One Thing RIAs Can Count on in This Anxious Market

“If there’s a pyromaniac out there, you don’t cut the fire department funding levels.”

Cole Burston/Bloomberg

Cole Burston/Bloomberg

Much is uncertain right now.

The novel coronavirus continues to spread, keeping borders and businesses closed indefinitely. As of Friday afternoon, there were more than 561,900 global confirmed cases and at least 26,161 people have died, according to a New York Times database.

Even if the outbreak turns a positive corner soon, economists expect a recession will be part of the pandemic’s fallout. Since the number of cases in the U.S. began swiftly rising, markets have been as volatile as they were during the global financial crisis in 2008 and plunged into the fastest-ever bear market.

In response, the Federal Reserve restarted quantitative easing and lowered its target interest rate range to between zero and 25 basis points earlier this month, to the detriment of some companies that advisors rely on, including custodians.

Morningstar estimates Charles Schwab’s 2020 revenue will fall by $1 billion, or 9.2% year-over-year, to just over $9.7 billion. It estimates adjusted net income will fall 28% year-over-year to $3.8 billion. In a potential negative rate environment, KBW estimates that earnings per share at Schwab, TD Ameritrade, E*Trade, and Interactive Brokers, could fall by between roughly 30% to 60%.

To offset lower revenue, the discount brokerages could cut expenses by 10% and make other changes to better their businesses, according to KBW. But where will those cuts take form?

Despite all the other uncertainties, RIAs can count on one thing: Advisor services from the custodians should remain intact and be sustained through whatever lies ahead.

There are “considerable opportunities to add value to their client firms by increasing service and support levels and remaining flexible during the crisis,” according to a new report by Aite Group, a research and advisory firm focused on financial services.

Regardless of its causes, market turmoil leads to heightened investor anxiety and an increased interest in financial advice. Overall, that’s a good thing for the wealth management industry. But those periods are stressful for advisory firms, which become more reliant on the businesses that support them.

If custodians and other companies compromised their level of service in troubling times to cut expenses, that could prompt RIAs to seek a new one, Greg O’Gara, a senior analyst at Aite Group, told RIA Intel.

“It’s not an area where I would be cutting resources. If there’s a pyromaniac out there, you don’t cut the fire department funding levels,” O’Gara said.

In fact, the research firm recommended the opposite in its recent report highlighting challenges and opportunities for financial services firms: Custodians and other service providers should consider, if they can, investing in and improving their businesses.

“Vendors that step up to the plate over the next few months have an opportunity to develop deeper client relationships, build trust, and articulate and evolve their value propositions under adverse circumstances. Custodians that have been criticized for their service models have a unique opportunity to erase prior missteps—if, and only if, they increase client support,” the report says.

There are other places companies can immediately lower expenses, such as sales-oriented roles, O’Gara said. He is adamant that any harm to customer service would be a bad move.

“You’re setting a precedent here. If you step up to the plate you’re going to make a lot of friends. If you don’t, you’re going to lose business. A lot of business.”

Discount brokerages and other companies that lean on interest rate-related revenue aren’t the only ones feeling the down market. RIAs, which typically charge clients a fee based on a percentage of value of the assets they manage, will also see their revenue fall, profit margins thin, and might resort to cost-cutting.

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