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Practice Management > Compensation and Fees

The Fast Track: Figures Don't Lie

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There sure are a lot of surveys of advisory practices these days; Moss Adams, the FPA, Quantuvus, the myriad Schwab studies, and the FA Insight survey conducted in partnership with Investment Advisor. I’ve said for years–and now it’s more true than ever–that I could make a career out of just translating the studies into a format that advisors can both understand and readily use to make their practices better.

The problem isn’t with the surveys themselves, it’s the way they are presented; they all take considerable time and effort to decipher, and then determine the essential takeaways for a particular practice. That’s time that most advisors aren’t willing or likely to invest. So it falls on consultants like me to interpret these surveys and boil them down into action items (if any) for my clients.

The surveys I get asked about most are compensation studies, which purport to poll various groups of advisory firms on how much they pay employees and owners, broken down by the jobs they do. They then create salary and total compensation ranges, but size of firm, geographic locations, and/or other frequently undisclosed factors are often left out. Owner/advisors, then, try to use these tables to determine whether their compensation levels jibe with other similar firms.

Over the years, I’ve come to understand how the various studies collect and present their data, and how to mine that information and repackage it so that my clients can use it to see how their compensation structures compare to industry norms. Here’s a brief description of what I’ve learned, and how I use all this study information, to make it easier for advisors who are so inclined to sort it all out for themselves.

Big-Firm Bias

While there are many problems with the existing surveys, the biggest challenge is that most if not all surveys are based on assumptions derived from the largest of advisory firms; those with a dozen or more employees and upwards of $5 million or more in annual revenues. While certainly well within the “small business” category in business management circles, these larger advisory firms bear little resemblance to the vast majority of advisory practices, which have less than $2 million in annual revenues.

That’s not to say that most surveys don’t include these smaller practices; they do. But they look at jobs and job titles based on business school models, which is way different from how most advisory firms work in the real world.

Larger advisory firms, like most larger businesses in general, have the luxury of allowing their owners, professionals, and staff to focus on specific jobs–advisors work with clients, rainmakers go out and get new clients, portfolio managers manage portfolios, IT people work on systems and hardware, back-office people execute and monitor trades, receptionists answer the phones and greet visitors. Sure, some folks will wear more than one hat, but the number of hats is limited, and usually still enables them to focus most of their time on their primary job.

The Multiple-Hat Issue

Smaller firms–which constitute the vast majority of advisory firms–don’t have that luxury. Smaller firms need to perform essentially the same jobs as larger firms (on a smaller scale, of course) but when you only have one or two advisors and one or two staffers, those people are going to have to wear multiple hats, quite often spreading their time and efforts over half a dozen jobs or more. An owner/advisor will often work with clients, bring in new clients, oversee compliance, manage investment portfolios, manage the office, be the financial officer, etc. A junior advisor often works on portfolio monitoring, and investment screening, the firm’s Web site, executes the trades, generates quarterly reports, and writes the financial plans.

The problem is that most compensation surveys don’t recognize this difference in the way small and large firms allocate the workload, presenting their data as if all firms operated like large ones. Sure, you can readily find the salary and total comp range for a lead advisor, a support advisor, a paraplanner, and a compliance officer. Assuming you can figure out what position in your firm equates with what each survey calls a “support advisor,” and so forth, if you have someone at your firm who spends 75% or 80% of their time doing that particular job, then the comp tables for firms of your size might prove to be helpful.

But in my experience, that includes darn few firms. How do you know what the average comp range is for your junior advisor who essentially does everything you don’t want to do, and that your assistant can’t do? Or for a junior partner who manages the client portfolios, the primary rainmaker, and the compliance officer? Most surveys don’t gather data or present their results in a way that makes it easy to answer those questions.

The Herbers Comp Equation

So in response, I’ve devised a two-part strategy to figure out these issues. The key is to take the focus off job titles (which in the advisory industry are arbitrary at best), and simply think about what tasks people actually perform. When it comes to the professionals in an advisory firm–owner/advisors, lead advisors, junior advisors, support advisors–there are functions that they may or may not have a hand in. Four of them are what I call “primary functions,” in that they usually comprise the tasks on which an advisor will spend the majority of their time–planning advice, investment management, client service, and administration/back office.

Then there are five “secondary functions,” which are the kinds of things people are assigned to do in their spare time, such as compliance, financial management, IT, marketing and sales, and human capital.

In most advisory firms, professionals of all levels tend to perform a number of these functions, sometimes even all nine. What’s more, it’s not unusual for more than one advisor to perform the same task–say, investment management–dividing the work between them either by specific clients or by sub-functions such as portfolio allocation versus specific investment selection. The important thing is to recognize all the functions in which each professional plays a role, even if it’s a small one.

Then, once you’ve identified all the jobs each advisor performs, the next step is to quantify the percentage of time that each advisor spends on each function. Because we’re working on finding an accurate compensation comparison for advisors, it’s important to determine how much time they actually spend on each function, rather than how much time they are supposed to spend, according to some prearranged organization structure. (If there’s an uncomfortable difference between the two, you can later work to bring into line the job with your vision, but for comp purposes, it’s far better to pay people for what they really do, not according to your imaginary vision.)

Finally, after you’ve determined how all your professionals (yes, you, or you and your junior planner) spend their time, you can use the data from one of the compensation surveys. The last piece is to prorate the appropriate salary range for each job function by the percentage of time an advisor spends on that job. For example, consider a junior advisor spends 40% of her time selecting investments, and 30% of her time on IT and 30% of her time on financial plans.

To get a reasonable estimate of her total compensation, we’d look up the average comp for each of those jobs at a firm your size, and multiply those averages by the percentage of time she spends on them. In this case, that would be $65,000 for a senior portfolio administrator (x 40% = $26k), $63,000 for IT (x 30% = $18,900), and $58,800 for a financial planning specialist (x 30% = $17,640), for a total average comp of $62,540.

Of course, that figure’s not accurate down to the dollar, but it’s a pretty good ballpark number for what young advisors who have these jobs get paid at other firms. Much of the accuracy depends on how closely those survey averages come from firms of the same size, offering the same services, and in the same geographic region as your firm. Unfortunately, no survey cuts their data that specifically, so ultimately you have to decide whether the figures you have are close enough.

Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at [email protected].


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