No two recessions are alike, yet many repercussions for employers, investors, and financial advisors are similar:
With recession talk looming large in the U.S. today, it's important to be well-prepared for the unknowns ahead. Get a plan in place to help your clients navigate challenging economic conditions.
As the saying goes, history has a way of repeating itself, and looking to the past for guidance on future obstacles can make all the difference in your preparedness for the road ahead. Let’s explore how lessons from the last recession can help financial advisors prepare for today’s challenges.
The 2007 – 2009 global financial crisis had far-reaching consequences for individuals and financial advisors alike. During the Great Recession, financial advisors learned several valuable lessons on how they could serve clients better and navigate financial markets more effectively.
A few overarching themes stand out when we consider how the last recession impacted financial advisors:
Long story short, the 2007-2009 recession was a wake-up call for the financial industry. Financial advisors should view this recent recession as a valuable learning experience they can build on to offer more effective financial guidance to clients navigating the current market.
What hurdles do advisors face during a downturned market? Financial advisors and strategists typically face several challenges during a recession:
Decreased client confidence: During a recession, clients may be concerned about the value of their investments and the state of the economy. This decrease in investment performance can lead to decreased confidence in their financial advisor and pressure to make changes to their portfolios.
Increased demand for advice: Many clients may seek guidance during a recession considering the uncertainty that comes with it. Financial advisors may need to spend more time answering questions, providing reassurance, managing budgets, and developing new investment strategies to help their clients. You also may find your clients have an increased desire for services you aren't currently offering, like tax filing support or retirement planning.
Market volatility: Recessions are often characterized by heightened market volatility, which can be difficult for financial advisors to navigate. Advisors must be able to manage clients' expectations, offer sound investment advice, and help them make informed decisions during periods of heightened risk.
Reduced revenue: A recession can result in a decline in the value of clients' portfolios and a reduction in their investment contributions. This drop in contributions can have a significant impact on financial advisors' revenue and profitability. For fee-based advisors, clients in the midst of a recession may want to cut spending and reduce some of the services they were previously paying for on a regular basis. Advisors offering in-demand services may consider rate hikes to help make up for some of their lost revenue.
Difficulty in predicting market conditions: During a recession, the strength of the economy and financial markets may be more difficult to predict, making it challenging for financial advisors to develop effective investment strategies for their clients. The nature of a volatile market means there isn't much warning before a drop or a recovery. Nervous clients may want to jump into a sell-off to avoid further losses, only to find the market improves soon after they accepted the loss.
These challenges highlight the importance of having a resilient strategy, an agile business, and a deep understanding of financial markets as a financial advisor. By being proactive and transparent with your clients, you can help support them and provide valued guidance during uncertain times.
It’s been said that all economic and market downturns are different in terms of cause, length, severity, and impact. The one thing they always have in common? They are great teachers.
The financial crisis of 2007 – 2009 was notable for a number of reasons, and it left its mark on financial advisors and investors alike. So, what were some of the lessons learned?
We spoke to four financial advisors to see how their experiences during those years shaped their response to current economic and market difficulties. Here’s what they had to say.
Keeping three to five years of liquid assets in a short-term vehicle is important for flexibility during a downturned market. Liquid assets don’t generate much in the way of returns, but having several years’ worth of money available that is not exposed to risk can protect clients from selling positions at a loss.
A market downturn offers financial advisors a timely opportunity to refine their business model. For non-qualified accounts, capital gains aren’t the factor they can be in up markets, so a discussion about moving client assets onto a third-party platform that offers more defensive or tactical asset managers is an organic conversation that could happen as a result of poor market conditions.
Market downturns also offer advisors an opportunity to move clients from commission-based to fee-based advisory; the long-term planning benefit appeals to clients, while the more predictable revenue flow strengthens the advisor’s business. Several advisors we spoke to moved to fee-based approaches during the financial crisis, with no attrition as a result.
An increased demand for certain financial services could mean an opportunity to expand your offerings. For example, you may discover clients want budgeting or tax strategies you didn't focus on before the recession.
Financial advisors who moved too quickly to conservative allocations in the early days of the 2007 – 2009 recession found portfolios had limited growth potential, and they missed out on the relatively quick recovery.
Now, instead of trying to preserve assets over the short term, the same advisors are much more likely to make minor adjustments. Stick with your logical strategy over gut feelings and hunches.
The math is the math: in a market downturn, your AUM-based fees are decreasing too. Your revenue from Q4 2021 assets is likely much higher than your Q4 2022 revenue. You’ve got to bring on new clients to make up for that loss of income.
Look to diversify your revenue stream by adding fee-for-service or hourly fee options, such as divorce planning, debt management, budgeting, insurance, or employer benefits (e.g., stock options, deferred compensation). By charging a minimum account management fee, you can open your business up to clients you might not have had before while managing that account profitably.
