With the many changes in the financial industry over the last 10 years (or even the last 10 months!), advisors seem to question evermore frequently: How do we overcome the growth wall? Our friends from Pinnacle Advisors Solutions shared an insightful article about what to do when all signs point towards an end of growth in your company.
We have spoken to hundreds of advisors over the last several years. We have spoken to advisors of all shapes and sizes and from all around the country. Across the board, the most common complaint we hear from them is that growth has hit a wall and they are unsure how to get over it. With retirement age fast approaching, there is growing concern they may not achieve their own financial goals and retirement many look very different than expected.
Unfortunately, the problem is not going away anytime soon.
The long and consistent secular bull market of the 1980s and 1990s put asset growth on autopilot, relieved advisors of some of the responsibility for building a small business and allowed them to concentrate on their craft -- delivering comprehensive wealth management services to clients – rather than their businesses. As a consequence, there was a proliferation of small independent wealth management firms.
With the advent of the secular bear market in 2000, that business model no longer works and this fact is evident in the absence of adequate growth among emerging firms. Think about the changes that have taken place …
Revenue Growth. In the 1980s and 1990s, stock and bond markets appreciated in value lifting assets under management higher to the tune of 10-20% per annum. There was no need for an advisor to actively engage in new business development. Since 2000, markets have been flat or down more often than not. Assets under management are no longer growing. Advisors must now actively engage in new business development to maintain revenues during down markets and grow them in flat markets. A considerable new allocation of time and resources that was not required before.
Client Service. In the 1980s and 1990s, advisors who may have wanted to meet with there clients 2-4x per annum often found their clients unwilling to meet that often. Client wealth was steadily growing and they did not feel the need to spend as much time with their advisors. Client satisfaction was high and hand holding was less necessary. Since 2000, investment markets have taken clients on two significant roller coaster rides with the Tech Bust in 2000 and the Credit Bust in 2008. The markets are uncertain and clients require more handholding. Another meaningful new allocation of time and resources.
Portfolio Management. In the 1980s and 1990s, investment markets climbed steadily higher and passive “Buy and Hold” investment strategies worked like clockwork. There was very little allocation of time and resources necessary after the initial asset allocation and security selection. Since 2000, advisors and clients have experienced considerable volatility and virtually no forward progress in asset growth. Clients have remained patient with the passive strategies that their advisors recommended, but with no end to the volatility in sight, advisors are increasingly concerned that clients may lose patience in the next market downturn if they continue with the same passive strategies – three strikes and you’re out! Since the European market meltdown in the summer of 2011, clients and advisors want a more risk-managed tactical investment program. But, of course, a more active program requires a greater investment of time and resources by the advisor: time to tactically manage the portfolio and resources for more sophisticated technology and third party research.
Compliance. While compliance has never been fun, in the aftermath of the 2008 Credit Bust, we all know that the compliance headache has been dialed up a notch requiring another new allocation of time and resources.
In other words, without the tailwind of the secular bull market, emerging advisors find themselves spending more time and more money to do the same job at exactly the time that they need to find more time and resources for new business development that supports growth. Economies of scale matter again and the lion’s share of advisors today do not have it.
Fortunately, a few forward thinking firms have launched businesses to provide advisors with varying combinations of investment management, back office, marketing and business consulting services that enable advisors to get over the growth wall without sacrificing their independence. We note two examples below …
Hightower Advisors. HighTower’s original model was to acquire an equity position in large advisory teams looking to break-away from wirehouse firms in exchange for providing a strong investment and back office platform. More recently, they have started to offer the platform on an outsourced basis. HighTower works with firms with more than $400MM AUM.
Pinnacle Advisor Solutions. A division of Pinnacle Advisory Group, one of the leading independent wealth management firms in the nation, Pinnacle Advisor Solutions lends its economies of scale and its “formula for success” to emerging firms with AUM of $20-400MM while allowing them to remain independent.
Has your firm experienced this phenomenon? If so, how have you handled hitting the wall? Check back tomorrow for the latter part of Pinnacle's mini-series that will feature a reference case on the impact of Turnkey Programs on Growth.
Author: Peter McGratty CFA, VP Business Development, Pinnacle Advisor Solutions