Preparing your advice firm for recession

Earlier this month the Bank of England warned the UK is staring down the barrel of its longest recession in modern times, predicting it will last the duration of 2023, plus the first six months of 2024. 

As a refresher, recession becomes rubber stamped once a nation’s Gross Domestic Product (GDP) declines for two consecutive quarters. The Bank of England defines GDP as a measure of the size and health of a country’s economy over a period of time, which is usually one quarter or one year. 

The economic outlook has been gloomy for some time, largely due to the worsening cost of living crisis. The recent tax cuts proposed within the government’s September emergency mini-Budget, and subsequent reversals just weeks later by new chancellor Jeremy Hunt, have exacerbated this uncertainty. 

As such, owners of financial advice practices will be weighing up the potential impact on both them and their clients. Here we examine the challenges a recession can bring and outline how to handle them.

How might recession affect advice firms? 

Your business can be affected in several ways:  

• Consumers tend to have less money to invest  

Given a key characteristic of recession is job losses, less of the population will have money to commit to their long-term goals. For those out of work, any money held in short-term homes may be needed to support them financially until employment is secured. 

But reduced financial capacity isn’t limited to those who lose their jobs. The recent spate of interest rate rises is hitting homeowners where it hurts. With mortgages significantly more expensive than they were this time last year, the resulting higher repayments are absorbing a bigger chunk of household income.  

To avoid plunging into debt, consumers will need be more frugal, leading to lower sales, and ultimately smaller profits for businesses – including those providing advice services. 

• Fragile consumer confidence 

A further hallmark of recession is falling asset prices. Stock markets have been hit hard this year with 2023 set to be equally challenging. House prices have remained buoyant of late despite the uptick in interest rates. But there are signs that the market is starting to slow, with many experts predicting valuations could witness falls of up to 30 per cent over the next year or so. 

Although lower stock markets present an opportunity for investors who are prepared to play the long game, consumers tend to be warier about ploughing cash into equities when stock markets are unstable. 

• Lower revenue streams 

Falling markets can also directly impact advice firms’ revenue streams. The most popular method of charging ongoing advice is as a percentage of client assets. The downside here is that whenever markets drop, client portfolio values follow suit, resulting in lower fee revenues for advisers who adopt ad valorem fee structures.   

Clearly, this will correct itself once stock markets recover, but depending on the severity of the recession this could take several months, or perhaps even years.  

During most recent recession, which occurred at the start of the pandemic in Spring 2020, while the FTSE 100 dropped to below 5,000 points, the rebound was swift. However, as mentioned above, the consensus is that this time around any recession is likely to be longer and more painful. 

How can you manage these threats? 

While we cannot predict how the UK economy will be shaping up in six to 12 months’ time, getting ahead of the game can help you avert any nasty shocks down the line.  

So, let’s examine some things you could be doing now to shield your business from what could come. 

1. Build cash reserves 

Many of the basic principles of financial planning can also be applied to your business.  

Consumers with a sufficient emergency fund at the start of this year will have felt less nervous about the impact of rising prices on their finances. 

The same can be said for businesses. Keeping sufficient cash reserves can not only protect your business from any financial pressures, but also provide the funds to seize any investment opportunities that may arise. 

1. Communicate with your customers 

For many advice firms, retaining existing clients is more important than finding new ones, given they often provide the bulk of your annual fee revenue.  

What clients typically value most from advice is having direct access to a trusted financial expert when times are hard. The pandemic offers a pertinent case in point. Advice firms were swift to harness video technology such as Zoom and Teams to provide much-treasured reassurance to their clients. Other tech like client portals were equally pivotal to this.  

Communicating effectively with your customers during a recession will not only help you retain their services, but also increase the possibility of new client referrals. 

1. Secure the right new business  

When revenues are falling, it’s easy to panic and attempt to balance the books by frantically topping up your client bank. 

But as you know all too well, not every customer is right for your firm. We’re hearing more and more about the importance of clients being the right cultural fit. 

In addition, every advice firm only has so much resource. Having too many clients on the books could result in your services being spread too thinly. The key is to remain focused on attracting clients that you can build a long-term relationship with, rather than seeking out quick wins. 

1. Keep on top of cashflows 

Maintaining solid cashflows is important in any stage of the economic cycle, but extra attention should be applied during a recession. 

Making sure that debtors pay on time can be more challenging when money is tight, so it’s essential to keep tabs on exactly what is owed, and when it’s owed by. This will avoid landing you in the unenviable position of being unable to pay any staff or suppliers. 

Technology is your friend here. There are tools that can help you manage your cashflow effectively, enabling you to spend less time chasing payments, and more time seeing your clients. 

1. Support staff wellbeing 

Your clients might not be the only ones seeking reassurance; your staff possibly will too. 

The unsettling nature of recession can affect staff perception of job security, which can affect their wellbeing. 

It’s therefore important to ensure your employees are offered the support that they need to cope, whether this means access to wellbeing services or a more flexible working arrangement. 

Maintaining good morale across the workforce will help steer your business through the financial instability. 

Preparation is key 

Taking the right steps now will ensure that your business is best placed to cope with the perils that may lie ahead. By preparing diligently, the next 18 months could prove an opportunity rather than a threat.  

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