Adviser Industry Impact of COVID-19

Art by Brian Stauffer

As fiduciaries to their clients, financial advisers are used to putting others’ interests first.

Indeed, advisers currently are spending a lot of time and energy helping their clients and prospects deal with the implications of the coronavirus pandemic. In addition to coaching individual investors through the unprecedented daily market swings, retirement specialist advisers are helping plan sponsors make tough choices about plan designs, especially the expansion of loan and hardship withdrawal provisions now permitted under the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Such work is certainly building loyalty and goodwill among the client base, sources agree, but it is also important for firm leaders to step back from these efforts to take stock of how this situation is affecting their own businesses. Not only is this prudent from a client service perspective—as it helps to ensure no unexpected disruptions in service will occur—it also can help staff gain an important piece of mind during an incredibly stressful time.

Remote Work Is Now the Norm

Like many sectors of the U.S. economy, the first major impact of the COVID-19 pandemic seen in the advisory industry was a wave of cancellations of in-person meetings and events. For example, back on March 10, J.P. Morgan Asset Management chose to hold its annual Guide to Retirement release event as a digital webinar because of concerns about the potential for a COVID-19 outbreak in New York. Appropriately enough, the 2020 Guide emphasizes the increased anticipated market volatility that investors will likely face in coming years—and not just due to the pandemic.

The large advisory industry conference events soon followed, either postponing their plans or canceling them outright, and soon advisory firms themselves began to implement work-from-home policies and remote meetings for clients and prospects. One firm, Two West Advisors, has launched a virtual, private consultation service for the 30,000 retirement plan participants it serves who may have been financially impacted by the coronavirus. CEO Marko Ungashick says the service is holistic, built on technology that enables individual participants to incorporate all their finances outside of their retirement plan accounts into the discussions.

“The meetings are set appointments so our financial experts can review each individual participant’s information in advance and be prepared to have an informed conversation,” Two West President Ryan Rink says. “We want to make sure the participants and [the financial experts] understand how their other accounts are doing to ensure they’re moving in concert with one another.” The service will be available for the foreseeable future, “regardless of the impact on Two West.”

“It’s a volatile time and as long as there’s a demand for it from our customers, we’ll make it work,” Rink says.

Another firm, Chepenik Financial, directed all its employees to work from home starting March 13, says Jason Chepenik, managing partner.

“This is likely the moment we will become remote and never go back,” he says. “It wasn’t a difficult decision to make. The only difficult aspect of it is maintaining camaraderie among my team.”

Firms say they are holding staff and client meetings via Zoom, Microsoft Teams and other platforms.

As the adviser community transitions to remote-based work, cybersecurity and protecting sensitive information should be top of mind, says Cassandra Labbees, a member of the Employee Benefits and Executive Compensation Practice at law firm Epstein Becker Green. “Employees’ Wi-Fi systems to connect to the internet should be private and password protected,” she says. “Should their system go down, they should not access public Wi-Fi. Instead, they should contact their IT department for help.”

The M&A Impact

Heading into 2020, one of the big storylines expected to define the year was the fast pace of mergers and acquisitions (M&A), after last year broke deal volume records for both registered investment advisers (RIAs) and independent broker/dealers (B/Ds).

As expected, 2020 got off to a quick start. Data provided by Fidelity shows 20 RIA transactions in the first two months of the year, representing $28.7 billion in client assets and exceeding assets under management (AUM) totals for all of the first quarter of last year. As market volatility and the COVID-19 pandemic unfolded in March, M&A activity clearly slowed. By the end of the quarter, just three more RIA deals were inked, bringing the total to $29.9 billion in client assets. In the end, the quarter’s RIA deal volume was down 26% in terms of the number of transactions, but up 35% in client assets compared to the first quarter of last year.

Those figures have M&A experts contemplating what the second quarter, and indeed the full year, will bring in terms of deal volume. Michael O’Bryan, a partner in Morrison & Foerster’s mergers and acquisitions group, notes there are many transactions that are currently in the interim stages—with deals signed but mergers incomplete. He expects these deals will more or less continue as envisioned, but the negotiation and signing of new deals may slow significantly.

O’Bryan says it is unlikely that deals that are now unfolding will unravel, though they may take some additional time to receive full regulatory approval as the functions of government also slow.

“Typically, if it is a stock-for-stock merger or acquisition agreement, you may find that while both parties have been hit pretty hard by this situation, they might both have been hit relatively the same,” he explains. “And looking forward, they are both facing the same issues, and so in a stock-for-stock deal there may not be as much of an impact as you would expect.”

Cash-based deals are different, though.

“In a cash deal, you can certainly imagine the attitude of the person who is supposed to be spending the cash might be a bit different today versus two months ago,” O’Bryan speculates. “In fact, while they already were benefitting from a sellers’ market, the cash price the seller is going to receive may now seem even more attractive. On the other hand, if you are paying cash to acquire a company, you may now feel like the contracted amount is too great.”

The Client Perspective

ISS Media, the publisher of PLANADVISER, recently fielded a pulse survey on the impacts of the COVID-19 pandemic and received 387 responses from a wide range of employer sizes.

The results show that employers are pretty evenly split in terms of being “somewhat,” “moderately” or “very” concerned about the effects of the coronavirus on their organization’s ability to operate. While the percentage varied by employer size, generally less than 10% of organizations feel their organization needn’t be concerned.

Employers in the ISS Media pulse survey are also pretty evenly split on the question of how their daily operations have been affected. Roughly half say some employees are unable to work, but others are now working from home or in modified office arrangements, while a smaller but still sizable group says their daily business operations have not yet been affected directly by the pandemic.

About half of employers seem to be weighing layoffs of furloughs and enacting hiring freezes, while about a quarter are contemplating mandatory salary reductions. But even with so many emerging challenges, the ISS Media data shows, employers—at least at this stage—appear to be committed to funding their benefits programs. For example, the data shows only smaller organizations are thinking of freezing their pension plans in response to the pandemic, while around one in four plans is evaluating its safe harbor status, with larger plans more likely to be doing so. 

The data further shows many respondents have not yet taken any action related to investment options/menus, with 85% saying they have not even yet discussed that topic. Notably, 20% have discussed increasing investment oversight and due diligence activities.

At this early point, few participants have adjusted salary deferrals into retirement plans, although high levels of uncertainty exist. The same is true for participation rates—no impact is yet appreciable but that could certainly change in the near- and mid-term future.