Granted, it’s a little early to judge the lasting impact of the 2008 market cataclysm on the advisory business, but celebrating survival after this disaster–and getting to work shoring up the foundation of your business–may be the best course of action for advisors today. Not surprisingly, most firms had less revenue, lower profit margins, and fewer profit dollars this past year than in previous ones. As a consequence of a greatly diminished cash flow, owners of advisory firms also saw a material reduction in their personal income. One material consequence of lower cash flow is a lower relative valuation of their business. All firms were not impacted to the same degree, however, depending on the decisions they made before the market’s precipitous drop.
Several industry surveys have released data on how advisory firms fared, and how they are preparing for future success. The first study to be released this year was produced by Moss Adams (and sponsored by my firm, Pershing LLC) and addressed the topic of compensation and staffing. FA Insight, Quantuvis, and Rydex are all producing data that supports similar issues. A few interesting observations emerged from the Moss Adams study:
1. Most firms did not panic by cutting staff precipitously, and thus have retained the capacity to grow.
2. Most respondents to the survey said they will use the layoffs in the broader financial services industry as an opportunity to selectively hire talent.
3. The smaller firms that cut back on staff and investment in their business are not as well positioned to get back on their growth trajectory.
4. Most firms have not adjusted their base and incentive plans yet to reflect the new reality.
5. Most missed the opportunity to make improvements in processes that would result in better productivity (they may have been slightly distracted by clients during this period).
The survey categorized the firms as “Opportunists,” “Pragmatists,” or “Mature.” The Opportunists plan to increase their capacity through new hires–they are financially healthy and have the resources to invest in their business. The Pragmatists, a group representing most of the independent advisory firms, plan to remain cautious about spending money on anything, including hiring. The Mature group, which account for a small percentage of firms, generally had higher operating expenses to begin with and continue to look for ways to cut all costs including staff.
In other words, just like their clients, some advisors were prepared to weather the storm and others are now seeking shelter after their windows were smashed and their roofs blew off. Like natural disasters such as forest fires and floods, market downturns and recessions cleanse the earth and allow for new growth. In this case it appears that the stronger firms could emerge as market dominators and the weaker firms may have to seek them out as partners.
The Opportunists’ Edge