How to Recession-Proof Your Financial Advisory Firm
Dear Advisors,
Most traditional advisors charge a percentage of assets under management (AUM). That means your fees go down as the market goes down. We saw a lot of that this spring! At a time when you’re getting paid less, your clients actually need you the most. The goal is to keep serving clients as much as possible, and stay on track with your business growth goals. Unfortunately, no business is truly recession-proof, but there are a few things to work towards before the next big market pull-back.
Move up-market as you gain skills and experience.
A study was recently done to measure the financial impact of the coronavirus pandemic on US citizens. The results show that 40% of households with less than $40,000 of household income or less were impacted by COVID-19. Only 10% of households with over $100,000 in household income were impacted by COVID-19. While every recession is different, wealthier families are better positioned to weather the storm. It makes sense to pivot your skills towards a higher net worth clientele as you become more established.
Hire your own financial planner.
You need a financial planner to who is excited to focus on you. Having someone to turn to in times of uncertainty can be a great source of psychological and emotional support both for you and your life partner. As the financial advisory firm owner, you spend your time being that support person both for your clients and your family. It’s healthy to have your own support network in place. Whether you hire your own planner or not, go back to basic financial planning: maintain your personal emergency reserve.
Keep a cash reserve for your business in your business bank account.
While keeping an emergency reserve for your personal expenses is wise, most business owners don’t apply that same rule of thumb to their businesses. While it’s important to leverage cash in your business, owning a business is very risky. Work with your financial advisor to determine how much of a cash reserve you need for your business. As an example, If your income went down 10%, an emergency fund to cover a full 1-month's expenses would sustain you like normal for 10 months.
Build your business to run a profit margin.
While it’s not always possible, you should work towards maintaining a 30% profit margin in your business. That’s not only good business strategy; it also comes in handy during a recession. If your revenue is impacted by 20%-30%, you can still keep the doors open, and stay on track with your business objectives for the year.
Do more ongoing financial planning.
Investment management is a transactional, replaceable commodity. True financial planning builds a deep relationship based on trust. If you’re looking to add financial planning in your firm, make sure you charge a separate fee. People take financial planning seriously when they have to pay something for it. You’ll help them get to the heart of their goals and create truly meaningful change in their life. These clients don’t leave when times get tough, which is a good revenue stream to offset fees based on assets under management when the market is down.
Nobody expected the pandemic this year, but every recession is caused by something no one could have ever predicted. You now have the next 10 years or so to “recession-proof” your firm before the next big market drop! The rules of thumb above are good business strategy. You’ll be able to both protect your firm against future uncertainty and grow the value of your business along the way.
Warm regards,
Brooklyn
P.S.
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