Back when I had jobs that involved managing people, probably my toughest ongoing battle with corporate management was over hiring and pay. Often, in their zeal to “contain costs,” as Oscar Wilde said, those in charge “know the cost of everything and the value of nothing.”
It hadn’t taken me more than a couple of years of trial and error to realize that when you’re doing something important (I know, putting out magazines isn’t curing Ebola, but we do like to get it right), one good employee can be worth two — or even three — mediocre employees. They work harder, work smarter, make fewer mistakes, take responsibility, help (and often inspire) other employees and are way, way more productive. I always tried to hire the best people I could find and pay them on the upper end of the pay scale for their jobs. This sent the message that we valued their skills and experience, and motivated them to do their best work.
Consequently, I was pleased but not surprised to read that one of FA Insight’s major findings in its 2015 “Study of Advisory Firms: People and Pay” is that the most successful firms pay their employees — both professional and non-professional — more. At the same time, these firms operate more efficiently, reducing their overall costs and increasing their bottom lines.
This year’s “People and Pay” study surveyed 351 advisory firms: 67% were RIAs only (no BD affiliation) and another 9% were primarily RIAs (which means they are independent RIAs, but with a BD affiliation for “conducting limited commission-based business”). The remaining 24% were affiliated with an independent BD, an IBD that has a financial planning RIA, an insurance BD, a wirehouse, or a bank or trust company.
As two-thirds of the participants were independent RIAs and another 9% were almost independent RIAs, it’s curious that FA Insight’s principals Dan Inveen and Eliza De Pardo would water down this 76% majority of similar businesses with the remaining 24% of not-very-similar businesses that have brokerage, insurance, banking or trust company affiliations. It seems that the data would be cleaner with this 24% broken out separately — and interesting to see a comparison of the two groups.
But the combined data does offer some interesting insights. It’s not surprising that median firm AUM growth slowed a bit from 2013 (17.1%) to last year (10.9%), considering that stock markets are trailing off. It’s encouraging that client ranks continued to grow (6%) at a rate that’s down only slightly from the 6.5% growth in the year before, and that this growth translated into 14% higher revenues in 2014.
As one would expect, overhead (as a percentage of revenue) fell, as firm revenues continue to grow: Median firm overhead expense, as a percentage of revenue, actually fell from 36.6% to 33.6%, which drove up median profit margins from 22.1% to 26.1%.
“The expense drop, coupled with the 14% revenue growth, fueled a dramatic four-percentage-point jump in median profit margin, which reached a record 26.1% in 2014,” the authors wrote.
However, it is surprising that this growth continued at a time when firm staffs — along with the accompanying increased overhead — continued to grow as well. “As firms increased business volume, headcount grew as well,” wrote Inveen and De Pardo. “The typical firm jumped from six to 6.8 full-time equivalents (FTEs) during 2014.”
While that might not seem like much of a staff increase, it is a 13.3% increase in the largest overhead expense in virtually all firms — 78% of all firm expenses in the study are “people-related.”
That makes it even more surprising that the most successful firms actually pay their employees more than other firms. The most successful firms in the study are called “Standouts” (the top 25% of firms, determined by equally weighting revenue growth and owners’ income, in each of four size categories).
“Standout firms paid their team members 5% or more in comparison to other firms,” wrote the authors. “For only one position (associate advisor) did Standouts tend to pay less.” They added that “compensation can be an important factor in recruiting new talent to a firm” and plays a “critical role in retaining and incenting a firm’s existing team members.”