For a decade, the financial planning profession has enjoyed strong stock market returns, which has led to firms growing and hiring at an impressive clip and posting record increases in profit, revenue, and assets under management.
This could not continue indefinitely, though, due to the cyclical nature of the stock market — or the coronavirus’ impact on the economy. So how should firms approach their human capital planning now?
For firms that have been struggling to attract talent and hire top performers, it might be a great time to build out your dream team. Here is how a firm can capitalize in a turbulent market environment:
1. Less Competition for Talent
One of the most significant challenges even good advisory firms have faced is trying to find “A” players to join their teams. Their offerings may be compelling, but due to growth of the profession, there is more competition for talent.
Once revenue started to fall, many will enact cost-cutting measures such as hiring freezes and staff cuts. This may work in product-based businesses, but not as well in service-based businesses, where demand from clients actually can increase substantially when markets are down.
Firms employing an asset-based fee model that are not being managed well (i.e., didn’t have healthy profit margins as a buffer against a downturn) will begin to feel the squeeze first.
For the best managed firms, who have built up healthy cash reserves, or run at healthier (e.g., 20%-plus profit margins), temporarily declining revenues in a bear market aren’t necessarily a cause for instant panic, and may not need to have to take quick drastic actions to reduce expenses.
This is especially true because client assets are typically invested into well diversified portfolios that should not have a commensurate reduction in value compared to the actual market decline (i.e., market declines 25%, but client portfolios and revenue “only” drop by ~10-20% as an average across the entire client base).
This could be an ideal time to double down and invest back into the business as talent/people/advisors are the largest asset at a firm’s disposal for calming client nerves and handling service requests.
For firms that have moved away from the asset-based pricing and into project and retainer fees, a market downturn will have less effect on revenue, thus creating a unique competitive advantage.