Much like the stock market itself, I’ve found that you’d be an idiot if you observe the independent advisory industry for long enough and don’t realize that it tends to go through the same boring (i.e., predictable) cycles. For instance, the only time that prospective consulting clients ask me where I got my degree is after the stock market has experienced a significant run-up.
I believe the reason for this is that most owner-advisors tend to be rather cost conscious by nature. So when the markets are down or even flat, and their cash flow and profit is also flat, they are looking to get their consulting help at a bargain basement prices. But when markets are up, and their businesses are flush with cash, they suddenly adopt a “nothing but the best” mentality. Unfortunately for them, many advisors tend to equate one’s alma mater—rather than experience and track record—with high-quality advice.
I’ll spare you the trouble Googling me and inform you that I got my degree in personal financial planning at a CFP-registered program, one of the top programs in the country, at little ole’ mostly agricultural public university Kansas State University.
K State’s program is housed in the College of Human Services, not even aligned with the business school. Why put CFP programs in business schools anyway? Isn’t it about helping people? But I digress.
Even more unfortunate, during booming markets such as the one we’re currently experiencing, I’ve found that many owner advisors tend to apply this same mentality to running their businesses, usually in two key areas: hiring and fees. In both cases, their misguided perception of “quality” usually proves to be quite costly.
Consider this my warning.
As we’ve seen during the past five or six years, when the stock market is booming, most firm owners start looking to expand their business, which almost always means hiring advisors. And, because they are flush with cash, more often than not, they want to hire “top” talent. That, as I said, tends to mean hiring kids out of top business schools, and/or advisors with considerable experience at other advisory firms.
While there’s nothing inherently wrong with hiring advisors out of Wharton or Harvard Business School, the problems are created by the firm owners themselves. To start with, they tend to overpay for young advisors they deem to be blue-chip candidates, which leads owners to place unrealistic expectations on them from the start.
For instance (and for reasons that escape me), owners tend to expect these recent graduates to hit the ground running (and advisors from other firms), with little or no additional training. You can guess how well that works out.
What’s more, their excessively high starting salaries tend to create a sense of entitlement among those young blue-chip advisors; leading them to believe that don’t need to work very hard, or to continue to learn, in their new jobs.
You can see how this might lead to less than ideal—and highly overcompensated—new employees. And as I said, it happens in every bull market (visions of the movie Groundhog Day just flashed brightly through my sugar-plum head).
The second major trend that I’ve noticed that coincides with every bull market is a robust discussion of transitioning from charging AUM fees to flat retainer fees.
The driving force behind this notion seems to be the combination of the memory of the last down stock market and the resulting decline of AUM revenues, with the fear of having the same thing happen to today’s currently high-fee cash flow. That leads many firm owners to want to lock in those high fees now, so they don’t dwindle in the next market downturn.