NEW YORK - Many financial advisers are feeling extremely guilty for failing to protect their customers from the 30% equity drop in 2008, but it will take more than remorse to earn clients' forgiveness.
As stocks tumbled off a cliff in early October, advisers reassured worried investors to stay in the market and to invest for the long term, while reminding them that selling at the bottom meant locking in losses. They repeated this widely held mantra again in January, February and March as stocks continued to search for a new bottom.
Even though the huge, unexpected market drop was not their fault, advisers feel they've let their customers down, and many are uncertain about how to move forward.
"A lot of advisers are questioning what they've been doing for the last 40 years," Misty Ford, director of business technology at Russell Investments, said at a session last week on financial advisers in transition, hosted by AccessData. "They are feeling guilty that they haven't kept their clients safe from risk."
This guilt has taken on many manifestations. Some advisers are too ashamed to call investors to explain what happened. Investors, in turn, are feeling rejected and ignored.
"Eighty-two percent of investors say they are not satisfied with their advisers," Ford said. "They are questioning their adviser's every move, and now advisers are questioning their own moves."
This cycle of loss, hurt and rejection has started a game of adviser musical chairs, with a large number of investors switching advisers and a corresponding number of advisers switching firms. The fact that nearly everyone got it wrong is not as important as eliminating the stigma of broken trust.
"There is a dramatic amount of movement going on in this space," said Nicholas Stuller, president and CEO of financial information provider Discovery. Stuller said that from November 2008 to the end of April, 5,901 registered representatives left their companies, and nearly two-thirds of them (3,845) went to another wirehouse.
But simply creating new relationships just to put the trauma of the past behind them won't solve the industry's or investors' problems, particularly if they don't learn from their mistakes, Stuller said. Advisers and wholesalers will have to change the way they do business if they want to succeed in the post-recession aftermath.
Most asset managers are waiting for the financial storm to pass by anchoring in safe harbors, said Steven Miyao, CEO of kasina. They are cutting costs, holding off on long-term investment projects and fighting off bad press, he said.
"Once the storm has passed, they are hoping to go back into the same waters," Miyao said. "The storm will pass, but the water, winds and currents will be very different. Firms will have to build a new vessel to succeed."
For one thing, assets are not going to recover quickly. Even at an 18% annual rate of return, it would take stocks at least five years to return to 2007 levels, Miyao said.
"Most firms are still on the same path as before," he said. "Profitability will stay low for a long time unless we change how we do business."
The large consolidations and mergers of giant companies such as Morgan Stanley Smith Barney, Bank of America Merrill Lynch and Wells Fargo Wachovia have resulted in a lot of double exposure, Miyao said. These super firms are interested in maximizing their own profits and will use centralized investment decision making to decide which products will stay on their platforms.
"There will be a huge overhaul of all product offerings, and a lot of firms will lose assets," he said.
Large distributors will be looking for a combination of small, boutique firms that provide high alpha, even while charging high fees, as well as global players that offer plain-vanilla, utility products at lower fees, Miyao said.
"Only large providers will have the scale to provide those services," he said.
When the dust finally settles from the financial fallout, the landscape will have changed so much that everyone will need to reassess the way they do things.
"In this environment, where the money's not flowing in, it's a huge problem," Stuller said.
Wholesalers and advisers have been trained to do things a certain way, but they will all have to be retrained, he said.
"It's all about execution," said Mary Anne Doggett, co-founder and managing partner of the New York-based sales consulting firm Interactive Communications. "If wholesaling doesn't find a new way to do execution, they're going to be left behind. Wholesalers will have to reprogram."
There is a general feeling that wholesalers should instinctively know how to adapt, and some of the really good ones already have, Doggett said, but the rest will need help. A lot of wholesalers are too concerned with making the sale of the day to look at the bigger picture.
"Wholesalers need to ask their customers, 'What is your business problem or issue?'" Doggett said. "In many cases, it's probably different than it was six months ago."
Large data providers continue to gather new intelligence, but all that data is useless unless it can be turned into relevant, actionable information, Ford said. One of the biggest challenges with having access to so much information is making sure the right people get the relevant data when they need it.
"What do people want to know?" she asked. "The whole business strategy has changed. Businesses are downsizing." A year ago, the emphasis was on breadth and growth, but now it's shifted to focus and retention strategies, she said.
"We need to help advisers have those hard conversations with clients," Ford said.
"Wholesalers need to have better conversations and more face-to-face meetings with clients," Doggett said. "They need to figure out what's changed and how they can continue to provide value. The handful of firms that really get it will take off like wildfire."
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