From the July 2008 issue of Wealth Manager Web • Subscribe!

July 1, 2008

Firms struggle to define how to use them, where to find them and what to pay them.

It must be confusing to be a Junior Advisor--on one hand being told that you are the future of the firm (and the industry) and on the other, feeling underutilized, underpaid and generally unclear about your career. Many practices today have an employee who is not the primary relationship manager to the clients they work with, does not develop much (or any) business independently, and generally supports the senior advisor--usually the owner\principal of the practice. Yet this employee is a licensed professional--clearly on track to becoming an "advisor" at some point in their career. This is the junior advisor: The term junior is rarely used on their business card, but that is how the owner(s) and other staff members refer to them in conversations. In fact, this is probably how they refer to themselves.

The junior advisor is a sought-after employee. While only 33 percent of the participants in the 2007 Moss Adams Compensation Survey of Financial Advisors reported such a position, I know from experience that many more firms are interested in recruiting such employees. The reason why practices are attracted to juniors is a function of the size of the firm: Large wealth management firms see them as a necessary part of the client service team that creates capacity and favorable economics; small firms see them as the succession plan. Firms of both sizes struggle to define how to use them, where to find them and how to pay them--but most of all how to get them out of the junior category and grow them to full advisor status.

It is clear to everyone that the long-term answer to the talent crisis in the industry is tied to training junior. However, most firms are still leery of hiring him or her in the first place, and those that do have a junior often speak of how "young people are different today"--code for "They are not working hard enough and they expect a lot of money." This comment comes up very often in my conversations with advisors, and I think the confusion begins with understanding junior's job description.

Defining the position

The term "Junior Advisor" is not really a job description after all, but rather an indication of deficiency, implying that some skills and experience are missing from that professional's portfolio. The nature of the missing piece usually describes the position more than the skills that the person has. Usually, the missing piece is sales, or business development. In many firms, especially practices under $2 million or firms with a background in the brokerage business, the lack of sales experience immediately qualifies someone as a junior advisor. In reality, there are usually two positions behind the junior designation--a technical position and a service position. Let me try to describe them:

The Paraprofessional (Level 3--One to three years of experience): The first phase of every professional career is defined by learning the tools of the trade. In the case of a wealth management firm, this will be the process of learning how to take client data, enter it into the financial planning software, how to create a portfolio allocation analysis, how to research managers of funds, how to trade on the client's account, how to rebalance, which contracts are used for what, etc.--to name a random set of responsibilities. Without this technical knowledge, it will be difficult to operate as a professional not to mention inspire the confidence of present and prospective clients.

This initial stage of development consumes the first one to three years of a professional's career. During this stage, the paraprofessional can be productive mostly in very routine technical tasks such as creating plans, illustrations, doing some routine research, data analysis, project management, etc.

The Service Advisor (Level 2--Three to seven years of experience: Once the technical stage is completed, the junior advisor typically will have enough experience and expertise to start working with clients directly--not yet as a relationship manager, but certainly as an "advisor"--i.e. someone who can provide significant expertise to the relationship. In my experience, this point usually comes around in the third year of industry experience, although there are many factors that can accelerate or slow down the process: education level, age, other experience (for career changers), the firm's training skills and the natural individual's natural speed of learning among them.

Typically, a service advisor meets directly with clients, often without the presence of the senior advisor, and he or she usually does most of the work on the client account-- developing the plan, making investment recommendations, communicating with the client regarding changes or circumstances. Over time, the advisor should be able to assume the "primary" role in several relationships and eventually take full responsibility for the clients with whom they work.

The Advisor (Level 1--Has eight or more years of experience): Implicitly we are now defining the "senior" or full advisor position. This advisor has full relationship management responsibility for all or most of his or her client base.

A couple of things should be noted about my attempt to describe these positions: First, a professional may have a mix of responsibilities, with some on the Level 3 list (paraprofessional) and some on the Level 2 list (service advisor). This is quite normal and a sign of normal career progression. The same may be true for responsibilities with respect to client relationships: In some relationships the advisor may be the "primary" while serving as the secondary on others. The second note is that as you probably notice, we have not even mentioned sales responsibilities.

That is because in my opinion, sales responsibilities--especially in wealth management--should not be used as a measure of whether a professional is junior or not, or whether or not he is fully developed. We could debate whether a professional without business development skill can be a partner\owner in the firm (quite doable, but in smaller numbers than those who develop business), but there is no doubt in my mind that in a firm where relationships dominate the culture and the revenue line--wealth management firms to be exact--a professional who independently manages groups of client relationships is a top level professional.

