Financial Health for RIAs: How to stay prepared in a bear market

The financial health of RIAs will be put to the test as stocks enter bear market territory. Firms must be prepared to weather anything that comes their way.

Inflation is approaching 40-years highs, and talks of recession are growing.

When will the markets hit bottom? How much volatility can RIAs stomach?

With all the uncertainty, this is a good time to make sure the financial house is in order.

1. Eliminate Unnecessary Costs

Downsize or eliminate office space

By downsizing or eliminating office altogether, RIAs can save thousands of dollars every month.

According to a PwC survey, 95% of financial service executives said their firms maintained or improved productivity when working remotely as COVID-19 lockdowns went into effect.

Given how well these firms have done, is it really necessary to keep as much office space as before? 

Check out one of our previous posts on office space and how much RIAs really need.

Consolidate technology and get rid of underused systems

Leveraging technology properly brings many benefits, but when used inefficiently, it's money down the drain.

RIAs can keep costs down by using systems that combine features and functions, rather than paying for multiple systems that don't always interact well with each other.

Even worse, some firms will have invested in various technology that ends up underused or not used at all.

They key is to give a close and hard look at all your software and applications, then determine what stays, what goes, and what can be combined.

Check out one of our blog posts on back-office technology mistakes RIA should avoid.

Stop paying for manual and time-consuming work

Download our Automation Guide for RIAs.

Many firms pay their employees to do the same mundane processes over and over again

Producing reports, entering and aggregating data... anything manual and highly repetitive can be automated and done at a lower cost. Firms like Empaxis have a long history of helping RIAs automate their workflows.

If you have a bunch of highly skilled staff with CFP and CFA licenses in hand, they should be doing more than basic tasks.

2. Increase revenue-generating capacity

Serve existing clients well

When looking at revenue growth, consider serving your existing clients as well as you can. 

Keeping clients longer will keep those revenue streams flowing, and those happy clients will be likely to refer new clients to you.

It's often easier to generate revenue from your existing clients than it is doing cold outreach or expensive marketing campaigns.

What's more, asset gathering is easier when clients already want you to manage their money, and they'll be more open to whichever new investment products or services you want to offer.

Improve investing acumen

Given surging inflation, volatile markets, and an economy on the brink of recession, RIAs need to spend as much time as they can doing research.

Opportunities are out there, and financial advisors can seize those opportunities if they have enough time to find what and where they are.

As prices rise and affect consumer spending habits, these market shifts create winners and losers.

Oil, gold, and other commodities typically perform well in inflationary times, as do consumer staples stocks.

On the flip side, the "losers" would include consumer discretionary stocks. As consumers tighten their belts, they travel less, eat out less, and delay purchases on luxury items and less essential products. And cryptocurrency is as volatile as ever, shedding over $2 trillion.

Learn from history

Markets rise and fall, and understanding trends and human psychology will help you in your investment strategies, as economic conditions and government policies change.

Managing your emotions and that of your clients are very important. History has shown it pays to the stay course. Similarly, Warren Buffett once said to "be fearful when others are greedy, and to be greedy only when others are fearful."

If you and your clients have a long enough time horizon, trust in the fact that, historically speaking, the good investment years outnumber the bad.

And after every crisis, the markets have ultimately recovered to reach new all-time highs.

Give yourself more time

In many cases, advisory firms know what needs to be done, but the biggest issue is time. There are so many demands, but so little time.

Freeing up capacity to focus on investment research and strategy will improve investing acumen and ultimately revenue-generating capabilities.

Non-core tasks can be outsourced to third-parties that specialize in areas like operations, compliance, HR, IT, as well as investment activity in the form of an OCIO (outsourced chief investment officer).

In turn, you and your team have more time to focus on what you do best.

3. Perform a stress test

Simulate a worst-case scenario. For the sake of your organization, err on the side of mercilessly pessimistic for a good stress test.

  • What will happen if markets fall by x percent and remain depressed for a prolonged period?
  • What assets in your portfolio are most vulnerable in these worst-case events?
  • What are your hedging strategies?
  • How will these events impact revenue streams and ultimately payroll?

Cybersecurity and compliance

Identify other weak links in the organization. Consider risks related to cybersecurity and compliance, which also affect bottom lines.

  • Are there any vulnerabilities in your systems, in which clients' personal and investment data can be compromised?
  • What do you have in place to prevent hacks and breaches?
  • Should anything be lost or compromised, do you have a way to recover the data?

Cybersecurity isn't just an IT problem, as we mentioned in one of our previous posts. Staff members all must play their part in following security protocol.

As for compliance, continue adhering to all industry standards:

  • Promote good governance.
  • Be transparent with clients; do not let conflicts of interest threaten your good standing.
  • Properly disclose accounting practices and company finances, both within the organization as well as with regulatory authorities.

A worst-case scenario will expose these weaknesses within the organization, and by then it's too late. Now is the time to find solutions to all at-risk areas.

4. Save up when the going is good

Just as RIAs advise clients to save, especially in their peak earning years, RIAs should do the same when riding the waves of a bull market.

Hopefully they learned lessons from 2008, saving up during the record 11-year bull market run or post post-March 2020 crash up until this year.

Not only do savings allow firms to weather prolonged periods of losses, but having cash reserves also allow them to purchase assets at discounted prices. That is the time to be "greedy."

And even if this news is "too late," be ready to save for the next bull market run, because another crash or correction will occur, as they always do.

Stay financially healthy

2022 has been a bumpy ride thus far, and the way the markets and economy have reacted are a stark reminder on the need for RIAs to maintain good financial health.

Just as your clients are advised on their finances, advisories must also maintain good finances for the organization.

By cutting costs, increasing revenue-generating capabilities, performing stress tests, and saving up RIAs will be well positioned for the future.

Don't be the zoo that builds its walls too low. Don't underestimate that tiger's ability to jump right over.

Build your financial sea wall high enough to weather those once-in-a-century storms. You'll thank yourself several times over.

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