Emotional Rescue

The variation of returns generated among domestic and international fixed income, equity, and real estate markets during the prior six months should serve as the proverbial “shot across the bow’ for many financial advisers and their firms. The gyrations of these markets have been unsettling to retirement plan sponsors, plan participants, and the general public. Yet, is it a surprise that these fluctuating markets are of such great concern to the retirement plan adviser? Is that normal? Should the “movement” of a portfolio have such a grip on the adviser?

Removing Emotion from Portfolio Management

Advisers regularly extol the virtue of their personal and professional education, training, and experience, each of which theoretically contributes to an adviser’s ability to remove emotion from every investment decision. More often than not, and based upon what many advisers preach to prospects and clients, advisers believe that they are in a position to extricate themselves from the emotion of any investment decision, and the day-to-day roller coaster ride of the markets. The pitch can go something like this: “Being removed from the impact of the investments places our firm in a better position (than the plan sponsor) to make investment recommendations to you and on behalf of your plan. We remove the emotion.’

That can be an accurate statement—to a point. As it is described, the adviser should be in a position to crunch the numbers and observe the movement with an objective critical eye, but what has been missed?

When Does Emotion Get Introduced?

Few plan advisers are facing growing revenue projections for 2009 and even fewer are the number of advisers who are enthusiastic about the coming year. The reasons are diverse, but also easily identified: Clients who are normally gregarious have become cantankerous; client contact and resulting conversations over the recent six months have increased in the range of 20% to 30%; and client-account workloads have not diminished. At the same time, those advisers who rely on asset-based fees are looking at a 25% to 40% pay cut.

When most individuals (regardless of the industry) learn that their compensation has been reduced by double digits, there is a reaction. When an adviser realizes he needs to budget a substantial revenue loss for the subsequent 12 months, that reaction is not devoid of emotion. In fact, there is a significant amount of emotion that manifests itself in a variety of ways (budgeting a 5% negative change to the payout grid will cause some advisers to become emotional—or go ballistic).

A nonadviser might consider 5% to be a small change. Most advisers would not agree. Consider the emotional impact of a single account that suffers a 30% asset-based loss. Multiply that by the number of accounts that the adviser oversees, and one quickly can place a figure on the “uncontrollable risk” that asset-based pricing introduces to the adviser’s future revenue stream.

Can the Adviser’s Revenue-Stream Risk Be Smoothed?

Regardless of business model or fee structure, an adviser must know the amount of time and resources that each of his client relationships consumes. If, due to shrinking asset values—or other factors, for that matter—client portfolios/relationships are no longer profitable, the adviser must make an informed decision as to how he will proceed with each and every client. Options might include charging a “flat fee” or “per-participant fee” for unprofitable accounts. Consider instituting a “minimum fee” for every client relationship so your working hours are not consumed with clients who cannot supply you with a sufficient margin. Certainly, the revenue stream can be smoothed; however, be cautious when doing so, as it could result in lost opportunity when the markets head in the opposite direction.

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.