The second quarter has just wrapped up. It's after the closing bell on the first Wednesday of what many analysts believe will be a tempestuous round of earnings announcements. But Ron Kruszewski, the president and chief executive officer of Stifel Nicolaus, is bullishly calm. Surrounded by a whirlwind of uncertain economic forecasts, Kruszewski stands in the green, literally.

"I just got my first hole in one!" he announces over the phone from a golf course in Stifel's headquarter city of St. Louis.

In the first half of the year, quarterly statements of many large firms contained a heavy dose of anxiety. Cautionary terms such as "challenging markets," "economic uncertainties" and "difficulty turning the corner" have cropped up in the shadow of Eurozone troubles, a major election year and an impending fiscal cliff.

Despite that triple threat, Kruszewski remains optimistic, confident in the long term strategy. While some firms trim salaries to boost profit margins, Stifel Nicolaus has been ramping up recruitment efforts by taking advisors from larger wirehouses. The downturn, Kruszewski believes, is temporary, lasting only a year or two, and he is in no hurry to change direction.

"Rising and sinking tides impact all boats," Kruszewski says. "Remaining on course with a solid business model, and not switching [the model] every year, I think, has been a hallmark of our success," he says.

Trouble Ahead, Trouble Behind
This election season carries an added level of uncertainty as the fate of a number of regulatory reforms and tax cuts depend on who assumes power.

"I can't see progress being made on any of this stuff before November," Scott Smith, associate director at Boston-based research consulting firm, Cerulli Associates, says.

According to Smith, a new President in The White House has the potential to overturn the Dodd-Frank regulatory reform act or lessen the role of implementation, and Republican control of the Senate could give an upper hand to those opposing new regulations.

The international picture is lackluster, too. Given the difficulties with the euro, a slowdown in China and mixed messages in emerging markets, investors treading overseas find themselves watching where they step.

"The second quarter experienced a return to volatility as heightened concerns over the European sovereign debt crisis and an aura of pessimism around the pace of global economic growth have reverberated through financial markets," a third quarter outlook from Neuberger-Berman stated.

As a result, wealth management firms find themselves faced with new challenges such as a higher cost-to-income ratio and reduced growth in assets under management.

"Unless you have a precise business model or niche to occupy, you're having a tough time right now," Alois Pirker, research director at Boston-based Aite Group, says.

Many investors are confused, undecided whether to retreat from their riskier investments or stay the course and ride out the challenges. Some worry that reallocating now amounts to changing horse midstream.

"There's a great deal of interest in alternatives and fixed income and limiting exposure as much as possible, but with low interest rates and alternatives being of questionable value, there doesn't seem to be some kind of panacea at this point," Smith says.

Emerging markets call out to some with the promise of relief, diamonds in the sand amid European dislocations. UBS Wealth Management America division reported that for the first quarter of 2012, many of their profits came from inflows from Asia Pacific and Switzerland.

Even so, a lot of investors are most comfortable at home, according to Smith. "Going overseas is still scary to some people," Smith explains. "It's a five-part conversation to get most investors to understand emerging markets."

In response, UBS has not only sought out some safer cash and alternative holdings, but also looked beyond investing to fill out clients' other financial planning goals. While they wait out the storm, UBS advisors are taking advantage of some low hanging fruits such as depressed mortgage and interest rates to refinance and make non-security investments. They are also exploring gift-giving and life insurance strategies for clients in light of the taxes that may take effect in 2013.

"We find that while clients may be risk adverse in terms of their investment, there me be opportunities that will help them in their overall financial goals," according to Jason Chandler, head of the Wealth Management Advisor Group and Private Wealth Management businesses at UBS.

Meanwhile Kruszewski remains hopeful in his current position. While he instructs advisors to make case-by-case decisions with each client portfolio, he personally hesitates to jump out of equities.

"I've see a lot of investors who were burned in 2007 who are shying away from equities and chasing yield," Kruszewski says. "My advice is that I would caution against that [because I believe equities are undervalued]." Kruszewski adds: "I don't believe this is the new normal." He compares investing today with a marathon as opposed to a sprint.

Kruszewski believes that a number of factors, including broad tax reform, a decrease in corporate tax rates and the jobs act will be catalysts for long term growth in 2013. Given several years, he bets that with 10 stocks of his choosing he will be able to beat the 10-year treasury.

Client Comfort Zone
Investors are not the only ones who get nervous when the market stumbles. Clients also need reassuring, and that is where firms who are numbers-focused will underperform. According to the RBC World Wealth Report 2012, advisors should be concentrating more on spending their time with existing clients rather than prospecting for new ones.

