The advisory business will probably never be the same.
While, thankfully, the vast majority of our lives will be spared from the virus, hundreds of advisory firms will not survive.
Even in the best-case scenario, in which the scientific community quickly develops a vaccine, it would still take months or years before the drug could be produced and all Americans inoculated. The simple fact is that advisers and clients are not going to be sitting together for a very long time.
How do financial advisers grow their firms in a world where they can’t meet with clients, earn their confidence and then discuss their personal financial plans?
Capital is the differentiator, and many of the larger firms have been able to pivot quickly and move to a fully remote experience. They’ve been communicating with clients by producing relevant emails, podcasts, videos and guides. They’ve been able to train their advisers to meet with clients via Zoom and other technologies. Their portfolio management systems have been able to rebalance multiple times, and their technology decks provide many fabulous tools that serve both the adviser and the client well.
With most small advisory firms simply not structured (or financed) to compete, what are their options for survival?
Consider what the pandemic has illuminated. Prior to the breakout, most small advisory firms we interviewed for potential mergers or acquisitions were not growing organically, yet most didn’t even realize it. However, if you remove the lift the stock market provided over the past decade, by and large, almost the only advisory firms that were attracting new assets were the larger ones, and that’s because they had the money to market and advertise.
Case in point, the 2018 InvestmentNews Research Pricing & Profitability Study found that firms with $10 million or more in annual revenue spent an average of $382,000 a year on marketing, while smaller or single-adviser shops spent on average only $11,000 a year.
The only way to grow in an era of declining assets is by bringing on new clients. But how is a small firm going to be able to market against the larger RIAs when they weren’t winning prior to COVID-19?
Some older advisers probably aren’t too bothered by the fact that the compression of their businesses will accelerate. I suppose one way to address the situation is to slash costs, reduce services, and squeeze the profits as the client base slowly recedes.
Unfortunately, this is an approach I see a lot of principals take. Rather than create a succession plan that serves their clients, they’ll “retire in place” and clip the dividends from a dwindling revenue stream. Once an adviser takes this approach, however, there’s nothing of value left to offer a larger firm looking for a merger or acquisition, and even less upside for clients.
Professionally, I don’t think it’s a stretch to call this an unprecedented era of economic survival. But, if you’re proactive, there may still be RIAs you could join forces with that would ensure your clients are well served while providing you with a better economic outcome.
I don’t believe the next decade will be at all kind to the small adviser.
Scott Hanson is co-founder of formerly Hanson McClain Advisors, a fee-based RIA with $8 billion in AUM.