In the 40 years spanning 1972 and 2011, the average consumer price for a gallon of gas increased nearly 10-fold from 36 cents to $3.53 per gallon. Netting out the effects of inflation, the price jump was still a dramatic 75%. As gas became dearer, vehicle fuel efficiency rose in step. Average vehicle fuel economy improved from 13.5 to 23.6 miles per gallon over this same period—a 75% increase.
In much the same way that the automobile industry has adapted to increasingly scarce resources, advisory firms must confront similar challenges related to their lead advisors. As primary revenue generators and client service providers for the firm, these experienced advisors undoubtedly play the most critical role in an advisory firm's success. According to “The 2013 FA Insight Study of Advisory Firms: People and Pay,” our fifth annual advisory firm study, about one in every four team members is a lead advisor—more prevalent than any other position.
With demand for financial advice on the rise, advice requirements becoming increasingly complex, and thousands of advisors nearing retirement, we forecast that the supply of financial advisors in the United States will need to grow 6.4% annually over the next eight years to keep pace.
Despite the obvious demand for more advisors, the industry struggles to develop new lead advisors, as we first observed in our 2011 “People and Pay” study. The supply limitations challenge firms to find experienced advisors to bring on board, and plans are ill-defined for internally progressing junior advisors to lead roles. As a result, many firms grow overly dependent on their lead advisors.
Top firms are confronting the problem head on. They are looking at potential ways to grow talent internally by utilizing new recruiting sources to hire and develop junior advisors. They are also setting themselves apart from the competition by leveraging non-professionals to offload lead advisors’ time. This distribution of labor allows experienced advisors to focus more time on their highest and best use—generating revenue for the firm.
Grooming the Next Generation
With demand for advisors growing, the glaring imbalance of junior advisors to lead advisors in the industry is troubling. The reserve pool for tapping into a new generation of lead advisors is woefully insufficient. As shown in Figure 1, the survey revealed that only three support or associate advisors are currently employed for approximately every five lead advisors.
Further, the ratio of junior advisors to lead advisors has declined substantially since our first “People and Pay” study in 2009. This suggests that some firms are starting to move less experienced advisors into lead roles, but are having difficulty recruiting new hires to replace them.
The rapidly rising compensation levels of support and associate advisor positions supports this interpretation. Both support and associate advisors outpaced growth in median total compensation for lead advisors by more than 2-to-1 during the latest four-year period.
In light of the challenges in recruiting both junior and senior advisors, recent hiring practices suggest many firms are starting to shift gears and rethink traditional channels of recruiting. In the past, wirehouses and independent or insurance-affiliated broker-dealers were the most important sources of new recruits. In 2013, firms were increasingly willing to hire candidates who were recent college graduates or had work experience outside the financial services industry.
This trend is particularly evident among the industry's Standout firms, those with superior revenue growth and owner income. These top firms are leading the way when it comes to looking to other industries for new hires, providing them with a more plentiful and lower cost of labor than other firms (see Figure 2).
Hiring and developing junior-level advisor candidates is a worthwhile long-term effort for firms. While the gap has narrowed some in recent years, they are still far less expensive to employ than lead advisors. As revealed in our January article for Investment Advisor, the 2013 median lead advisor total compensation was $174,000, nearly double that of an associate advisor and three times that of a support advisor. Junior advisors offer a lower cost solution for taking over less complex client servicing responsibilities and relieving some of the lead advisors’ workload.
In addition to being a less expensive option, focusing on the long-term internal development of junior advisors provides further firm benefits. Junior positions fill out a natural career path for less experienced advisors to gradually increase their responsibilities so they can eventually move into a lead advisor role. Because these individuals are not as entrenched in particular ways of doing business, they often bring fresh perspectives with new ideas on ways to innovate and improve the firm. Further, the skills and capabilities of these less experienced team members can be more readily developed in line with the preferences of the firm.
