What factors will determine financial advisor success in 2023?

The outlook for this year is murky. What challenges will independent investment advisory firms face?

Veteran industry observer and AdvisorEngine’s Head of Sales George Tamer says there are lessons for younger firms to draw from those that went through the 2008 financial crisis.

In the following conversation, Tamer outlines how firms are preparing to make tough business decisions, if necessary, and what RIAs can do to grow their client lists in this time.

The following Q&A has been edited for clarity.

How are advisory firms preparing to operate their practice in a tougher market?

GEORGE TAMER: "Top-performing financial advisory firms should prepare for three different scenarios in a down market: Baseline Revenue declining, Expense Growth / Revenue and Expense Growth. Firms planning this way can pivot very quickly. For example, if revenue isn't growing as expected, the firm moves to the scenario where it works off a revenue base of 10% less than baseline."

What elements go into thinking up these scenarios?

TAMER: "You start with three revenue projections.  A low case, a base case, and a best case. What is your revenue goal for the quarter of the year based on your existing asset base? What do you want to grow by? Is that new clients, is that referrals or adding to existing business from existing clients?

"From the revenue base, you consider the same three expense cases.  A low expense case, a base expense case, and a best expense case.  Each quarter you have a baseline of what expenses will be, and it's fixed versus variable costs. Fixed costs are items such as rent; overhead you have little control over to pare back on. Variable costs include your travel budget, marketing budget and human resources like bonuses or if you want to add an additional hire. Essentially what you're doing then is, as the revenue starts to become clearer, you're pivoting to whatever expense scenario that you think is going to suit your business.

"It might be the case where revenue is down versus forecast and you go to that lower expense scenario where you're paring back expenses, such as travel to trade shows. The challenge for RIA firms is that to grow in a down market, you're going to have to spend more even though you're facing these kinds of headwinds with your clients to ensure that organic growth is happening and that momentum is there. It will be more challenging as a firm because that revenue isn't there. But for those willing to do this, market downturns historically have been tremendous growth opportunities.

"In the past down markets, like 2008 and 2020, I’ve seen in larger, full-service firms the advisor base isn't prepared to deal with the influx of client calls asking for information. That's a tremendous opportunity for the independent RIA. But you need to be in the market to do so. You need to be marketing; you need to be on social media posting your economic commentary, letting your clients know you're here through all this volatility.

Do firms need to determine then which decisions they can put off and which need to be acted upon?

TAMER: "It's always challenging to have those trade-off choices. But when I think back to 2008, it was an eye-opening experience for advisors. Many learned to invest in technology to run an efficient business from that period. There's been a 15-plus-year-run of advisors heavily investing in infrastructure since, and they're running very efficient shops now that will allow them to weather this storm like never before."

What about talent acquisition? Is it a good time to check out other firms for new hires?

TAMER: "There will be firms cutting back on expenses; often, human capital is the first expense to cut as a variable cost. If you are following headlines, you know Amazon’s been laying off employees and Apple’s been laying off people. Many big banks and broker-dealers are freezing hiring too. There will be opportunities to scoop up talent that you may not have been able to even six months ago -- not only in advisor-facing roles but for other critical roles in your firm, in operations, technology and administration."

There’s a fine balancing act between being cost-effective and spending on resources.

TAMER: "Again, you don't dial back on your outreach and marketing in a time like this. You double down and be out there when other firms aren't doing that."

What’s exactly in that outreach?

TAMER: "If you've done a good job communicating, your clients know you’ve planned for this market. I’m not giving investment advice, just strategies; in my opinion, I have seen work well in this type of environment. You've allocated their portfolios to withstand ups and downs like this based on their goals. This can't be the first time that clients hear from you. For prospects, it's just about having an appropriate outlook. It doesn't have to be perfect, but you should be able to give reasonable guidance. For example, you could say in rising interest rate environments, you will expect higher volatility and lower returns, and there are things you can do to weather the storm. That level of commentary can back you up. There's been a lot of emphasis on moving the client discussion away from performance to life planning. " 

What other client changes will challenge advisors? 

TAMER: "You've seen the studies about the billions that will change hands in generational wealth transfer.  AdvisorEngine CEO Rich Cancro had a good point – a lot of times, what that means is that the one client that you were managing $1,000,000 for, now you're managing $333,000 for three members of the next generation. You’re doing three times the work for the same fee. It's an expense challenge to manage those assets over three individuals instead of one, but you can capture new business through that transfer of assets.

"Those same studies show that most Gen X and Gen Y clients who inherited money are not sticking with their parents’ advisors. There is a tremendous opportunity to capture that business from your competition. But you will need tools and technology to manage those clients efficiently and profitably. The next-Gen investor is looking for different things around communication and technology, so having the savvy and the technology to do that will be necessary."

Cancro has also spoken about hyper change. What do you see changing quickly if we experience a market of prolonged diminished returns?

TAMER: "Just as the pandemic accelerated trends around virtual meetings, you'll see this market accelerate the democratization of finance, specifically around alternative investments and digital currencies. With that democratization will come demand for more investor education, so informing your clients about the changes you're going to make to the portfolio will go a long way to continue capturing new clients and new assets. Investors will find this information, and they aren’t always going to be right. You will be asked about alternatives and cryptocurrencies and should be prepared to have those conversations.

"Advisors should learn more about blockchain - they can pick one use case, like non-fungible tokens (NFTs). The use case for NFTs isn’t art; it’s the digitization of important documents, like titles or medical records. You will need to be able to accept transactions in that way. It’s the next evolution of paperless transactions, even from existing ones. Today, when I send documents to my advisor, it's still me scanning them as a PDF and sending them, such as a copy of my driver's license or birth certificate or things from my estate plan. It’s a copy; it’s not digitized. An NFT is a digitized document that can't be changed, that can't be altered, it is secure. That’s the next wave in finance."