A Lost Decade for Advisors?

Duran says that advisors and clients alike had become accustomed to a steadily rising market that protected everyone from temporary downturns. But now, he says, the “buy and hold” strategy of yesteryear no longer works. Second, the variable costs both for brokers working in the largest wirehouse firms and on their own have increased. Ten years ago, for example, buying a piece of software represented a fixed cost. Nowadays, software and other services come with annual fees and maintenance charges that take 30 to 40 basis points off the bottom line. Lastly, Duran says, there has been a “massive reduction” in pricing. Whereas 10 years ago a broker could charge 2 percent to manage assets, now that fee has been slashed in half and even quartered at large consumer firms like Schwab, where customers can have their money managed for 50 basis points per year.

Advisors, Duran says, are “squeezed from all sides and working harder than they ever have.” What’s more, he says, they are “not even sure what they are doing is helping clients.”

An upbeat market would cheer clients and give advisors a break, but according to Don Schreiber, CEO and co-founder of WBI Investments, an investment management firm, things are not looking rosy. Schreiber foresees a market downturn for “at least” the next 10 years, until 2021. He says our current market stalemate resembles the one that lasted from 1924 until 1952. In that period, the Dow Jones Industrial Average started and ended at around 300 points.

“The way the market is behaving, it’s tough for getting clients to invest,” Schreiber says, and that means less money in the pockets of fee-based advisors. Schreiber suggests that advisors will have to look for novel approaches to investing to keep their fee-based paychecks coming. “The precepts that we’ve been using, like passive asset allocation, have underperformed expectations,” he says. “We’ve got to find a better solution.”

Stock price appreciation, for instance, is obviously not a winning strategy for advisors or clients in a down market. So Schreiber recommends strategies that focus on cash flow and not return, in particular dividend-paying stocks. “I think there’s a great portion of the investor community that is in denial about the current form of the product that we are giving to investors,” adds Schreiber, whose firm manages more than $900 million. “There are people in the industry who know this isn’t working and it hasn’t been working since the market break in 2000.”

One of the reasons investors — and thus the advisors who collect fees on their money — lose out is that they don’t fully embrace the “buy and hold” strategy. Instead, spooked by a down market, investors will sell low, stay on the sidelines until market gains boost their confidence, then buy once more. The problem is that investors lose twice employing this strategy. First, they sell stocks at a low and not a high. Second, by staying on the sidelines, they miss out on the biggest gains of the recovery.

Happy Ones

All the more reason that investors should rely on the advice of their financial advisors, argues Mark Elzweig, a New York-based recruiter for money managers. In fact, Elzweig argues against the idea that the aughts were a “lost decade” for advisors. While it’s true that there are fewer advisors in the industry than 10 years ago, he says, and that those advisors are earning less in asset management fees, the ones who remain are earning more for their firms and bringing in wealthier clients.

In fact, data provided by SIFMA confirms Elzweig’s supposition. In 2000, revenue per employee at FINRA’s 4,700-plus member firms stood at $645,264. By the end of the decade, that amount rose to $672,361. Profits per employee rose even faster, according to SIFMA data. At the beginning of the last decade, after-tax profits per employee stood at $31,095. By the end of the decade, that amount had more than doubled, to $65,473

“It seems to me that it’s kind of hard to argue that the past 10 years have been a lost decade when the average producer at Merrill Lynch is grossing $931,000 [for his firm] and his counterpart at Morgan Stanley is not far behind at $767,000,” Elzweig asserts. “What’s happened is that the wires have weeded out lower producers and are requiring their advisors to [earn] more with bigger clients.”

In other words, the volatility of recent years has wiped out trainees and those advisors with weaker franchises. Those who remain are managing larger pools of money. If they perform well, they are being rewarded with referrals to new clients.

“Many advisors expanded their businesses this way,” Elzweig says. “Right now, a stagnant advisor pool is chasing expanding pools of wealth located worldwide. If you’re an advisor who is still in the game, that’s a good thing.”