Another key tactic for getting more output from existing lead advisors is to leverage non-professional expertise. Our 2012 “Growth by Design” study revealed that professionals typically spend just half their time on revenue-generating, client-facing activities. The remainder of their time is consumed with various operational, administrative and managerial tasks. With such a small percentage allocated to their role's most critical function, professionals are losing out on opportunities to grow the firm. In many cases they are also required to spend time on areas outside their expertise, which undoubtedly creates inefficiencies within the firm.
Utilizing non-professional positions such as dedicated management and specialized support staff provides numerous benefits to the firm. With work broadly shared and distributed, dependency on key individuals is greatly reduced. Given that lead advisors are among the most highly paid positions in a firm, cost savings multiply when non-core tasks can be delegated to lower cost non-professionals.
Non-professionals also contribute more specialized areas of expertise to the firm. Whereas a lead advisor may not have the skills or interest in managing the firm's human capital issues, a dedicated manager position can capably take those tasks off their plate. The specific skills of technical specialist positions, such as investment managers and financial planning specialists, enhances the firm's client service capabilities. Marketing experts can improve advisors’ success with promoting the firm and developing new business, and operations staff can focus on ways to make the firm more efficient and to improve the client experience.
This is another area where the best firms are leading the way. One component to the superior performance of Standout firms is their ability to make wider use of non-professional positions. With the exception of Operators, the industry's smallest firms, Standout firms utilize more non-professionals per professional (see Figure 3). Not surprisingly, support ratios tend to increase as firms grow in size, as larger firms have the scale that can more readily support specialized positions.
Another advantage of the use of non-professional roles is an improved ability to provide team-based or collaborative service to clients. The industry's biggest and best firms, Standout Innovators, are more likely than other Innovators to assign teams to distinct client groups, by a ratio of 3-to-1.
The 2013 study reveals that a team-based approach generates the highest professional productivity while maintaining the lowest overhead margin. Compared with other service approaches, team-based firms achieve higher profitability and rates of revenue growth. Our next article will cover the numerous benefits and the best approaches for adapting a team-based service delivery model.
Looking Beyond the Lead Advisor
Frequently, a firm's first response to growing its capacity is to hire another experienced advisor. As the supply of lead advisors looking to join a new firm continues to shrink, firms would be well-served to focus on getting more “mileage” from their existing advisors. We encourage firms to explore alternative cost-effective and equally beneficial tactics for stimulating and accommodating growth.
Options abound for a firm to improve productivity from its existing cadre of lead advisors. Firms can better support lead advisors and prepare the next generation by hiring junior advisors from non-traditional sources and developing their skills over time. Equally important is the need to maximize lead advisor productivity by leveraging the experience of other staff members. Non-professional staff is essential to not only keep the firm running smoothly on a day-to-day basis, but also to enhance expertise that is critical for providing the best possible client service.
No driver wants to run out of gas. By applying a more comprehensive approach to expanding advisor capacity for revenue generation, owners will better ensure their firms remain on the road to success.
TO ORDER THE 2013 FA INSIGHT STUDY OF ADVISORY FIRMS: PEOPLE AND PAY
For more comprehensive guidance, including compensation benchmarking data, the complete "People and Pay" study is available for order through FA Insight. Investment Advisor readers can purchase a specially priced copy of the study by visiting www.fainsight.com, clicking on “Order,” and then entering the discount code IAREADER when prompted to receive a 30% discount off the $250 price of the study.
THE 2014 FA INSIGHT STUDY OF ADVISORY FIRMS: GROWTH BY DESIGN
The FA Insight team welcomes your participation in its 2014 "Growth by Design" study, which in turn enables us to bring you advanced insight for your business. By taking part in the study, each participating firm will receive a complimentary study report with more than 50 pages of detailed benchmarking data and prescriptive analysis when it becomes available in summer 2014. Additionally, survey participants will receive exclusive and immediate access to the FA Insight "People and Pay" Benchmarking Tool. The tool provides industry compensation data across advisory positions and allows advisors to compare their firms against their selected peer group.
Advisors, you have until April 11 to submit survey data for your firms. Firms interested in participating can visit http://www.fainsight.com. The "Growth by Design" study is supported by Investment Advisor magazine, FA Insight’s media marketing partner.