As clients see their year-end statements for 2022, some will move on from their financial advisors. Take advantage of that. Ask existing clients for referrals and check in with your Centers of Influence for referrals.
Today’s financial advisors need to be available. As one advisor said, “When’s the last time you wanted to be ignored?” Clients need to know you are standing by and ready to support as needed.
Avoid staff reductions that make it hard to keep up with client needs and services. If you can, add to your staff to handle the increase in client outreach. Remember, financial advisors must be proactive and responsive during times of volatility.
Communications are more email-centric now versus a phone call, which works to an advisor’s advantage. Email is less time intensive—you can reach dozens of people with the push of a button, and you can prepare your communications in advance. Plus, people often prefer email.
Enact a standard review calendar and set up your clients’ next appointment at their current one. It helps with communication flow because clients know when they’ll be seeing their advisor next.
If all you talk about is investments, you live and die by returns — something you really can’t control. Don’t focus on the market downturn but, rather, how it affects clients in the short- and long-term. Recognize that inflation in the short term affects your clients, especially small business owners and retirees who feel it every day.
Instead, focus on what you can control: conveying your expertise and emphasizing goals. Discuss estate and retirement planning or cash flow modeling instead. If you’ve done a good job with planning up front, there’s no need to talk numbers or projections.
The more you can talk about the financial plan, the more your clients will understand why the current downturn isn’t as impactful as they fear.
Provocative news isn’t a new problem, but it has certainly been on the rise in the last 15 years. Your clients are bombarded with “news” and opinions everywhere they turn: social media, cable news, podcasters, etc. The most sensational stories tend to get around the fastest—even if they aren't helpful or completely true.
It’s important that your clients know they can turn to you for answers. But don’t wait to be asked. Instead, be proactive. Share insights you’ve come across via email or share reliable information on your Facebook or LinkedIn page.
The conflicting ideas your clients hear often fuel a lot of questions. You can help keep them calm and focused, but it will take some effort on your part.
The markets can quickly take a turn for the worse. Proactively getting a communication strategy in place helps reassure clients, frees you up to focus on other responsibilities, and saves a lot of stress for your employees. Create a library of pre-approved communications ready to send out as needed based on how the market shifts.
If you don’t have the time or expertise to create these communications, leverage a marketing platform, such as AssetMark Marketing Advantage to help create and distribute the content.
So, how can you move forward in a strategic way? Here are three trends financial advisors can leverage to build a stronger business during uncertain times.
Communicating with clients—but not overcommunicating—is imperative. Make sure clients know you are available for questions or just to talk so they feel a personal connection.
That being said, don't inundate clients with updates too frequently because this could cause anxiety. Balance the need for information with keeping clients assured that it is business as usual.
The impact of social media, pundits, political/social divisiveness, and the 24/7 news cycle is greater than ever. As news outlets and podcasters search for an attentive audience and social media sites rely on click-throughs, fear-based headlines have become more prevalent. Understand that the current media strategies stoke fear in investors and make it more difficult for financial advisors to do their jobs.
As digital algorithms reinforce confirmation biases, it’s getting more and more problematic for investors to access objective information. Become the reliable rock your clients need to ease their fears and offer strategic, long-term solutions.
Your clients expect you to be a steady presence in uncertain times. But you certainly don't have to do this alone. Each of our advisors noted the importance of working with the right third-party asset management firm.
One explained, “I don’t have to be the expert. I just need to go to the expert as the client advocate, and my team at AssetMark will help me find the right solutions for the client.” Another added, “AssetMark gives you so much support, way beyond investment solutions.”
A recession can be especially challenging for financial advisors, and being unprepared could lead to harming your reputation, losing clients' trust, and stunting long-term success. In challenging economic conditions, firms that are responsive, available, invested, and proactive have an opportunity to stand out from the crowd and win the respect (and loyalty) of clients.
Keep your practice strong in the face of economic uncertainty and market volatility. You can prepare for potential disruptions and protect your professional reputation by working with a turnkey solutions provider like AssetMark.
You need industry-leading tools and resources that help you sustain operations and deliver value to clients. AssetMark can help you build sustainable growth, even during a volatile market. Our solutions make it possible to balance the challenges of running a business and provide guidance to clients during uncertain times.
For more information on how AssetMark can support you during difficult economic times—and beyond—download our new guide, Recession Proof Your Business.
You can also request a consultation or speak with someone on our team to understand exactly how AssetMark solutions can help you weather whatever lies ahead.
AssetMark is a leading provider of extensive wealth management and technology solutions that help financial advisors meet the ever-changing needs of their clients and businesses.
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