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McKinsey Report Warns Against Applying 2008 Lessons to Coronavirus Crisis

The pandemic's impact will affect advisors differently from the last major financial crisis, according to McKinsey.

While many advisors may be looking to the 2008 financial crisis to help predict and understand the effects of the coronavirus on their practices, there are key differences that will make that comparison difficult, according to a McKinsey report compiled by tracking client holdings and transaction information from 65,000 advisors across "more than 25 wealth management firms." Unlike in 2008, fallout from the coronavirus pandemic will be uneven and affect some clients and their advisors disproportionately; advisors’ reliance on asset-based fees instead of transaction pricing will produce different worries and opportunities than it did in 2008 and advisor compensation plans will need careful calibration to retain top talent and maintain growth.

For business owners, the COVID-19 pandemic is doubly damaging, write Kieran Bol, Patrick Kennedy and Dmitry Tolstinev. in their report “The State of North American Retail Wealth Management.” Business owners will see portfolio losses alongside business losses, likely leading to a higher rate of client attrition in the year ahead. “Advisors who are passive and reluctant to step up and serve their clients will see disproportionately more client[s] leave,” they noted.

Advisors eager to retain clients through discount pricing will want to think twice, however. Advisors who discounted pricing during the 2008 financial crisis, and who later raised prices as the crisis entered its recovery, were able to recover only half of what they gave up, according to the report.

Additionally, asset-based fees are market sensitive, so advisors using that model will see revenue decline when the market declines. “Advisor pay will decline, as 2020 will mercilessly demonstrate,” noted the report.

Advisors relying on asset-based pricing will find themselves doing the same, or more, work during a down market, for less revenue. A decade ago, just one-third of advisor revenues came from asset-based fees. Today, two-thirds of revenues are based on those fees.

On top of receiving less revenue, advisors will be working harder to retain clients: in 2009, 1 in 10 clients left their advisors, according to the report.

“The good news is that advisors entered this difficult period from a position of strength,” the report noted. “A prolonged period of growth followed the last bear market, as advisors reached record levels of assets and revenues in 2019.” Advisors’ focus on deeper, more holistic relationships has also benefited them. Advisors who are focused on holistic wealth management have improved their walletshare, with accounts per advisor per household up to 3.1 in 2019, compared with 2.7 in 2015.

In fact, the report found clients are more likely to stay with advisors who serve fewer clients, but who go the extra mile. Advisors who are best at retaining households served just 140 households but held more accounts, 3.4, per household. Meanwhile, the poorest-performing advisors in the same category actually served more households—153 households—while managing fewer accounts per household—just 2.6 accounts.

The report did not break out data between independent RIAs and brokers, noting only that it covered "personalized wealth planning, portfolio construction and investment selection delivered by licensed financial advisors," while excluding professionals at banks, discount brokerages and those engaged in direct investing. The firms represented by the report include a "mix of national, regional and independent firms," according to Monica Runggatscher, a spokesperson for McKinsey.

With a test of advisor-client relationships more likely during a down market, firms will want to make sure their compensation models are incentivizing close attention to existing clients—and growing the business where advisors can add new clients who are dissatisfied with their current advisors, noted the report.

The report's authors suggest that advisors would be wise to pay attention to client needs and services provided, as well as consider expanding services to new demographics or client segments. “To adapt and succeed over the next several months, wealth managers will face a new set of questions,” the report concluded. “Nothing will pay more dividends to advisors in the long run than deeply servicing their existing clients, being their trusted advisor and helping guide them through the months ahead.”

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