Joel Naroff and Ron Scherer suggest business owners, including advisors, need to be economists to run successful firms.

In their book “Big Picture Economics,” Joel Naroff and Ron Scherer tell the story of Greg Parker, who, after graduating from college, took the convenience store his father built and parlayed it into the Parker Companies, which now owns a chain of 30 convenience stores, a 24-hour gourmet market, two laundromats and a real estate development business. To share business ideas—and get new ones—Parker “organizes a meeting with other CEOs from a wide variety of industries to discuss the economy and figure out ways to become more competitive.”

Two years ago, a speaker at one of those meetings got him thinking about the opportunities in the next business downturn—which he felt had already started—and how to take advantage of them. He took out a $10 million loan at a 3% fixed rate and started to expand the business. “My position is if you look from an economic standpoint, huge wealth was accrued at the end of the last Depression,” he told the authors. “And I am of the belief that huge wealth is going to be made in these [coming] times of hardship, and I think people who are well-positioned, that are smart and understand risk and are collateralized, have a huge opportunity.”

Lately, it’s become popular to suggest that financial advisors need to be “economists,” at least part of the time. From what I’ve read, this advice is primarily focused on advisors using forecasts based on economic indicators to better position client portfolios to weather—and profit from—what lies ahead. While this clear break from traditional long-term “buy and hold” asset allocation is understandably controversial, it seems to me far less problematic to suggest that independent advisors need be economists for a different reason: to manage their own firms more successfully. As I’ve written before, with the post-mortgage meltdown bull market now entering its seventh year—and up some 200% since its low of March 3, 2009—it’s probably past time for owner-advisors to start taking steps to position their businesses for the inevitable financial downturn. “Big Picture Economics” offers a novel approach to using economics to do just that.

Naroff, recipient of the National Association of Business Economists Outlook Award and Bloomberg News’ top economic forecaster in 2006, and Scherer, a veteran reporter for the Christian Science Monitor, used Parker and others to illustrate their contention that successful owners of businesses of any size (as well as elected officials, bureaucrats, bankers, educators and just about everyone else) need to be “economists.” But not just any kind of economists: We all need to use what the authors call “economics of context.” They contend that successful economic forecasting depends on understanding the context of the current situation.

“When it comes to using economics to help make decisions, what matters most is context,” they wrote. “Economics is all about taking human reactions and creating a way to understand how those decisions are made. Those reactions will differ under a variety of economic circumstances. Thus, you need to know where you have been and where you are so you make a correct decision about how you can go forward.”

For those who need it, “Big Picture Economics” goes into considerable detail about really big-picture stuff, such as how our current economy was created and how the federal government and Federal Reserve policies (taxes, borrowing and interest rates) work—or often don’t work—as expected. These chapters provide some macro context for economic events, yet the takeaway seems to be that the outcomes of actions at this level are really dependent upon the context of other, less recognized factors such as how people react.

Fortunately, the vast majority of “Big Picture Economics” is focused on how macro factors affect what’s happening around our businesses locally and the industries in which they operate. According to Naroff and Scherer, to manage our lives and our businesses successfully, we need to be aware of the economic factors—growth, decline or stagnation—that are occurring right now. “What most business people don’t directly recognize is that it is really all about the economy […]. It’s all about where you are in the business cycles,” they wrote, “and how outside factors, such as the world economic activity, as well as human perceptions, combine to create the economy we must deal with. And, most important, it needs to be recognized that conditions change and any business decision must be made in the context that what currently exists may not be the case going forward.”

This brings us to the business of independent advice. While not directly addressed in the many case studies in the book, it is my observation that most owner-advisors seem to operate their firms without full awareness about their dependence on the economy (which is doubly ironic considering that the primary, if not only, revenue source of most firms is based on assets under management, which, of course, are directly affected by the markets). Despite their financial training, most advisors seem to have an aversion to tracking business cycles and, as the likelihood of a downturn increases, positioning their firms to take advantage of the opportunities that a downturn would present.

In the independent advisory business, market downturns always seem to offer opportunities to firms that are prepared. A flood of clients whose portfolios drop farther than their comfort zones allow often look for new advisors (primarily fleeing banks and wirehouses, in my observation). People who didn’t have advisors suddenly see the wisdom in having one, and usually a not-insignificant number of independent advisors are driven from the business, either in the shock of watching client portfolios take sizable hits or daunted at the prospect of having to rebuild their businesses. What’s more, this time around, I see an additional opportunity for advisory firms that are prepared: A market downturn just might be the nudge that will drive a flood of baby boomer advisors into retirement, as soon as they can sell their firms.

Now, I’m not suggesting owner-advisors rush out to open a line of credit or take out a loan as Parker did, but I believe the last data I saw showed advisors over 60 years of age still manage over half the AUM in the independent advisory world. I wouldn’t be a bit surprised if a substantial portion of those assets is moved to new advisors within the next two or three years.

At this point, I don’t think there’s any secret about what owner-advisors should do to prepare for a market downturn. The key point is that there will be a lot of clients—and AUM—in play, and the goal is to attract enough of them to create the business you’ve dreamed about. But in case you’ve been on sabbatical doing pro bono financial planning in New Guinea, here’s a rundown:

  • Strengthen existing client relationships. This is probably job one. You don’t want to be one of the firms losing clients. They’ll also be your best source of new clients. So beef up client service and client contact.

  • Increase cash. If you manage any assets at all, chances are your revenues are going to take a hit (remember 2008-2009?). But if you’re going to start bringing in substantial numbers of clients, the last thing you’ll want to do is lay off employees. Now’s a good time to put any costly plans on hold. Your cash isn’t much of an advantage now, but it will be later. And if you’re thinking about acquisitions, a low-interest loan isn’t a bad idea, either.

  • Increase marketing. To be effective, even the best marketing plan takes time. If you wait until after the downturn, it will be too late. The goal is to get into the heads of potential clients now so they’ll think of your firm if they become unhappy with their advisor.

As Naroff and Scherer tell us, be your own economist. Watch for the context of what’s going on in the economy, in the financial sector and in your hometown. Look for potential challenges: plant or military base closings, etc. Position your firm to survive—and prepare for the opportunities created by firms that aren’t prepared.