As the dust settles in the aftermath of the third quarter, we take a look at several earnings calls from pace makers in the RIA industry. Changes in the character of the financial markets is driving change in firm business models, and out of this we see a few common themes that we expect will play a role in shaping the industry going forward.

Managing expenses and improving operating leverage in a time of revenue weakness, while trying to offset the increased cost of regulatory compliance with a greater reliance on technology.

• Now when revenues decline, we have one lever that is always painful but we’ve certainly done in the past and that’s headcount. And so as revenues decline we can remove people from the firm and probably will. But I think that you’d have to believe in doing that you’re still going to have a challenge in keeping your margin as revenues decline because your fixed expenses aren’t going anywhere. – Jim Gingrich (COO of AllianceBernstein)
• In a declining revenue situation it’s just hard, it’s next to impossible to – smartly to have expenses go down in line with revenue declines. […] We’re still working it through and you’re going to get a lot more color in terms of thoughts around guidance for 2016 on expenses at the next call. Just know that we’re very aware, we’re very tuned to it and we’re working hard to try to manage the expenses in light of this volatile market. – Loren Starr (CFO and Senior Managing Director at Invesco)

Movement towards more liquid alternatives, which had a great quarter, and provide an opportunity for portfolio diversification to offset volatility from an expected increase in interest rates.

• The fixation on the Fed’s next move and related speculation about the future direction of interest rates continues to roil the markets. It’s worth reiterating, in this environment that historically REITs have had virtually no correlation to interest rates and that fundamentals are strong and improving and valuations are attractive. – Bob Steers (CEO of Cohen & Steers)
• The flows in our retail channel look to be improving as inflows to alternatives and global and emerging markets equities are offsetting our US equity outflows which are slowing. – Nate Dalton (President and COO of Affiliated Managers Group)

An unprecedented opportunity for RIAs to make a name for themselves during a period of extreme volatility and market divergence.

• Periods of market dislocation and falling stock correlations provide the best active equity and alternative managers with opportunities to distinguish themselves. – Sean Healey (Chairman and CEO of Affiliated Managers Group)
• We think that volatility, rising rates are good things for our business, and that this liquidity-driven six year, everything rises up marketplace will change in a more volatile market. And the active manager can take advantage of volatility – Greg Johnson (CEO of Franklin Resources)

Redirecting focus towards the United States as global volatility presented a challenge to international investors in the wake of Asian market declines.

• Europe is rebounding a bit, but Asia volumes remain low. We are finding that our clients still want our research, but are not as interested in trading in Asia stocks. That’s the beauty of having a global business. We can trade leadership around regions. Last year Europe and Asia were greater growth drivers for the U.S., for us and this year it’s the U.S. and trading is making an overall greater contribution to result than it did last year. – Peter Kraus (Chairman and CEO of AllianceBernstein)
• Most of the weakness came in August, as an unexpected devaluation in China’s currency and concerns over global growth continued or contributed to the selloff and risk assets and a sharp spike in market volatility. […] The U.S. dollar has strengthened considerably in recent years and that’s provided a strong headwind to U.S. investors in emerging markets, which we do not expect to be a significant factor in the years ahead. – Brian Casey (CEO of Westwood Holdings Group China)
• Concerns regarding China’s growth prospects around commodities, especially energy and the potential knock-on effects in emerging economies, all weighed heavily on the capital markets or especially equities. – Bob Steers (CEO of Cohen & Steers)

And finally, dispelling concerns over the effects of a rising rate environment on portfolio performance.

• I think that’s a dynamic that is less understood, certainly in the media, when they just view rates moving up and everybody trying to move out. I don’t think that’s the case. – Greg Johnson (CEO of Franklin Resources)
• We feel quite comfortable that our product will perform well under sort of a rate hike increase. But people are skittish at this point, and generally the market is skittish about that one topic overall, which is keeping people a little bit off side. – Loren Starr (CFO and Senior Managing Director at Invesco)