their practices. With those assets substantially down, along with the corresponding revenues, practice values (which are usually a function of those revenues) are off as well. Again, as markets eventually recover, those client assets should, too, as they have done in the past. But, how long that will take is anybody’s guess, and in the meantime, it’s fair to say that the value of many advisory practices will be down significantly, extending retirement time horizons as well as the size of your nest egg, particularly if, like many baby boomer advisors, you were planning on packing it in some time soon.
The silver lining in this somewhat dismal scenario is that independent advisory practices offer their owners a great deal of flexibility both in their working time horizons and in their management strategies. Consequently, rather than just battening down the hatches and riding out the storm as many businesses have to do these days, owner/advisors have myriad options at their disposal to respond to our new economic environment, and create a future that’s more to their liking. Here are some of things you might consider, as you quantify how your retirement plans have been affected, to soften the blow, and get your exit strategy back on a more acceptable track:
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