How 2016 Can Be the Year of the Advisory Business

Written by: John Anderson

This article originally appeared on SEI's Practically Speaking Blog.

A few weeks ago, the SEI Advisor Network polled advisors around the county, asking for their New Year’s resolutions . In some cases, the responses were predictable. In others, it was very telling about the mindset of today’s independent advisor.

What we already knew

It was no surprise to me that one of the top advisor resolutions was to grow their businesses in 2016 by increasing their referral networks. In fact, every year we have done this survey, I think “grow by referrals” is the number one or two resolution. What I find interesting is that this correlates with the personal resolutions that most of us make. This year, advisors also listed losing weight as the top personal priority – a resolution that I would bet they don’t keep, either.

Building a referral network is hard and takes a long time (as is losing 10-20 pounds or more). It takes commitment, focus and effort – but more importantly, it takes a plan. Many advisors create full financial plans to help clients achieve retirement or education goals, but do little planning for their own business for growth.

Since this is the first week of the New Year, why not change your resolution? Resolve to create a plan to grow your referral network then execute. Work with your personal trainer (wholesaler, coach or practice management specialist) to keep you motivated and on track.

Pessimistic, realistic – or both?

As you start to dig into the survey results, some interesting trends begin to emerge. Throw out the standard “lose weight” and “referral” resolutions, and I think you get the picture of advisors who are worried about their business and coming volatile markets. Advisors told us they are going to increase the use of managed volatility products to help weather ups and downs in the markets, increase the use of goals-based investing, and implement better workflow systems. In other words, what advisors are saying is:

The markets are going to be volatile and I want to potentially assuage client fears with a low beta equity approach.

By adapting goals-based planning and investment solutions, I can tap into behavioral finance and help my clients focus on goals, not the noise of the markets and the media.

The more I adopt workflows (especially if integrated into my CRM), I can increase efficiency and potentially profitability, which will be important if gross revenues are down due to a flat or negative market.

While I don’t think that these advisors are predicting doom and gloom or a repeat of 2008, I think they are being realistic; 2016 could be a difficult year to manage investor behavior. If advisors are smart – and I think they are – they are trying to get ahead of the curve and help mitigate the emotional responses of their clients. And while I agree with the advisors in the survey, I don’t think it is a time to be pessimistic. In fact, this may be the single best opportunity in years to really grow your firm.

The optimistic advisory business

Every year, when PriceMetrix puts out its “The State of Retail Wealth Management” report, one of the first things I look at is the growth of the average advisor versus a simple 60/40 (S&P/Barclay’s Aggregate) benchmark. As far back as I can remember, the average advisor’s growth was at or below the benchmark – which means that the advisor’s growth was almost completely due to the market’s appreciation. If this trend holds true and next year we have a down market, most advisors will see no growth in AUM or revenue for 2016.

So the question is, what are you going to do about it?

I have mentioned before that there is a difference between an advisory practice and an advisory business. Here is what I expect for each in 2016:

The advisory practice will see choppy markets and emotional investors (whose natural reaction will be to circle the wagons). The practice will fire off a letter or two, maybe send an email or possibly make a proactive phone call to a client. It will bemoan the economy and politicians and agree with clients who want to “try something else.” Then, the practice will “tighten their belts” with regard to expenses, and limit their client contact (as they are fearful of questions that they can’t answer), while waiting out the markets.

The advisory business sees change as an opportunity to grow, and meet more prospects who can use their services (today). The business will be proactive with messaging around strategies that can reduce portfolio volatility. It will use goals-based planning and investing to manage client behavior and align itself with how clients actually think, instead of trying to talk about standard deviation or alpha. The business will market and ask for referrals, as unstable markets create questions in the minds of prospects. The advisory business will see an increase in activity, with new clients and prospects.

What is your resolution (for real)?

If your peers are right about 2016, it could be a great time for an advisory business, and a bad time for an advisory practice. What type of business are you running? There is still time to decide.