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The Lessons Advisors Learned During the Market Crisis: Practice Edge for August 2010

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As we often hear in our industry, “past performance is not indicative of future results.” While that’s true about the performance of any given investment vehicle, our research with RIAs shows that the past has taught advisors plenty about how to run their practices now and in the future.

In the last decade, the RIA landscape has changed considerably. Between 2003 and 2007, advisors experienced dramatic AUM growth. In 2008, however, assets declined significantly due to the reeling economy. As the market environment improved in 2009, so did RIA business–assets soared and RIAs became better at fine-tuning processes and taking advantage of new opportunities. This month, we discuss the lessons we have learned from the last business cycle and identify what RIAs are doing now to adapt their practices to the current environment.

The top business goal of most advisors (53%) is to increase AUM, and 2009′s growth puts them on track to do that. The industry as a whole is optimistic about meeting its growth target: almost half of advisors surveyed between February 2010 and May 2010 (42%) expect to grow their business (as measured by AUM growth) by 11% to 20% over the next five years. However, this forecast is not as optimistic as it was in 2007, when almost half of financial professionals (44%) said they had plans to grow their practices by 30% or more in the next five years.

As advisors look forward to the next five years, 79% say the most important business growth driver will be referrals from existing clients, while 50% think that increased marketing and networking will lead to more success–the same key growth drivers we have seen in the past years. However, they are also more reliant on organic growth from current clients–63% of advisors rank this as a growth driver in 2010 versus less than half (46%) in 2009.

As with all businesses, a key way to reach growth goals is through a clear business plan. The good news is that most advisors take business planning seriously–according to our data, 74% of advisors have a business plan. But it’s not enough just to have a business plan. Advisors also need to be able to implement their business plan through a systematic business planning approach that is reviewed regularly. It’s important to ensure that goals are prioritized and measured throughout the year. Measurement is essential to determine how effective your tactics are so you can repeat what works and discontinue what doesn’t. Set up some realistic goals.

Some of the questions your business plan should answer are:

  1. ? What is your business goal? What do you want to accomplish?

    ? How much revenue do you want to bring in?

    ? How many new clients do you want to acquire?

    ? How are you going to achieve this goal? What will you do to get new business?

    ? How many meetings are you going to have with clients?

The Power of Repetition

Those advisors who want to win and stay profitable in the next decade need to be prepared for the new business cycle. One of the best ways to prepare is by learning from the past–that is, learning how successful advisors changed their businesses to adapt to the last business cycle.

RIAs in our sampling reported they made these changes to adapt their practices to the market environment:

? Fewer advisors (55%) said they maintained their infrastructure in 2009 than in 2008 (when 63% maintained their infrastructure)

? Of the advisors surveyed, 31% said they reduced principal compensation in 2009

? On the positive side, 18% of advisors added new services while none decreased their service offerings

? Only about 8% of advisors surveyed reduced administrative and support compensation compared to 15% in 2008

? Only 3% of advisors surveyed conducted staff layoffs, compared with 31% in 2008

Taking a Look Ahead

Client acquisition and marketing is the top area that advisors feel needs improvement, according to 47% of survey participants (down from 74% in 2008). A recent Cerulli Edge Advisor report supports our data, with advisors telling Cerulli they are planning to add more financial planning services and are rethinking their client relationships and their portfolio construction. Below are the changes that advisors in our survey said they made last year compared to 2008.

When planning for the future, those advisors who utilize strategic planning and assess trends clearly will be in the best position to navigate market conditions–and continue to grow their practices, no matter what the market environment is like.

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

Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. Preliminary study results quoted in this article are based on the 373 RIA firms that took the online survey in March-May 2010. 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.

AdvisorBenchmarking is an affiliate of Rydex Investments. The analysis on Rydex|SGI 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.


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