THE FINANCIAL ADVISORY BUSINESS
a. A slower rate of organic growth caused by competition and market returns b. Clients that are more demanding
c. Difficulty in recruiting, retaining, and rewarding people d. An aversion to managing anything except their clients
e. The pressure of margin squeeze
f. The shrinkage of time
Slower Rate of Growth
The late 1990s created an illusion for a lot of people who invested in the markets, including financial advisers, who witnessed extraordinary rates of revenue growth tied to investable assets. This bonanza made many of them feel brilliant, especially those who had the wisdom to convert to a fee-based or fee-only model. However, the market correction at the turn of the century and the modest returns projected for the foreseeable future have made revenue growth— at least organic growth—more of a challenge. Several conditions are conspiring against advisers who still hope for rapid revenue growth:
1. Most experts predict long-term market rates of return of below 8 percent. 2. Inflation remains at very low rates (although that could change). 3. There is no longer an Internet bubble to give an artificial lift to the markets—and consequently to fees. 4. Many advisers have already reached their capacity in terms of the number of new clients they can add. 5. More pressure is likely on pricing, with new competition and more demanding clients. 6. If a firm’s service offering is one-dimensional, justifying higher fees is hard. 7. Many advisers lack a well-developed, systematic process for marketing.
The good news, of course, is that challenge breeds opportunity. There are things advisers can do, such as institutionalizing their approach to business development and implementing a more rigid client-acceptance process to maintain fee discipline. But it is impossible— and imprudent—to ignore the weight the marketplace can exert on top-line performance and on the rate of organic growth.
Clients Demanding More
The illusion that dazzled many advisers in the late 1990s afflicted their clients as well. Clients grew confident of double-digit returns and early retirement; they thought they had become risk tolerant (in fact, they were only return tolerant), and their feedback to their advisers was positive and glowing. As the markets corrected, though, and returns dropped, many clients reacted with more needs, demands, and requests, and they required significantly more handholding and support from their advisers. For advisers charging fees based on assets under management (AUM), fees declined at exactly the same time that clients’ demands, needs, and expectations increased. Some firms lost clients and felt the impact on their top line. Others kept the clients, but felt the impact on their bottom line because they needed to deliver more services for the same fee.
Difficulty in Recruiting and Retaining People
One of the most underdeveloped management muscles advisers have is the one for managing and developing staff. Some love the task, but most have neither the know-how nor the patience to do it well. Given a choice of where to spend their time, advisers will universally choose to be with clients rather than with staff. And since time is a finite resource in every practice, it’s clear why staff development suffers. The dilemma has a certain irony, considering that advisers are generally good “people” persons, meaning that they’re generally empathetic, nurturing, encouraging, and fair in their judgment of clients—almost to a fault. Yet many of them struggle to employ these same qualities when dealing with their own staff. Part of the problem may lie in a perception that staff is a cost to be managed and controlled, rather than an asset that can generate a return. When the perception shifts from a cost-based view to an asset-based one, advisers begin treating their staff as one of their top clients, which has the potential to...
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