It may sound like a contradiction, but I’ve always felt that one of the biggest challenges that independent advisors faced has been that business was too good to be true. Following the widespread conversion to asset management fees in the early 1990s, many advisory practices became virtual cash cows, generating way more in revenue–and income–than advisors ever expected.
While it’s heartwarming when good things happen to good people, this kind of rapid, and unexpected, success isn’t necessarily good for business discipline: in my experience, their own success often made it hard for advisors to make the hard financial and management decisions that more competitive industry require: releasing problem or unproductive employees, exploring all the benefits offered by outside vendors and technology they’ve already purchased, or streamlining services and operations.
The good/bad news is that those days seem to be over. While it’s never fun to work harder and make less money, the current recession does have a silver lining, the advisory industry will be forced to take the next step in its evolution–from providing a valuable and much needed service to delivering that service via soundly running businesses. The result will be independent practices that are not only much better positioned to weather the inevitable market downturns, but clients will receive more consistent and targeted services.
Don’t get me wrong: I’m not suggesting that the trauma you and your clients are currently going through is a “good thing” by any stretch of the imagination. A nearly 50% drop in portfolio values is sure to wreak havoc with their lives and your business. And as is always the case in times like these (that is, assuming there ever have been times like these), the worst is not knowing how bad it’s going to get or how long it’s going to last.
The problem is that this time it does truly seem to be different. By that I mean that the 27-year bull market that started in 1982 lulled a lot of us into a false sense of reality: sure there were major market “adjustments” in ’87, ’91, and 2001, but every time the markets just seemed to pick up where they left off and didn’t look back. That’s a long time for folks to remember that this may not have been the real world–at least not the only real world. Perhaps the best example of this is the comment I heard time and again from people explaining why they were going to vote for candidate Obama: “After the Bush years, how much worse could it get?”
Assume the Worst
Well, now we’re going to find out how much worse it could get. But from my reading about the late 1960s and ’70s, and talking to my friends who lived through those years, things could get much, much worse than our last eight years (e.g., riots, wage and price controls, double-digit inflation, interest rates in the high teens, and a 17-year flat stock market). From a strategic planning perspective, I believe that independent advisors need to assume that they will.