Reports of a talent shortage in the financial advisory business have been repeated for years. Now we are beginning to see the consequences: The average rate of growth within RIAs has slowed materially while the price for top talent continues to rise.
Sponsored by BNY Mellon Pershing, the InvestmentNews 2017 Adviser Compensation and Staffing Study shows a steady decline in year-over-year revenue growth for advisory firms, from a high of 16% in 2013, to 8% in 2015, to 5% last year. Meanwhile, advisory staff salaries continue to rise.
In 2017, lead advisor salaries were up 23% year-over-year, service advisors were up 14% and support advisors were up 13%. Administrative staff has also seen salary upticks ranging from 11% to 15%. The implications for the advisory profession are serious and concerning.
Oftentimes people attribute slow growth to a slow economy or, in the case of the advice business, a bear market. Neither of these factors has been in play for about eight years. In fact, studies show an exponential growth in millionaires in the U.S., indicating a substantial opportunity to manage more assets.
Blaming external factors — or factors out of the control of advisors — amounts to the rationalization of real systemic problems:
A lack of capacity to grow
The absence of marketing and clear positioning
Weak business development efforts
Physical limits exist for the number of active client relationships one advisor can manage. That number varies by type of client, value proposition, service experience and complexity of the relationship. It is not uncommon to see a single advisor manage 60 to 80 client relationships. Some have more and some far less, so it is helpful to establish your own benchmark for what is reasonable.
A normal work year has just over 1,800 available hours. If your typical client consumes 20 hours of time each year, you know that the maximum number of relationships you could manage would be 90. Of course, that does not account for time spent on tasks other than client service: business development, business management or continuing education.
The answer for this challenge lies in building an ensemble or a team of individuals who can perform many of the tasks that are too basic for the advisor, or where the advisor does not add value. Advisors often push back on this recommendation, saying they fear losing control of the client, a distracting process change or steep front-end costs.
In reality, the cost of not adding capacity retards top-line growth and squeezes margins because the price for overworked people is going up. As a rule, advisory firms should begin adding staff when they are at 80% of capacity and should begin the recruitment process even earlier, because it can take as long as six months to fill key roles.
One of the most startling data points that came out of the current Compensation and Staffing Study is the decline in productivity. When measured as revenue per professional, the median firm generated $517,000 in 2012 and $478,000 in 2016. When measured as revenue per total staff, the median firm generated $235,000 in 2012 and $230,000 in 2016.
Observing trends in key ratios helps reveal how well you are managing your business. If you are experiencing the same troubling symptoms in your advisory business, it is time to evaluate your workflow, your talent and your client mix. For example, how many steps does it take to open an account, develop a plan, manage a portfolio or produce reports? How many errors does your staff make in each of these steps? Are there elements of these processes that could be automated? Are the tasks performed by people who are inefficient, or mismatched to the type of work required?