Who Should Employ a Junior Advisor?

This, in fact, should be your first question. I would boldly venture to tell you that unless your practice allows you and the junior advisor to be involved with the same client at the same time, you should not be hiring juniors. In other words, if the only way juniors can operate in the firm is by having their own clients, the firm will not benefit much from their presence. Moreover, the relationship with him or her will always be threatened and compensation equity will be difficult to establish. The purpose of having a junior advisor is to create capacity and leverage, and to train. A junior working solo on the smallest clients accomplishes at the very best only the capacity portion of the goal--by itself, not enough to justify the risk.

There are four factors that influence your decision: First is the size of your firm, next the size of your firm's typical client relationship and third, the level of standardization of the work. The fourth and perhaps most important factor is the personality of the "senior" advisor. That I leave to you to self-analyze.

The size of your firm is a critical factor for hiring junior advisors since it determines whether you can bear the "non-systematic" risk inherent in employing younger people. People who are new to a profession (and likely young) will expose you to the risk of losing them through no fault of your own. They change their mind about their career; they change their family circumstances; they decide to move to the other coast; they may go back to school. These are all normal and generally positive steps in any career but unfortunately, if the person who just changed their mind is your only junior advisor and the next closest thing you have to a succession plan, you are in trouble. This non-systematic risk suggests to me that practices that can only afford to hire one junior in a three-year period (just an average measure) should not try to play the probabilities unless they are very risk tolerant.

Notice that the non-systematic risk tends to decline with the junior's increase in experience, meaning that while small practices will have a very hard time hiring a paraprofessional level junior, they may succeed in hiring a more seasoned service advisor. As a generalization I would say that practices under $2 million in revenue should focus on recruiting service advisors, while larger practices can afford to recruit directly from college.

The size of the relationship is important because it determines the ability for the senior and junior advisor to be involved with the client at the same time. The problem with two advisors working on the same relationship is what I call "communications overhead"--the time it takes to communicate information between the two advisors, to assimilate and explain that information and to coordinate action. This includes correspondence, scheduling of meetings, chit-chat in-between, feedback, etc. My experience has been that the communications overhead tends to be a fixed investment that consumes a minimum of an hour and there are clearly economies of scale--the larger the project, the smaller the overhead percentage. As a result, on an account requiring only five hours of work or less, it is generally inefficient to spend and hour delegating a couple of hours worth of work. That's when advisors just prefer to do it themselves. On the other hand, if the client requires 50 hours of work, there is clearly a benefit to investing a few hours in delegating and supervising 30 hours worth of work.

As a rule of thumb, I would propose that if your firm spends less than five hours per client in a year, you will find it very difficult to involve juniors productively. If you spend five to 20 hours per client, you have the opportunity to train juniors and make them productive. If your average client requires more than 20 hours of work, you can even involve three levels of professionals in the work. Roughly translating these hourly thresholds into client relationship size, I would propose that you draw the line at $5,000 per client for no junior, $5,000 to $15,000 for one junior and over $15,000 for multiple.

The level of standardization is important because the standardization lowers the communication overhead and allows you to collaborate on small projects. If the same process is used over and over again with relatively little variation, then there is less to be communicated, and there is less need for quality control and various other tasks.

Where to find them

In your competitor's firm--Turnover for seasoned professionals is very low, less than 10 percent of all professionals change firms in a year. However, at the lower levels of experience there is still a significant recruiting opportunity, especially for firms that offer a career track. The Achilles heel of most large wirehouse firms and many wealth management organizations is the inability to clarify how a professional can progress from one phase of his career to another without "creating a book of business."

In college--According to the Foundation for Financial Planning, there are more than 90 colleges that award a degree in financial planning. In addition, programs in tax, accounting and finance increasingly incorporate topics related to personal wealth management in their curricula. While demand for accounting and finance majors is high, the recognition of career opportunities in wealth management is also increasing. More and more, young people are recognizing that this is a fast-growing profession with great income and the potential for personal satisfaction.

In your own firm--You may be one of the 32 percent of firms who employ a junior. Or it may be that you don't know that you do. In many firms there are a number of support employees who are interested in pursuing professional positions. For some the operations position that they currently hold has been a valuable introduction to the technical side of the business. However you also must be very careful not to over-accommodate. Junior positions should be opportunities to learn that are offered to people who can become lead advisors some day. If support employees have an interest in the position, they should also obtain the proper degrees and designations.

