From the July 2014 issue of Investment Advisor • Subscribe!

Team Up to Stand Out: The 2013 People and Pay Study

Teams are a trait for the industry’s best firms

Advice delivery does not necessarily have to be a team sport, but it is no coincidence that the industry’s most competitive firms are team-focused. According to the fifth annual advisory firm study from FA Insight, “People and Pay,” the industry’s best and biggest firms are three times more likely than their large-firm peers to maintain a team-based service structure.

The importance of teams is apparent in FA Insight’s consulting work as well. We are typically engaged by good firms that hold strong aspirations to become great firms. Frequently the key hurdle they must overcome relates to putting in place the right organizational structure, starting with the best possible framework for managing client relationships.

At the core of a successful firm’s organizational structure—one that facilitates, anticipates and accommodates growth—is the way in which a firm organizes for advice and service delivery. In addition to being a key influence over the client experience, advice and servicing personnel account for the majority of a firm’s staff and are accountable for much of the firm’s expenses. On average, 37% of a firm’s staff members bear direct responsibility for delivering advice or services. These professionals, including those with oversight for business development, account for nearly three-quarters of the average firm’s payroll. Another 29% of team members indirectly support advice and service delivery.

Perhaps the most important reason for focusing on teams, however, is based on the ability of a well-structured team to amplify the productivity and effectiveness of the firm’s most senior advisors. Readers of our previous “People and Pay” feature in Investment Advisor (see “Getting More Mileage from Your Lead Advisor”) will recall our focus on the critical need for advisory firms to get more out of their lead advisors. In that article we touched on teams as just one of many ways an advisory firm can maximize the return from this scarce resource.

In this, our fourth and final article featuring findings from “The 2013 FA Insight Study of Advisory Firms: People and Pay,” we examine teams in more detail, putting the advantages of teams in context with other servicing structures and offering suggestions for how firms can make best use of a team-based servicing structure.

Options for Servicing Structure Grow with Firm Size

Client service organizational structure: 2013 FA Insight People and Pay

For the 80% of “People and Pay”firms with more than one professional, the great majority work collaboratively to deliver advice and service (see Figure 1, left). Most of this collaboration occurs informally, however, where professionals partner on an ad hoc basis to service the firm’s common client base. Just 11% of all firms are truly team-based, where a defined team services its own distinct client group.

As firms grow and add professionals, their options increase for how they might organize to serve clients. To gain a better understanding of service structure types and their respective advantages, FA Insight conducted a special tabulation of multi-professional study participants. Firms were grouped according to three primary service approaches:

  • Silos—A sole professional responsible for overseeing a distinct group of clients, sometimes assisted by non-professionals who may or may not be dedicated to a sole professional.
  • Firm-wide collaboration—Professionals partner on an ad hoc basis to service the firm’s common client base.
  • Teams—Professionals are organized in teams, with each team servicing a distinct client group or providing a distinct service.

Service Organizational Structure by Firm Stage; 2013 FA Insight People and PayThe use of multiple professionals collaborating across the firm’s client base tends to dominate with smaller multi-professional firms. As firms grow in size they will increasingly adopt one of the other two main servicing approaches. They will organize by defined teams or, alternatively, they will trend in a very different direction, relying on “silos” where sole professionals oversee distinct groups of clients (see Figure 2, right).

Teams Yield Compelling Advantages

Analyzing these service structures reveals a great deal about the advantages and disadvantages of each, as well as which structure might be most suitable for a specific firm. Selected performance metrics for typifying each approach are provided in Figure 3. The data points provide a helpful backdrop for our assessments of each model.

Performance Indicators by Service Organization Structure: 2013 FA Insight People and Pay

Silos

Turning first to silo-oriented firms, their most obvious performance distinction is rooted in low overhead expenses, which in turn support solid profitability. They restrain overhead largely by capping use of non-professionals. Compensation costs in general are also lower for silo-oriented firms.

