Ax is still falling at advisory firms

Late last year, CLS Investments LLC and RegentAtlantic Capital LLC began laying off employees in anticipation of a drawn-out revenue slough. The layoffs were painful for the firms, but the two may well have been in the vanguard. Despite the second-quarter market jump, many advisory firms are struggling, and few financial advisers expect a return to prosperity anytime soon. Investment bankers, custodians and others who work closely with registered investment adviser firms say that many advisers are only now reluctantly addressing the issues tackled by CLS of Omaha, Neb., and RegentAtlantic of Morristown, N.J. “Until recently, advisory firms were in shock, or lethargic at best, hoping the markets would get better and lift revenue,” said Paul Lally, president of Gladstone Associates LLC, a Fort Washington, Pa.-based mergers and acquisitions boutique for middle-market RIA firms. “They're now coming to the realization that they have to adjust their businesses to a new environment.” CLS, which manages the AdvisorOne group of equity mutual funds, sold largely through independent broker-dealers, has fired 12% of its staff, or about 10 people, in three rounds of cutbacks since last October. It has 55 employees today. “We started early last October, did a little and hoped we could stop, but we didn't understand the severity of the decline and had to come back with more,” said Todd Clarke, president of CLS, part of the NorthStar Financial Services Group LLC in Omaha, which was founded by his father. “We had to make cuts to remain profitable.” The firm, which has about $3 billion of assets under management, spent $6.83 million on employee compensation and benefits last year, according to the firm's ADV filings with the Securities and Exchange Commission. The cutbacks, along with benefit and salary reductions, are expected to save $1 million in annual overhead, Mr. Clarke said. “I think we reacted sooner than many other firms,” said Jennifer Papadopolo, the chief operating officer of RegentAtlantic, which has about $1.6 billion in assets under management and a staff of 39 after cutting about seven professionals through layoffs and attrition in late 2008 and early this year. “You can cut seminar budgets and other things, but at the end of the day the biggest cost savings come from layoffs and freezing salaries.”

TAKING ITS TOLL

With revenue dependent largely on assets under management, the sharp decline in asset values has taken its toll. Total assets managed by SEC-registered advisers fell 19.6%, to $34 trillion at the end of April, from $42.3 trillion one year earlier, according to a forthcoming joint study from the Investment Adviser Association in Washington and industry vendor National Regulatory Services of Lakeville, Conn.
“Six months ago, there was little to no talk about cutting staff. Our firms are now talking about significant staff reductions to achieve the revenue and profit necessary to run their businesses,” said Brian Stimpfl, head of adviser advocacy at TD Ameritrade's custody unit for RIAs. “Anecdotally, we know that firms have been making staff cuts, some of them fairly severe,” said David Tittsworth, executive director of the IAA, a trade group of SEC-registered advisers with $25 million or more under management. The group's membership ranks have dropped to about 455, from 520, in the past six months. Few advisers expect a return to prosperity anytime soon. “There may be a little more optimism, but nothing has changed,” said Robert DiQuollo, president of Brinton Eaton Wealth Advisors in Madison, N.J. In April, the firm laid off two employees — including a financial planner — the first cutbacks for financial reasons since its founding in 1988. Brinton, which employs 15 people, also has cut bonuses, frozen the salaries of its four partners and is hoping that it doesn't have to cut benefits and will have profits to distribute, Mr. DiQuollo said. RegentAtlantic is similarly uncertain of what remains to be done. “We hope we're done [with layoffs], but we don't know what tomorrow will bring,” Ms. Papadopolo said. “In the past, we were pretty certain of how things would be quarter to quarter, but we don't have that anymore.” Matt McGinness, principal of Best Practice Research, a San Diego-based consulting firm, said he knows the founders of several small advisory firms who took pay cuts in the range of $50,000 to avoid trimming staff. But he doesn't think that that can continue. “Layoffs are becoming inevitable,” Mr. McGinness said. “There a lot of principals who have ratcheted back so much that they feel like they are back to the early days of their practices.”

ADDING TO THEIR RANKS

To be sure, many advisers remain reluctant to impose layoffs at a time when they are focusing more strongly on retaining clients and winning new ones. “They really can't afford to let people go, because they can't afford to lose clients,” said Scott Slater, a managing director of business consulting at The Charles Schwab Corp. of San Francisco. “They also recognize they have to add new clients, and need the capacity to do it.” And some advisers also see opportunity to add to their ranks. “This is a remarkably good time to find good people,” said John Morris, a managing partner at Crestwood Advisors LLC, a Boston RIA that has seen its assets under management grow to $450 million, from $265 million two years ago. Crestwood is recruiting an equities analyst, he said, and has received a “torrent” of résumés from people who previously “would never have considered coming to a boutique firm.” Mr. Morris' RIA has nine employees, up from seven a year ago. But Jon Jones' story may be more typical. The co-founder of Brighton Jones LLC in Seattle said at a conference sponsored by Fidelity Investments of Boston in late April that Brighton had cut staff by 25% to 32 people and was debating whether it would have to cut pay. “We're trying to keep it light” for the remaining employees, he said, by taking such actions as delegating someone to be “chief fun officer” and ringing a bell every time the firm brings in a new client. Mr. Jones didn't return a call seeking further comment. E-mail Jed Horowitz at jhorowitz@investmentnews.com.