Data & Research November 12, 2012

Advisers Need Growth Strategy Plan

Registered investment advisers (RIAs) must invest in their company to ensure it not only thrives but grows.
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That is the message of “Taking Control of Your Future: Scale, Value and Certainty,” a report from the Alliance for Registered Investment Advisors (aRIA). 

“We have a lot of great financial advisers in the RIA and independent channel, but there is less focus on business management than there should be,” John Furey, principal with Advisor Growth Strategies and a managing member of aRIA told PLANADVISER.

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“Many advisers focus solely on being a great planner. When it comes to thinking about long-term succession and building scale, there is much less focus on that.” It is not sufficient for an adviser to focus on the “day to day,” ignoring the fact that they aren’t experiencing any “pain point,” Furey said, because the fact of the matter is, without a plan, an RIA firm will undoubtedly experience erosion caused by “new competitive forces.” Over the past few years, independent advisers were able to take market share from wirehouses, and that cycle is now over, Furey said.

As aRIA puts it, advisers need to “take control of their future” by creating “scale, value and certainty. Increasingly, the RIA channel is seeing dispersion where larger, more sophisticated entities are gaining share, while other advisory firms are stagnating. The key distinction is effective business planning and the ability to generate people, process and investment to take a firm to the next level.”

It is not enough for advisers to generate healthy profits that entitle them to what aRIA calls a status quo, or “lifestyle practice.” Advisers need to develop a long-term growth plan of 10 years or longer, aRIA said. They need to consider ways to grow organically by reinvesting capital to hire a chief operating officer and/or chief marketing officer—or perhaps partnering with or acquiring other advisory firms.

Admittedly, this is a difficult decision, which is why only about 10% of RIA firms have a “meaningful,” long-term growth strategy. “If you have $1 million in revenue and profits of $200,000 but need to invest $150,000 to grow your business, it’s a difficult and emotional choice,” Furey said. “Most advisers fail to do that and have a plateau effect. What they need to do is put a meaningful investment back into their business.

A strategic plan needs to include a blueprint for exiting the business when the lead adviser is ready to retire.. “Most deals take several years, and in many cases, the adviser has to stay on three to seven years after the deal closes,” Furey said. “We handled a succession plan for a $100 million firm in northern California, and they have a 15-year plan to transfer the business.”

The options advisers can take to grow their business, according to aRIA, include:

1.) Hiring the right talent.
2.) Hiring a business manager in addition to great advisers.
3.) Building scalable systems and processes.

As the aRIA report puts it: “Too many independent advisers may be stuck in the present and could put greater emphasis on taking control of the future. Advisers who fail to plan for the future or decide to do nothing are almost certain to realize eventual fee compression, erosion of margins, challenges in recruiting top talent, a below-market firm valuation, limited liquidity options and degradation of enterprise value.”

The Markets November 9, 2012

What the Re-Election Means for Investors

Volatility is likely to continue with current market conditions, but investors should keep a long-term outlook.
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Although the threat of the fiscal cliff looms and current market conditions will likely lead to high volatility, investors must remember that the market tends to bounce back quickly, said Anthony Brown, partner at Mercer, during the company’s post-election webinar. Brown cited last year’s debt-ceiling crisis, in which the market fell 20% but returned quickly.

Investors should think of the long-term horizon rather than just the short-term news items, he said. Overall, Brown said it is likely to remain a “very tough” investing environment.

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“When talking to your clients, keep in mind that people will have very strong emotional reactions to what happened,” said David Kelly, global chief strategist at J.P. Morgan Funds, speaking about the recent presidential election. But, he added, it is important to remind people that even if the results weren’t what they wanted, logic—not emotion—is what’s needed in making investment decisions.

At the moment, the biggest drawbacks of investing are uncertainty and fear. But the outlook should improve if the economy is seen as growing, Kelly said. He pointed out that from an investment perspective, the economy can grow under a number of circumstances.

Looking back at the last 75 years of stock market returns, the average return is about 10%. But in those years with a Democrat in the White House and Republicans controlling at least part of Congress, he pointed out, the average is 15.4%. In other words, investors should not view the re-election of President Barack Obama as dire financial news.

 

(Cont’d…)

Wednesday was a bad day for the markets, Kelly noted, possibly because of the ongoing situation in Europe, the election and worries about the fiscal cliff. One key to the expiration of the Bush tax cuts will be how the Republican Party approaches a solution. Kelly feels there are three scenarios: an early compromise, which would be ideal, though unlikely; a last-minute compromise at the end of the year, or an overdue compromise sometime in 2013. “Either way, there will be a compromise,” he said.

John Boehner, speaker of the House, indicated they are willing to consider new revenue. Kelly said the first overtures from House Republicans will need to be steps toward compromise, so that would appear to be a reasonable notion. A good plan would be extending the Bush tax cuts and gradually allowing the deficit to come down. The two parties are not that far apart if they can find a political reason to compromise, Kelly said, though he would not bank on this happening early in the game.

A Romney presidency might have meant the appointment of a more hawkish Federal Reserve chairman, Kelly speculated, since Ben Bernanke will likely step down in January 2014. 

The reelection means the stock market will likely be more positive than the bond market for investors. “As we go into 2013, the way to go will be overweight with equities and underweight in fixed income,” Kelly said.

Low-volatility equities are a good option right now because they keep pace over the long term, Brown said. Diversifying growth assets into hedge funds and private equity will likely be a continued trend, he added.

There could still be a sell-off in the stock market, which would be undesirable, according to Kelly, as people try to sell off before the arrival of higher dividend taxes. “We could see a market correction,” he theorized, “probably not as bad as the one that we saw in 2011, which was a 19% correction.” Kelly cautioned that the worst thing for investors to do is sell out amid the market angst and then see the market soar. “The lesson is, don’t buy into it,” he said.

In other areas of monetary policy, Kelly’s expectations are that long-term interest rates will rise, the U.S. dollar will fall, and that the country will continue its progress on bringing down the deficit.

 

 

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