Strongest RIAs managed for growth during the financial crisis: TD study

With the U.S. unemployment rate hitting record levels and the economy heading toward a potentially protracted recession, financial advisory firms are instinctively circling the wagons to weather the downturn.

But according to research from TD Ameritrade Institutional, sometimes it’s best to zig when everyone else zags.

During a webcast presentation on Wednesday, TD representatives cited data from the “Great Recession” that started in 2007 to show that some of the most successful advisory firms embraced a growth strategy during the financial crisis.

To provide a sense of direction and a strategy to owners and operators of advisory firms, the FA Insight research identified characteristics of “standout firms” from that period, including firms that had above average growth and operating margins.

One characteristic of the standout firms was that they grew headcount from a median of seven employees in 2007 to 10 by 2009, while most peer firms slightly reduced headcount, according to the research.

“By pursuing a disciplined, consistent approach to business management fundamentals, RIAs can do well by themselves in good times or bad,” said Vanessa Oligino, managing director of business performance solutions at TD Ameritrade Institutional.

“Our research shows that standout RIA performance is not magic, it’s a matter of planning, perseverance and focus,” she added.

The business discipline showed up in reduced overhead expense margins, which standout firms saw drop from 45% in 2008 to 42% in 2009, while the non-standout firms saw the operating expense margins climb from 46% to 56% over the same period.

Part of managing those expenses involved standout-firm owners taking deep pay cuts, reducing their share of total firm revenue from 31% to 19%, which compares to owner pay levels of around 25% of total revenue for non-standout firms.

Oligino said cost-cutting can be accomplished in various forms, including better use of technology, managing non-revenue employees more efficiently or making adjustments to owner compensation and profit draws.

She warned, however, against making cost-cutting mistakes that can have negative long-term effects, which means “holding firm on pricing but making plans to reexamine pricing structure once the economy recovery takes hold.”

And she advised only cutting base salaries of staff as a last resort.

“Until all other options are meaningfully exhausted, we do not recommend cutting base compensation for staff,” Oligino said. “If cuts must take place, RIAs should consider combining them with reduced hours or greater incentive opportunities. Advisers would be well served to maintain staff morale for the long term.”

Standout firms in TD’s analysis also saw 11% average annual growth in new clients from 2008 to 2011, while the non-standouts grew their client base by an average of just 0.4% during the period.

Bottom line is that investing in the business during the darkest days of the financial crisis likely put a temporary damper on productivity for standout firms, but those firms were better positioned for growth during the recovery that followed.

In 2011, for example, revenues per revenue generator at standout firms were 22% above where they were in 2008, which compares to a productivity drop of 10% at the non-standouts.

“We want RIAs to appreciate that unprecedented events can present once-in-a-lifetime opportunities for them,” Oligino said. “Short-term decisions can have long-term consequences, so make the most of the current opportunity.”

Written by Investors Wallets

Raymond James to focus on ‘virtual’ recruiting

Financial planning groups ask advisers to encourage charitable donations