So, both UBS and Stifel Nicolaus are reaching out to clients during tough times with updated research.

UBS produces a weekly "What Is Happening in Washington" news brief, which covers everything from tax rates to healthcare and the election. "We're proactive with top-of-the-mind questions that clients have," Chandler says. "We're going to them with an opinion of what our view is and then giving them a way to exercise that," he adds.

In addition to macroeconomic conditions, the "Flash Crash," the Facebook IPO controversy and the LIBOR and other scandals have hurt firms' capital formation by undercutting clients' willingness to invest, Kruszewski says.

"We as an industry have to do a better job," Kruszewski says. "I can't pick up the paper every day and read about LIBOR [manipulation and other events] that make people think that the game is rigged. It's incumbent on the industry to remember that the bedrock of capital formation is investor confidence."

The two firms say they are strengthening their advisor- client relationships and building investor confidence by engaging in effective client segmentation. And, Pirker says that innovative approaches to client segmentation remains a crucial challenge for the industry.

Firms, Pirker says, have to ask themselves: "'What do I have right now as a business? Where are my clients located on the wealth ladder? Are they mostly mass affluent, high-net-worth or low-net-worth?' Most firms still have a mismatch," Pirker says.

UBS, for example, has been able to concentrate on ultra-high-net-worth individuals with $10 million or more in investable assets who continue to take some risks. Those wealthy customers drive growth at the firm while the less well-heeled clients hold off.

"That's where we're seeing our best growth, and we've seen the best growth there for the last six quarters," Chandler says. "Not only internationally, but also domestically."

Though firms may not have all the capital they need to recruit top notch advisors, having the right culture can be more important to lure in talent. Wirehouses such as Morgan Stanley Smith Barney and Merrill Lynch are seeing many of their wealth managers leave for smaller, regional firms, Smith says.

Consider Richard Ward, who had been a Merrill Lynch advisor for more than three decades, before leaving for Stifel this summer. In his announcement, he cited the need for "something different than the typical wirehouse environment, a place where I would be both supported and appreciated."

Ward is just one example of Stifel's recent recruiting success. As of March 31, 2012 the firm reported a total of 2,013 FAs, a net gain of 26 advisors from the previous quarter and a net gain of 66 advisors for the full year.

What those regional firms have been good at, Smith says, is making advisors the center of their business. "It's just a matter of focusing on their fundamentals and putting advisors in the middle of their practice," he says. "There was a fear that Merrill would lose its culture, and that's kind of coming true. Janney [Montgomery Scott] and others have the opportunity to be what the wirehouses were," Smith says.

UBS, the smallest of the wirehouses, has been unique in its ability to attract the best talent. The firm raised eyebrows several years ago when it reduced it advisor force and critics questioned whether the UBS could stay competitive with its bigger rivals. Yet UBS appears to have found its sweet spot. The firm reported 7,015 advisors for the first quarter, ending March 31, 2012, reflecting a net gain of 48 individuals from the previous quarter. For the full year, UBS had a net gain of 204 advisors.

"Seven thousand advisors is right around our stated goal," Chandler says. "We don't have aspirations to be much bigger and at that level, we are large enough to generate revenue to invest back into the business and small enough to be responsive to advisor and client needs." It is a simple matter of quality over quantity, Smith says, "UBS has set themselves apart in terms of not trying to have the most advisors, but trying to have the most productive and a lot of that has come through big recruiting deals."

Chandler notes that the UBS focuses on recruiting teams of advisors as well as individuals who have at least 40% advisory-based business and who have been at one firm for a long time and will likely stick around.

The Path to 2013
Given that much of the uncertainty is likely to last through the year (even the ever-bullish Kruszewski agrees), it will be important for firms to not only scale their operations, but also save money or raise enough capital to reinvest in the company during downtime.

"Ultimately, scale is important, but it isn't everything," Pirker says. "Profitability is very important. Where do you need to go and do you have the means to be able to do it?"

Pirker believes that investing in technology will solve many of the root problems, allowing firms to interact online with clients in new ways and react more quickly to breaking market news. "Smarter firms have the ability to move earlier," Pirker says. "Sitting tight is not really helping and makes matters worse," he says. "Technology is required to feed clients what they need and achieve profitability. That requires investment."

UBS has made a push on both fronts. The firm is looking to roll out an iPad application to allow advisors to be functional even when they are out of the office. In order to build their capital, UBS also has partnered with investment managers such as Blackstone, Goldman Sachs and KKR to raise funds.

"That strategy in combination with being focused on the high-net-worth and ultra-high net worth has led us into some decent momentum," Chandler says.