How to pay them

In proceeding with broad generalizations, I would also pull the trigger right away and declare that junior should be compensated with a salary plus bonus. Compensation by commission lowers risk to the firm, but creates the wrong culture and the wrong relationship. Commission compensation results in years of under-compensation until eventually the professional develops, at which point in time they inevitably ask, "What do I need you for?"

If commission compensation is at one extreme and a salary is at the other, there is a lot of space in-between that can be covered by salary plus incentive compensation plans. Generally, the factors that drive incentive compensation should be straightforward, well understood (not all have to be measureable) and in synch with the firm's strategy and the professional's individual development plan. It is a common mistake to over-focus on business development. At levels 3 and 2 the better factors may be number of clients serviced, revenue responsibility, client satisfaction scores, number of reports, etc.

As a rule of thumb I would expect incentive compensation to be between 10 percent and 20 percent of the total compensation for Level 3 professionals, and from 20 percent to 40 percent for Level 2. Every firm is different in its optimal mix, since every strategy is unique. In the same way, the number of compensation formulas is limited only by your imagination.

Finally, salaries should be established by a combination of market information and firm compensation philosophy. The philosophy simply states how you define compensation--for example, by statements such as, "We pay in the top quartile of the market." There is plenty of market information (surveys, etc.) that provide applicable data.

In the 2007 Moss Adams Compensation Survey the median salary for a level 3 advisor was $55,000. The median for level 2 was $85,000. Of course geographic and other factors also play a role. The upper quartile (top 25 percent) of salaries for Level 3 advisors was $70,000 and for Level 2, the top quartile was $100,000.

How to Grow Them

At my previous firm, we were always struggling to find consultants with five or more years of experience. In fact, we struggled for years. One day we realized that for five years we had had a position open for someone with five years of experience. You have to wonder what would have happened if, five years ago, we hired a few people with one year of experience. Advisors have to avoid this trap too. People take time to develop, but time flies by really fast.

In my experience, the five most important steps towards helping Junior grow are:

Hire the right people for the right job: Every day I head advisors say, "He's a good guy, but he will never be a full advisor..." This is a tragic situation for both sides. Ask yourself, if you were the manager of a football team or any team for that matter, would you start the eight-year veteran with below average numbers who won't mess up but won't win the game either or would you rather start the exciting new rookie you just recruited who could be a great player some day? My answer would be: The starting spots are too valuable to waste on people who are not going anywhere. You only have space for so many employees in your firm. In fact, if you are a small firm with two or three people, this becomes even more problematic. The opportunity to learn and get experience is too precious to be wasted. Hire people with the potential to be advisors rather than career Level 2s or 3s, and put them in the right position to gain that experience.

Don't let them get comfortable: The training process is one of constant deconstruction and rebuilding. If your junior people are getting settled into a comfortable routine, it is a sure sign that you should be increasing their responsibilities. Stagnation at any level is the result of not being exposed to the right experiences or not receiving the right training. Giving people a chance to be always just a little outside of their comfort zone is what creates fast growth.

Give them time, attention and training: Your time is the most precious resource the firm has, and your people are your most significant investment. Junior cannot grow on his own; he needs your coaching and training. He needs to watch you work and to work by your side.

Be specific in terms of the skills you are trying to develop-- and how: Some skills will come with time and experience; others need exposure to specialized training. A lot of professional judgment and decision-making skills come from being exposed to a situation and knowing the answer. The more situations the professional has been exposed to, the more they will be capable of judgment. In this sense, deliberately exposing junior to common or interesting situations will help build a "database" of professional experiences that they can rely on.

Chart their career track: Finally, people like to know what they can expect from their career. Many firms lose people because the employees do not understand what opportunities lay ahead of them and how to capture them. Failure to understand the skills and criteria necessary to move to higher levels of income and responsibility is also the leading cause of compensation problems.

Every advisor was a "junior" advisor once. Many of today's successful advisors learned from the hard school of life and years of low income while trying to develop business. However, not every generation has to repeat that experience. The very first step towards developing junior advisors is accepting the responsibility for their development. If wealth management firms accept the fact that their future depends on their ability to develop advisors, they will be better positioned to grow and at the same time, tremendously enhance their own equity value.

Philip Palaveev is President of Fusion Advisor Network. He can be reached at ppalaveev@fusionadvisornetwork.com

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