InvestmentNews: Three ways volatility diminishes the value of your firm
With the much-anticipated return of market volatility comes a reckoning: What happens to the value of firms where growth was almost entirely tied to an ascending market?
If volatility sticks around for a while, or if there’s a crash, firms that aren’t prepared to adapt may find their survival is in doubt. In his latest bi-monthly exclusive for InvestmentNews, Allworth Co-Founder Scott Hanson explains what advisors should do to evolve and steel themselves, and the value of their firms, against the possibility of a prolonged market decline.
From the article: Three ways volatility diminishes the value of your firm
After red hot returns for the broad US stock market last year, 2022 has gotten off to a rocky start. That’s why, when it comes to the value of your firm, having the right strategy, and doing an exceptional job of implementation, is the real differentiator between growth and decline.
Market corrections typically impact a firm’s value in three ways: a decline in profits, greater client attrition, and something I call, the “Guru” effect.
Let’s start with the Guru effect because it’s the least intuitive. The Guru effect is the perception clients have that their adviser is a brilliant investment manager and market timer, and less so an overall financial, tax, and estate planner.
But studies have shown that most Guru advisers don’t achieve superior returns. In fact, they typically enjoy lower returns than an index or passive strategy. When the markets correct, lower returns result in a decline in AUM and, as a result, lower fee revenue.
But when it comes to firm values during a declining market, Guru asset management may be secondary.
Scott Hanson, Co-Founder, Allworth Financial