The silo structure offers a primary advantage of independence to firm professionals with respect to client servicing preferences. This trait can facilitate a growth strategy based on advisor recruitment, where a seasoned professional can join the firm with little or no change in how they must service their clients.

The structure is not without drawbacks, however. Silo profitability is not accompanied by effective conversion of revenue to owner income. Additionally, silos, with embedded client experience determined by a particular professional, may find it more challenging to build a brand around the firm. The client experience delivered within a silo may be sub-optimal given scarce interactions with other advice teams.

What’s more, the absence of collaboration pressures professionals to become generalists instead of specialists, which may then restrict the quality of advice delivered to clients, professional growth and compensation. Finally, silo-type servicing may constrain career opportunities and succession solutions.

Firm-Wide Collaboration

Firm-wide collaboration dominates when firms are just beginning to build the ranks of professionals but may not yet have the scale or maturity to form defined and distinct service teams. This is consistent with the relatively small revenue size of the typical firm that practices this approach.

Among the positive aspects, firm-wide collaboration enables a firm to assemble the most ideal advice skills to effectively deliver individual advice needs. Fewer borders prevent shifting a client to another professional or bringing in an additional professional to assist.

But these advantages come at a cost. Firm-wide ad hoc collaboration lends itself to challenges in standardizing servicing procedures and workflow, which restricts profitability. Firm-wide collaboration, relative to other service approaches, imposes the highest overhead expense margin and returns the lowest profit margin for a typical firm. It also features the lowest productivity among all three approaches as measured by revenue per professional.

Teams

Firms with sufficient scale to maintain distinct service teams are poised to enjoy the most convincing advantages. In comparison with the other service approaches, team-based firms generate the highest professional productivity while maintaining the lowest overhead expense margin. This is largely a result of putting each team member, and the lead advisor in particular, to their highest and best use.

Overhead remains low even though these firms employ the highest ratio of non-professionals-to-professional. It is no surprise, therefore, that team-based firms also were the most profitable. Maximizing profits does not appear to compromise future growth either. In the most recent study year, team-based firms grew revenue 50% faster than their peers.

Firms with no career path: 2013 FA Insight People and Pay

Sustainability is core to the success that team-based firms enjoy. Teams ensure client relationships do not depend entirely on any one individual and that those relationships will last beyond the tenure of a single professional. Teams also provide natural career paths for developing employees poised to become the next generation of lead advisors. Just 11% of team-based firms fail to provide career path opportunities. (See Figure 4, left. Note: Includes only multi-professional firms.)

Implementing a Successful Team Structure

Achieving team-based success starts with applying the right combination of roles. Additionally, an appropriate compensation structure must be in place that motivates team members to work together to further the objectives of the firm. A formal system for supervising, mentoring and managing the performance of individual team members provides additional assurance that team members develop and perform in alignment with firm goals.

A typical team comprises a lead advisor, an associate advisor and a client services associate. Bigger teams might include a support advisor and technical specialists in financial planning or investments. For details on the accountabilities of these roles, position summaries are available in the full 2013 “People and Pay” report.

For firms transitioning from a silo model or firm-wide collaboration model to a team-based structure, role accountabilities will typically change in significant ways. These changes frequently require that compensation be realigned as well. Team members may be asked to work in new ways which may no longer directly relate to the way in which their compensation is currently structured. The bedrock for the new compensation model consists of understanding the mechanics of the firm’s team model and how to best leverage compensation for driving the right type of behaviors and activities in each role.

Correctly structured advice and service teams build value by enhancing current profitability and improving growth prospects. For firms interested in transitioning to service teams, getting these details right is clearly worth the investment considering the proven ability of team-based servicing to generate profit, growth and income within a structure well-suited for sustainability. For firms seeking customized advice in organizational design and advice team development, please contact FA Insight directly.

While this piece concludes our article series based on the 2013 “People and Pay” study, findings from “The 2014 FA Insight Study: Growth by Design will soon be available. A record number of firms took part in this year’s study. We look forward to sharing highlights with readers in the weeks ahead.

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.

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