Financial Health for RIAs: Staying Prepared to Weather All Storms

RIAs extoll the virtues of good money management to their clients, but what about the financial health of the firms themselves?

We're not out of the woods just yet with the pandemic, and a full economic recovery will take years. Meanwhile, the S&P 500 hit a record high to start September.

Unless you are shorting, it is nice to see that markets have more or less recovered since March.

But this year has shown nothing is certain. Will there be another dramatic drop? How much volatility can RIAs stomach?

Just as advisories help clients maintain their financial health, RIAs must practice what they preach by managing company finances wisely.

Financial Health Tips for RIAs

Save Up When The Going Is Good

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

Although the crash in March put advisory firms and their clients on edge, the market recovery has been swift.

But if there were major financial concerns during the crash, then this should be a lesson to advisories on the importance of saving in good times.

After all, who knows how "forgiving" the markets will be the next time around?

Depending on how long you've been in the profession, you have experienced the stock market crash in 1987, 9/11, the 2008 financial crisis, and 2020, which needs no introduction.

Roughly every 10 years, it seems a new threat emerges. And just when you thought you've seen it all, you say, "I haven't seen anything like this in the x-years of my career," as you said in 2008.

If history is any indicator, another unprecedented event will happen. The key is to be prepared as much as possible.

Increase Revenue-Generating Capacity

When looking at revenue growth, consider the clients' interests first. Without the clients and their investable assets, there is no revenue to be had.

Think about new investment products and services that help them. If you demonstrate the value, the clients will want your offerings.

Also, look at ways to increase client retention rates. Keeping clients longer will keep those revenue streams flowing, and improving the client experience will help with retention efforts.

Likewise, reaching out to new market segments like millennials  and Gen Z will be helpful for revenue generation.

And one way to improve the client experience across these segments is by improving your digital offering. Our web-based TAMP1 platform, for instance, lets clients easily see their investment details in one place and they can communicate with their advisor through the platform.

Improve Investing Acumen

2020 is history in the making. Given the pandemic and the economic and social fallout, the world finds itself learning as it goes.

For investment managers, there is a lot to learn from everything going on.

Consumer habits have shifted dramatically since March, as a result of COVID-19 and subsequent lockdowns. The global economy took a hit, but some industries are thriving.

These shifts have determined market winners and losers. Some of the clear winners are tech, home delivery services, consumer staples, sanitation products and services, and gaming.

Some of the notable losers have been air travel, hotels, dine-in restaurants, large public entertainment venues, and countless other businesses that benefited from the open movement of people pre-pandemic.

Understanding consumer trends and human psychology as economic conditions and government policies change will help in your investment strategies. Forecasting the trends and timing your investments is paramount.

Learn from History

Learning from the past goes with out saying, and the lessons learned from this year will serve you well long term.

As we pointed out in an earlier post, stocks took a hit during the 1918-1919 pandemic, but the markets recovered shortly after. We've seen a similar replay of events since March.

Managing your emotions and that of your clients is another consideration. The markets may fall, but that doesn't mean you should pull out. If you're playing the long game, stay put. Of course, these decisions are contingent upon your clients' investment horizons.

Looking back at history, it underscores the importance of saving for various crises. What's more, having cash reserves when the markets head south grants RIAs the flexibility to purchase assets at discount prices.

Similarly, Warren Buffett once said to "be fearful when others are greedy, and to be greedy only when others are fearful."

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.

Eliminate Wasteful Spending

To maintain good financial health, RIAs need to cut unnecessary spending.

During the pandemic as firms work remotely, they have realized they are paying a lot for their legacy software, or they are paying for various technology that is underused or not used at all.

By upgrading to a cloud-based system that consolidates features and functionality, companies won't have to spend so much on various systems that don't always interact with each other. In addition, the companies will save money and be more efficient in the long run.

Also, some organizations might conclude they don't need all that office space they used to have. Firms could save a lot of money by downsizing or going completely remote. We wrote a blog post on the topic of office space to help RIAs decide what to do.

And as it relates to non-core, manual and time-consuming tasks, it makes sense to find third parties and automated solutions for these activities.

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.

Stay Financially Healthy

2020 has been anything but normal, 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 saving, increasing revenue-generating capabilities, cutting wasteful spending, and performing stress tests, 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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