Preparing for a Bear Market

Have you prepared your practice to weather the turmoil and financial consequences of a bear market? In many cases, the answer is, sadly, “no.”

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    Preparing for a Bear Market

    Preparing for a Bear Market

    Your Clients are Ready … Are You?

    One of the most valuable things an advisor can do for clients is to prepare them for the inevitable bear market, both emotionally and financially. With the right amount of groundwork, educated and prepared clients can avoid the bad decisions whose costs continue long after a bear market is over.

    Let’s now turn the lens on you. Have you prepared your practice to weather the turmoil and financial consequences of a bear market? In many cases, the answer is, sadly, “no.”

    Five Steps to Prepare Your Practice for the Next Bear Market

    A 20-plus percent decline in equity prices can shrink fee-based revenue quickly. In worse case scenarios, a bear market can last years, like the one in 2002. Falling asset prices, in combination with client withdrawals, can wreak havoc on an advisory practice’s financial well-being.

    Consider these five ideas to help you prepare and thrive during the next bear market:

    1. Evaluate Your Cost Structure. What share of your expenses is fixed versus variable? Are there opportunities to reduce fixed costs (e.g., outsourcing certain functions, renegotiating your lease, reconfiguring employee compensation so it’s in greater alignment with your practice’s financial performance)?
    2. Begin Diversifying Fee Revenue Sources. The asset-based fee model has many advantages for the advisor and his or her clients. Fee revenues, however, will shrink during a bear market, without any commensurate decline in client servicing demands. Indeed, servicing demands may actually rise. Consider migrating to a hybrid fee model that combines asset-based fees with flat retainer fees that pay for the sort of non-investment planning services you offer. Such an approach may limit the revenue growth potential during periods of rising markets, but it does provide revenue stability in tough times.
    3. Shed Unprofitable Accounts. Examine your book to identify clients who cost more in servicing and time than the revenues they generate justify. This should not only help your margins, in good times and bad, but it can free up time to devote to new business development.
    4. Expand Your Menu of Services. There is a range of services that you may want to add that can help generate revenues regardless of the markets, like college planning or family office services.
    5. Get Efficient Sooner Rather Than Later. Good times mask a lot of inefficiencies. Whether it’s work processes or old technology, cost inefficiency may be overcome during rising markets, but it can be an albatross during falling markets. Better to address inefficiencies now in a deliberate fashion than later in a panic.

    The financial services industry is ever-changing; taking the time now to assess your practice will help you to minimalize losses in down markets.

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