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January 13, 2016 at 11:27 AM
On March 6, 2009, in the wake of the 2008 market meltdown, the S&P 500 Index had fallen from its October 12, 2007 high of 1562 to 683: a loss of 879 points, or 56% of its value—devastating investors, and pulling the AUM revenue rug out from under independent advisory firms.
But by May 21, 2015, the S&P had climbed to an all-time high of 2131: a 212% gain—making more than whole investors who stayed the course, and fueling the biggest boom in independent advisory history.
Yet true to its form of correcting every seven years or so, the market has recently begun to stumble: falling 10% (209 points) since May, down to 1922 on Jan. 8 of this new year—including an 11.2% drop from August 17 to August 25th, and another 7.5% drop from Dec. 29 to Jan. 8. Whether this decline will continue to be followed by more minor adjustments, a major correction, or a recovery is, of course, anybody’s guess.
Yet we believe the likelihood of further significant market declines is sufficiently high that independent advisors whose revenues are tied to assets under management should begin to take steps to protect their businesses, if they haven’t already. To insulate your firm from turbulent markets, we recommend the following three goals for the New Year: Think of them as “fall back” positions, in case things get unstable.
Step 1: Engage, Listen and Trust
At the top of our list is what we call “employee engagement,” that is, creating a culture that gets everybody in your firm together, working as a team. Successful owner-advisors already know that the success of their business largely depends on the efforts of their employees (and the larger their firm, the greater that dependence). In a down stock market, this dependence increases dramatically.
In worst-case scenarios, declining revenues can force owners to suspend annual bonuses, cut salaries, or even lay off some staff. But even less bearish markets can adversely affect employees’ working environment: including suspended raises, delayed promotions, and postponed expenditures for new computers, training, professional development, etc. At the same time, workload and time in the office often increases to meet a rising demand for client contact, information, and handholding.
Of course, we strongly believe that establishing good, supportive working relationships with employees is always a good idea. But during market downturns, these relationships are essential. The key is making sure that your employees know that you value them and their contribution to the success of the firm. Easier said than done, we usually suggest that owners start off by ensuring that their employees have the training, tools and resources to succeed at their jobs—nothing sends the message that an employee isn’t important louder than being set up to fail.
