For more than a decade, the financial planning profession has enjoyed strong stock market returns, which has led to firms growing and hiring at an impressive clip and posting record increases in profit, revenue, and assets under management. This explosive growth obviously could not continue indefinitely, though, due to the cyclical nature of the stock market.
So how should firms approach their human capital planning, now that we are transitioning into times of market turbulence?
For firms that have been struggling to attract talent and hire top performers, this can be a great time to build out your dream team, as some firms did in the 2008-2009 downturn, as difficult times mean even great future team members may be looking for (or forced into seeking out) new opportunities.
Here are some things to keep in mind so your firm can capitalize in a turbulent market environment…
- Less competition for talent – One of the most significant challenges even good advisory firms have faced over the last decade is trying to find “A” players to join their teams and serve clients. Many consider their offering to be compelling, but due to the success the firms have garnered and growth of the profession, there are many other good firms hiring as well to try and keep up with the rapid pace of growth. When candidates have their choice among many different firms all offering compelling career opportunities, it is more difficult to land that high performing candidate… especially when there are not enough candidates to begin with in the first place!
Even though firms say it is a last resort once revenue starts to fall, some will react by enacting cost-cutting measures such as hiring freezes, and potentially even reducing the size of their team. This can work in product-based businesses, but not as well in a service based business, where demand from new and/or existing clients can actually increase substantially when markets are down, and enacting freezes and staffing cuts puts even more pressure on the existing team to handle the additional workload.
Firms employing an asset-based fee model that are not being managed well (i.e., didn’t have healthy profit margins as a buffer against a downturn) will begin to feel the squeeze first. For the best managed firms, who have built up healthy cash reserves over the last few years, or run at healthier (e.g., 20%+ profit margins), temporarily declining revenues in a bear market aren’t necessarily a cause for instant panic, and don’t have to take quick drastic actions to reduce expenses. Especially since client assets are typically invested into well diversified portfolios that should not have a commensurate reduction in value compared to the actual market decline (i.e. market declines 25%, but client portfolios and revenue “only” drop by ~10-20% as an average across the entire client base).
Accordingly, for some firms, this could be an ideal time to double down and invest back into the business and team even more, since talent/people/advisors themselves are the largest asset at a firm’s disposal for calming client nerves, updating financial plans, and handling service requests when many investors are spooked because their accounts are down. For firms that have moved away from the asset-based pricing and into project and retainer fees, a market downturn will have even less effect on revenue (but only as long as the firm maintains sufficient service levels to prevent clients from outright leaving!), thus creating a unique competitive advantage for these firms who have mostly insulated themselves from stock market gyrations.
- Larger talent pool – When fewer firms are hiring, it means more available candidates for the remaining hiring firms to choose from. In addition to this, there are other factors that lead to a larger potential candidate slate for a firm to hire.
Some firms that have not been managed as well will lay off people to reduce costs, and these experienced team members will look for other firms to join. Some candidates will resign voluntarily if they do not have confidence the firm’s leadership will navigate through the downturn successfully. Others will look for new/better opportunities because their compensation has been reduced as another cost cutting measure enacted by their employers. The last time we saw this was in 2008-2009, when the supply of high-caliber candidates outweighed the demand in most of the major talent markets.
While some candidates certainly will be concerned about their ability to earn an income and would not consider making a move during uncertain times, there is a large percentage of job seekers who were happy when everything was going well, but are much more willing to consider a move when industry-wide disruption is present.
It will be interesting to see how it plays out, but based on what some of our clients have told us to prepare for and the overall struggle by a lot of firms over the last few years to attract talent to their firms, expect some firms to increase their recruiting and hiring during this time. It is possible that demand for planners will shrink to levels causing prices for talent to come down, thus a timely opportunity for a firm to hire in someone at lower prices than a few years ago. Realize though, be careful lowballing candidates, no matter how desperate they may seem, as this can sow problematic seeds with your firm long after the market recovers, and is not a reputation your firm wants to have for its hiring future.
- Client service standards – Successful service firms have one thing in common, which is that they take great care of their clients. This is evidenced in the low attrition rates and high referral frequency which best managed firms often cite about their clientele.
In times of turmoil, clients need you more than ever. I always ask people I meet who work with a financial planner what it is that they appreciate the most about their professional, and usually at the top of the list is something like ‘the fact they are watching out for me and get me through the tough times.’ This is the time to show them how valuable a trusted advisor can be by preventing them from making unwise decisions based on sound bite headlines meant to stir emotions for increased clicks for advertising purposes.
However, during these periods, clients need a lot more time and attention versus when the markets are calm and climbing - so even if you didn’t hire anyone, your team will be experiencing a higher workload than normal. Assuming you have the right team, they will expect this and be able to meet the challenge most likely.
Still, though, firms that know increased workload, longer hours, and overall higher stress levels can lead to burnout, lower morale and turnover, anticipate and take preventive actions that solidify culture and build strong loyalties that will be present even after the market recovers.
We hope you will consider these recruiting and hiring tips and ideas as you find yourself making decisions for your firm in what can be very stressful times as an entrepreneur and firm owner.
But the bottom line is that best managed firms tend to practice what they preach, and in this case follow the advice that they are giving to their clients: 1. Don’t make any drastic decisions based on emotion, 2. continue to invest, 3. stay the course and, 4. view this is a buying opportunity.
We encourage you to keep this mindset too as you move your firm forward, too!