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Weathering the Storm: Practice Edge, May 2009

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These are challenging times for everyone. Many investment advisors are experiencing revenue declines as well as declines in assets under management and, consequently, are trying to do more with less. In this month’s practice management article we will provide critical market trends and insights advisors need to navigate the current environment and to benchmark themselves against their peers.

Pressured, Yes, but Still Optimistic

For the first time in the last six years, the advisory industry suffered a drop in assets under management (AUM), with assets decreasing 12% in 2008, according to the preliminary results of the Rydex AdvisorBenchmarking survey conducted in March-April 2009. Negative stock market performance, of course, drove much of the decrease in RIA assets. However, RIAs have weathered the stock market fall much better than the stock market itself, likely through raising new assets, as well as by their asset allocation and investment management skills. While the S&P 500 was down 37% in 2008, RIAs’ AUM decrease was slightly less than half that amount–12%.

To put the asset slide in perspective, advisory firms, on average, now manage approximately the same amount of money today as they did in 2005, when the stock market was at a much higher level. However, since advisors’ most important goal is to increase AUM (according to 33% of advisors), the industry as a whole is pretty optimistic about meeting this goal: almost half of the advisors surveyed (44%) expect that they will grow their business as measured by AUM growth more than 30% annually over the next five years.

The more important question is how do advisors plan to regain those assets? What top client asset sources are advisors relying on? As advisors look to the future, 82% say the key driver for growth in the next five years will continue to be referrals from existing clients, or continued reliance on the same source of growth as they did in the past. Almost half of financial professionals believe that organic growth from existing clients will help them hit their asset goals. With an opportunistic outlook, about 30% of advisors surveyed believe that organic growth from the stock market will propel their firms’ growth in the next five years.

So what are advisors doing to survive the crisis? Most (63%) are sticking to their guns, and report not making any changes, maintaining the same infrastructure and compensation structure in 2008 as in past years. Only 14% said they reduced principal compensation and only 7% of the advisors surveyed were conducting staff layoffs. Also, only about 15% of advisors surveyed have reduced administrative and support compensation. On the positive side, one fourth of the advisors surveyed said that they added new services versus the 5% of firms that decreased their service offerings.

The Rescue Plan

So how can firms increase their value and revenues, getting their own financial plan for firm growth back on track? A majority of advisors gained clients in recent months, according to the Cerruli report The Cerrulli Edge. How did they do it? These best-practice advisors benefited from the recent market downturn since many investors seek financial advice during a bear market as opposed to a bull market. Here are some ways advisors can weather the storm:

Increase your number of services in the wake of the market downturn and focus on non-investment advice to strengthen relationships with your clients.

l Work on adding a manageable number of new clients.

l Ensure that you–and your staff–are not stretched too thin by automating or outsourcing routine tasks and making sure you focus your efforts on tasks that are tied to assets under management or client relationships.

l Communicate proactively with your clients–those advisors who have solid relationships with their clients are more successful and have better client retention rates.

l The best use of your time is to spend it with clients and prospects.

l Get your expenses under control

By continuing to focus on relationships with your clients as well as keeping expenses under control, and keeping your efforts focused, your firm will continue to operate efficiently in today’s environment and be positioned to grow when the economy recovers.

Attention, Advisors: Click here to take the 2009 AdvisorBenchmarking survey and benchmark your practice against your peers. The first 100 survey participants will receive the book: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods. All other survey participants will receive a $5.00 Starbucks gift card.

Rydex AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. Its semi-annual survey of 213 RIA firms was conducted online in November 2008. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

Maya Ivanova is a market research manager with Rydex She can be reached at [email protected].

AdvisorBenchmarking is an affiliate of Rydex Investments. The analysis on Rydex is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex Investments or any of its affiliates.