The last bear market jolted a lot of financial advisors, and many are still feeling the impact a decade later. The advisor workforce is smaller today than it was in 2007, even as the number of millionaires is going up each year. While that’s partly due to age and technology, some of the erosion can be traced to strategic and tactical mistakes.
Sadly, many advisors today are doing the same things that altered or ended the careers of so many of their peers when the financial crisis erupted 10 years ago. Now is the time to study the lessons and opportunities from that downturn, as well as to determine whether to plan and implement strategies in preparation for the next one now.
I have worked through a series of market skirmishes during my career, including when the Dow plummeted almost 20 percent during the fourth quarter in 1990; the “stealth bear” of 1992; the long-term capital fallout of 1998; the early 2000s tech bubble and the liquidity crunch that set off the financial crisis. Those experiences—as well as my research—tell me the next market slide could impact your career in three ways: your client relationships, asset levels and growth trajectory.
Down markets create stress for clients and advisors, which will either solidify or undermine your relationships based on the nature of your communications and actions.
Establishing frequent points of contact is paramount. You must reach out to clients before they feel the need to call you. Once per month is a good starting point, but depending on the situation, you may have to reach out more than that. Keep conversations short, succinct and to the point. If the client isn’t available, leave a message. This shows you’re caring, alert and ready to act.
During times of market stress, clients don’t want to hear, “Just ride it out. Stocks always bounce back,” even if that’s true. For one, there are always strategies you can put in place to try to mitigate losses. More importantly, clients have a bias for action, rarely content when their advisor tells them to sit on their hands while turmoil engulfs their portfolio. They want action, and gestures, even small ones like reaching out via phone to touch base regularly, which go a long way to satisfying that desire and solidifying the relationship.
Nearly every portfolio drops in value at some point. That’s a reality of the markets that advisors cannot eliminate. However, what they can do is minimize losses so that clients have more investment capital to work with when the outlook improves. Think about it this way: A drop of 10 percent requires a subsequent gain of more than 11 percent to get back to the break-even point ($100,000 - $10,000 = $90,000 and $90,000 + $9,900 = $99,900).
While the difference between 10 percent and 11 percent seems minimal, a passive 60/40 portfolio of stocks and bonds lost 35 percent of its value—before taxes and advisory fees—from peak-to-trough during the financial crisis. For fee-based advisors, this is a critical consideration, because not only could reducing client risk impact your current income, it may affect future revenue and, ultimately, your succession plan’s value.
An advisor who mitigates losses has a tremendous advantage when negative markets turn positive again. For instance, a $100 million practice that has 50 percent of its advisory assets in a risk-managed strategy that sheds only 15 percent during a 30 percent downturn would preserve an additional $7.5 million. Compound that over 10 years at a 7.2 percent rate of return, and that’s an extra $15 million of fee-generating assets—and likely more than $300,000 to the sale price of the practice.
When the last bear market occurred, the average financial advisor was in their mid-40s. The focus then was doing the best you could to minimize the fallout from the crisis so you could retain clients and position yourself to grow in the years ahead. Fast forward a decade, and the average advisor is over 50, with much of the industry older than 55, according to Cerulli Associates, and conversations now center on succession planning.
Looking ahead to the next bear market, the trajectory of your business growth will determine the future valuation of your practice. Coming out of a significant downturn with stronger relationships with your clients—because they avoided the full turmoil that most other investors experienced—can lead to more and higher quality referrals, which will accelerate growth.
Whether you are planning your exit or the next phase of your career, I have seen and experienced firsthand, how proactive communication and risk management can positively impact the growth trajectory and valuation for an advisory business.
Greg Luken is founder and CEO of Luken Investment Analytics, a turnkey quantitative research and asset management firm.