Managing your advisory business in volatile times

During periods of financial market volatility there tend to be a lot of talk about how to manage clients’ concerns and emotions. However, periods of volatility can also be stressful for advisory firm owners, too, and it goes beyond managing their clients’ expectations. Let’s take a look at how the advice you may be giving your clients may apply to your own business.

What can you do to manage your business, as well as your team and your own emotions in today’s volatile market? 

Our VITAL series provides resources for you to use with your investors to address five key themes: volatility, income, tax management, adaptability, and low cost.

The “V” in VITAL represents volatility. In our volatility investor-video, we call out the following three lessons for you to share with your clients:

1. Embrace volatility
2. Be patient
3. Diversify

Let's turn the tables and apply these same lessons to an advisory business.

Embrace volatility

We’ve been here before and know that historically, markets have been resilient. Staying the course can have long-term positive outcomes for not only your clients, but your business.

The InvestmentNews 2022 Advisor Benchmark Study, which SEI sponsors, highlights that many advisory firms have benefited from high profitability (>30-40%) over the past decade. Related to high profitability, we saw historically high owner compensation in 2021.

As an owner you take on business risk, which is why owner compensation tends to be higher when the markets are good and the business is thriving. On the other hand, during difficult times, one of the first places to look to reduce costs is (unfortunately) your compensation.

Managing expenses before the markets are challenging can help you navigate a dip in revenue. Having a game plan for this will help.

Challenging markets provide multiple opportunities to advisory firm owners:

• It may force you to more closely manage your balance sheet. Target a 25% to 35% profitability.
• It can provide business development opportunities. The Spectrum Group found that 11% of investors have either fired their advisor or hired a new advisor as a result of the current recession.
• It provides an opportunity to engage and showcase your value to your clients.
• It may encourage you to rethink aspects of your business such as your pricing model. The majority of advisory firms use an assets under management fee-model, which works for larger clients, but may not be profitable for smaller ones, especially in a volatile market. Alternative pricing-models such as hourly, subscription, and one-time or an ongoing fee for service have slowly gained adoption and may be a better fit for certain clients.

Take action: Embrace volatility

Manage your business’ balance sheet with the same commitment that you manage your client portfolios. Actively review key profitability and productivity metrics, versus an industry or custom benchmark, at least annually (ideally quarterly).

Calculate your operating profit with the following formula:

In general, target an operating profit of 25% to 35%. Above 35% it may be time to invest in the business. Below 25% you may need to manage expenses, charge more, or improve client profitability.

Be patient, we’ve been here before

Fear-based decisions often lead to less than ideal outcomes. If you’ve managed your business through a previous recession, you have experience on your side. Regardless, now is the time to stick to your plan and not make any rash decisions.

Many firms we consult with have lofty new business goals to help counteract lost revenue and maintain long-term growth goals. While that rationally makes sense, it’s important not to get desperate. Just like you advise your clients—your business is a long-term investment.

One very simple way to be patient is to have a plan, control what you can, and stay the course.

Take action: Have a plan and be patient

• Develop a business plan using the Growth Lab One-Page Business Plan
• Build a marketing plan with the Marketing Plan Builder
• Get more referrals with a Referral Plan
• Manage your largest investment, your people, with the Talent Strategy Planner

Diversify

We know that diversification is a powerful tool used in asset management, but how does it apply to your business? Healthy advisory businesses are full of examples of diversification.

For example they diversify the business by:

• Seeking to have a mix of young, middle aged, and older clients (they often put intentional effort into getting to know the people who matter to their clients, such as their children)
• Segmenting their clients to maximize profitability and rationalize their resources
• Sharing responsibilities and ownership so as to not overly depend on one individual (unless you’re a solo practitioner)
• Diversifying their sources of revenue with multiple fee models
• Not being overly dependent on a small percentage of households
• Investing in talent and the training, management, and infrastructure (technology and operations) needed to help them be productive
• Seeking key partners to outsource aspects of the business to maximize their time in the right places (i.e. with their clients)

Take action: Diversify

Identify opportunities in your business to diversify. Consider the list of examples above and pick one to focus on improving.

Being a business owner can be difficult during volatile times. Remember, you aren’t in this alone. At SEI, we’re committed to helping you build your brave future^SM and to navigate the bumps along the way. Our Advisor Services team has a number of practice management resources available in the Growth Lab plus four communities (RIA, growth, operations, and women advisors) with over 800 members to help you learn, share, and grow together.