I imagine it’s bittersweet when one’s dire predictions become reality: on one hand, you’d have to be somewhat gratified to know you were right; on the other, you’re probably saddened that no one heeded you enough to take a different course and change their future. Some observers, including my partner and fellow Investment Advisor columnist Angie Herbers, have been predicting for more than three years that a growing shortage of professional talent coupled with low retention rates and virtually non-existent partnership tracks some day will adversely impact the independent advisory industry.
Now, data from the 2007 Moss Adams Compensation and Staffing Study of Advisory Firms shows us that day is today. If the majority of firms continue to fail to solve the problem, we just might see the massive consolidation of the brightest advisors, the wealthiest clients, and the vast majority of assets into the mega-firms that Mark Hurley predicted some ten years ago.
As we’ve seen in every Moss Adams study since 2001, the independent advisory industry continues to skyrocket in terms of clients, revenues, assets, and profits: average AUM was up 25.7% in 2006; from 2000 to 2006, average revenues jumped 253% ($632,000 to $1.6 million), and owners’ income increased 63% ($228,000 to $371,000). The past five years have, indeed, been a good time to be an independent advisor.
More insightfully, however, Moss Adams also provides us with a pretty clear answer about how the industry is generating this stellar growth: employee leverage. During that same five-year period, the average number of employees including the owner(s) at advisory firms has more than doubled, from two to five. But is adding more people a good thing? To validate the trend to build bigger firms, Moss Adams added a new measure this year–the return on labor, which is a firm’s total compensation expense divided by its operating profit–which has increased steadily from 22% in 2001 to 34% in 2006.
As you might imagine, with benefits of adding more people beginning to surface combined with new clients and their assets pouring through the doors of most firms, the demand for employees–particularly professional advisors–is also rising quickly.
(In 2006, 23% of firms hired professionals, while 37.2% said they expected to do so in 2007.) In fact, the demand is rising too quickly: faster than college programs can turn out new financial planners, and way faster than the industry’s makeshift training programs can turn them into real advisors. This demand is reflected in a 41% increase in compensation for lead advisors over the past two years, to $150,000 a year. You can only pay them that amount, of course, if you can find one to hire in the first place.
Poaching From Your Younger Brothers
It may well be that the most pressing challenge facing independent advisors today (at least those who want to grow beyond a solo firm) is where are they going to find the young advisors to help them grow their firms. I’m afraid the answer for the larger firms is going to be “from the smaller firms,” which will create an even greater economic divide between large and small firms, and concentrate a greater share of the brightest and the best of the industry at the larger firms.
Consider that the Moss Adams data is also clear that as firms get bigger, their productivity just continues to increase: Revenue per professional today is $272,500 for Early Ensembles (firms with more than one professional); $511,750 for Mature Ensembles (with multiple professionals and between $3 million and $5 million in annual revenues); and $719,330 for Market Dominators (firms with revenues over $5 million).
This increase in productivity translates directly into higher income for owners: $236k for early ensembles, $493k for mature ensembles, and a whopping $1,111,000 for market dominators.