5 Strategies to Help Advisors Survive the Next Bear Market

Most advisors today have built their practices during one of the longest bull markets in history. When the inevitable downturn comes, it could have a devastating effect on advisors who did not prepare for it.

It will bring challenges that many advisors have never had to contend with.

Double-Edged Sword of Advisory Fees

The traditional AUM fee model has served advisors well during rising markets. But it creates a dangerous dependency on market performance. When markets fall 20, 30 or 40%, so might your revenue. This happens when clients need you most and when your expertise should command premium compensation. Ironically, the opposite is occurring.

Even in good times, assets naturally leave your practice. Retirees take monthly distributions. Clients achieve goals and purchase the toys they were saving for. Clients pass away, and assets transfer to heirs who may have their own advisors. Others leave for competitors.

In a prolonged bear market, this natural attrition increases as clients go to cash or cash out permanently, affecting not only current revenue but also future earnings.

The gap between revenues and expenses can widen. As your personal assets decrease, the value of your practice may decline as well, potentially affecting your ability to borrow money when you need it most. This is why diversification is not just advice you give clients. It is a strategy you must adopt for yourself.

The Great Detached Investor

The next bear market will create what I call the Great Detached Investor. These are investors who made a conscious decision to work with an advisor, but as the market declines and deepens, the phone becomes a 500-pound weight, and they stop calling, afraid to discuss why their $1 million portfolio is now worth $680,000.

Smart advisors will use this as an opportunity to court those clients.

Establishing yourself as the go-to expert now — drawing visibility approaches that will make you more discoverable and credible via artificial intelligence and browser-based search scenarios — could lead to referrals in a bear market as your clients introduce you to those Great Detached Investors seeking expertise and guidance.

The advisors still standing at the end of the next bear market will be those who diversified their revenue, created an emergency fund and established themselves as experts. The time to prepare is not when the storm arrives.

Put the storm shutters on now while the sun still shines.

Here, then, are five strategies to best make that happen.

1. Diversify your income.

Start expanding beyond investment management to create multiple sources of income insulated from market volatility. Consider new lines of business such as:

— Tax planning and preparation, which provides year-round revenue independent of market performance, while positioning you as a holistic partner;

— Insurance solutions such as life, disability and long-term care to generate commission income while addressing client financial need;

— Estate planning and/or exit planning services, which could add substantial value and give you a front-row seat to liquidity events and help you manage wealth across generations;

— Specialized expertise in a profitable niche or demographic such as physicians, who tend to be less affected during economic downturns; women, who are projected to control $30 trillion in assets by 2030; and family stewards, who are always interested in preserving assets for the next generation and/or favorite causes.

2. Seek alternative fee structures.

Flat fees for comprehensive financial planning remove the direct link between revenue and market performance. Subscription or retainer models provide predictable, recurring income that stabilizes cash flow during downturns.

Some advisors use hybrid models, charging a flat fee for initial planning, then an AUM or subscription fee for ongoing services. This approach provides diversified revenue while maintaining the benefits of both structures.

3. Develop a business emergency fund.

Just as you advise clients, it's wise to build cash funds covering up to six months or more of expenses. This buffer prevents desperate decisions during revenue contractions.

4. Lock in a line of credit.

While you are profitable and your practice valuation is strong, secure a line of credit. Waiting until the bear market hits may mean facing rejection or perhaps less-than-desirable terms.

5. Start cutting unnecessary expenses.

Audit every subscription, service and overhead item. Lean operations weather storms that can sink bloated practices.

Salvatore M. Capizzi is chief sales & marketing officer at Dunham & Associates, a registered broker-dealer and RIA that provides wealth management solutions for advisors.