There are many studies of independent advisory firms, and some of them can be quite helpful. Using them can also present significant challenges to owner-advisors who want to grow or run their firms more successfully.
For starters, few of them are actual “studies,” conducted by researchers who are familiar with their subject firms and who actually observe how they change over time. Instead, most studies are actually surveys: unaudited data voluntarily supplied by owners or employees at the firms involved. This, of course, can lead to questionable data for a number of reasons, including the tendency to make your firm look better than it is and the inclination of busy owners to “ballpark” numbers of which they really have no idea.
What’s more, the sample size of many study/surveys is relatively small compared to the actual number of independent firms, introducing randomness into the data, along with a skewing toward more successful firms, as those less successful are also less willing to participate. Sadly, this skewing toward more successful firms can have a considerable effect on the most valuable aspect of these studies: comparing changes in the subject firms over a number of years, as a whole or in subsets.
Finally, there are the problems with the data itself. Job descriptions in the independent world vary widely, with little consistency about what firms call all levels of advisors from associate to lead to senior—or how firms divide the multitude of tasks in a firm, such as compliance, HR duties, training, rainmaking, supervision, marketing, finance, etc.—making comparison between any two given jobs difficult at best.
The best of the firms that produce these studies attempt to control or adjust for these sampling and data gathering problems. Using their experience with and understanding of the workings of advisory firms, they discount data deemed to be unrealistic or outliers. Probably the best advisory industry studies were the old Moss Adams annual reports, which were produced by a dedicated team of professionals who understood the advisory business and attracted well over a thousand firms to participate each year. Unfortunately, that team has long since disbanded, but two of its members—Dan Inveen and Eliza De Pardo—have continued conducting studies. While their sampling size is quite a bit smaller, and their methodology is a little different, the annual studies they produce are, in my opinion, the best in the industry today. Their current offering, “The 2013 FA Insight Study of Advisory Firms: People and Pay,” is no exception.
As I mentioned, FA Insight’s survey participation is a bit of a problem. This year, only 211 firms met their standards for complete submission. It’s a small sample, to be sure, but equally important is whether they are the same firms. A quick look at the breakdown of participants in the 2013 study compared to those in the 2009 study reveals that the concentration of firms generating $500,000 or less in annual revenues fell 7% (from 28% to 21%). The firms in the $500,000 to $1.5 million category stayed level at 36%. Those firms with more than $1.5 million grew by 7% (from 36% to 43%). That suggests that the same firms did consistently participate, as their revenues grew with the general economic recovery.
The breakdown of the participants’ business models tells a similar story. While the concentration of RIA and “primarily RIA” firms grew from 69% to 80%, the number of brokers shrank from 29% to 13%. This would be consistent with both the growth in revenues and the trend toward asset management, suggesting that the firms in the FAI studies for the past five years have, for the most part, been the same or very similar firms. Here’s how the FAI folks explained it: “These data represent medians across the respective groups of firms that participated in each study over the past five years. Some variability in these series over the years may simply result from the changing makeup of firms that participated in the study in any given year.”
While on one hand, surveying the same firms over time makes for some valid comparisons, it also introduces another data problem. As firms grow, they tend to face different challenges. Attracting new clients is replaced by hiring and training new employees, which gives way to providing a consistently high level of client service, then operating more efficiently and, finally, finding new markets. Thus, as the study participants grow, the problems they face change, again skewing the data.
With that said, the most striking data in the 2013 study shows the biggest challenges for today’s owner-advisors are today’s owner-advisors. To wit: 52% lack documented and up-to-date position descriptions, which formalize the jobs employees are supposed to be doing. What’s more, 69% fail to define their organizational structure in a way “that effectively supports hiring decisions.” That’s consultant-speak for not having any system to determine when it’s time to hire new folks so that work doesn’t start backing up. And, 78% have no documented organizational plan for the future.
To make matters worse, one can only assume that these figures contain a substantial fudge factor by firms who don’t want to admit they don’t have these plans. The only silver lining here—and it’s a thin one—is that at least the financial planning firms are better planners than the investment firms, with 35% versus 14% having organization structures that support hiring, and 23% versus 14% with formal plans for the future.
While a large majority of both planning and investment firms seem to be having a hard time applying their professional skills to their businesses, FA Insight shows us that firm economics during the recovery have improved across firms of all sizes. During the five years from 2008 through 2012, average AUM per client increased by 74% from $551,000 to $960,000, while expense margins fell from 41.7% to 38.1%. Consequently, revenue per professional increased from $419,000 to $439,000, and average owner income rose from $446,000 to $610,000.
Recovering finances also trickled down to senior employees, with CEOs increasing their annual take by 25% from $225,000 to $281,000. COOs’ share increased by over 30% from $125,000 to $165,000. Owing to the aforementioned vagueness in advisory job descriptions, it’s more than likely these are roles filled by owner-advisors in many firms. When it comes to actual employees, the rebound flow is a trickle. Lead advisors’ compensation grew just 5% from $164,000 to $174,000.
When we get down to the staff employee level, this picture appears more bleak. Although Inveen and De Pardo write that “firms managed to keep costs low without shrinking payrolls,” the data shows that it was the employee roles that didn’t shrink, increasing from five full-time employees (or equivalent) in 2008 to six employees in 2012.
Although I’m sure those new employees are happy for their jobs, employee cash compensation during this period fell from 66.5% of expenses in 2008 down to 66.2% in 2012. Not much of a drop, you might say, but remember this was a period when expense ratios were falling. While employee compensation may not have declined at most firms, it sure doesn’t look like they were getting 25% raises. At the same time, expenditures on benefits and training also fell from 7% of expenses in 2008 to 5.5% in 2012.
Seems to me that the overriding message of the 2013 data is that despite the shared hardships of everyone at many advisory firms during the mortgage meltdown, a significant number of owner-advisors still aren’t willing to share their firms’ success in the recovery. During a period when firm owners’ income grew some 37%, benefits and pay for employees has barely increased. While the survey shows that 50% of the firms surveyed have performance-based incentive pay for their support and administrative staff, the expense data shows that those bonuses aren’t moving the expense needles very much. Perhaps if more owner-advisors had formal plans for growing their firms to the next level, they would realize the importance of truly motivating their employees to help them get there.