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Pay,ProductivityandProfitsUpforRIAs:CanitContinue?
October1,2015
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Theshortsupplyoflaboroutstrippedbydemandisoneofthebiggestcloudson
thehorizonforadvisoryfirms.
ThisPracticeManagementarticleisintendedforfinancialadvisorsonly(registeredrepresentativesofbroker/dealersor
associatedpersonsofRegisteredInvestmentAdvisors).
Theregisteredinvestmentadvisor(RIA)channelof theadvisorybusinessissoaring,recordingits
highest-evermedianprof itmarginin2014.Butwillitheedwarningsthattalentshortagesand
outdatedcompensationmethodscouldsenditintoatailspin?
Thelatestdataonthewealth-managementindustry’sperf ormancecomesf romthenew“FAInsight
Studyof AdvisoryFirms:PeopleandPay.”The50-pagereportispreparedbyFAInsight,a
researchandconsultingf irm,andspotlightstrendsinf irmperf ormance,advisorproductivity,and
compensation.
Overall,thereportnotes,2014wasabanneryear.Risingproductivity,improvedoperational
ef f icienciesdrivenbytechnology,growingdemandf orholisticf inancialplanning,and,tobesure,
thelong-runningbullmarkethaveproducedaperiodof unprecedentedprosperityf oradvisors.
ButtherearecautionarydataintheFAInsightstudyaswell.“Thereisnoguaranteethatthegood
timeswillcontinue,”saysDanInveen,anFAInsightprincipalanditsdirectorof research.“My
greatestconcernisthatf irmsarelivingonborrowedtimewhenitcomestotheirpersonnel.The
typicaladvisorisagingandnearingretirement.Withexperiencedlaborinshortsupply,howmuch
longercanf irmproductivityincreasewithoutcommensurateincreasesincompensation?”
TheCompensationParadox
Asithappens,compensationhasbeenincreasingsteadilyacrossavarietyof industrypositions.
Chief operatingof f icers,f orexample,havereceiveda7%compoundannualgrowthrateinpay
since2009,whileof f icemanagers’compensationhasrisen4%.Thegainshavebeendrivenbythe
industry’sgrowth.Asthestudynotes:“Thetypicalf irmisnowatasizewheretheCOOposition
anddedicatedmanagementingeneralhavebecomecriticalf orf irmsuccess.”
YetrevenueperRIAprof essionaljumpedevenmore.Themedianrevenueperprof essionalwas
$528,500lastyear,awhopping31%increasef romthe$363,600generatedin2009.Andwith
productivityrisingf asterthancompensation,theindustryisseeingincreasinglyhigherprof its.
Butthesegainshaven’tbeenevenlydistributed,and,paradoxically,thosef irmsthatarepaying
moref ortalentarealsothemostprof itable.WhatFAInsightsterms“standoutf irms,”whichrankin
thetop25%of revenuegrowthandincomegeneration,paymoref ortalent,butgaingreater
productivitybecausetheiradvisorsandotherpersonnelgeneratemorerevenueperprof essional
thandotheirpeers.Forexample,in2014,topadvisorsatstandoutf irmsgenerated$867,472per
prof essional,comparedwith$754,049f ortheirpeersatotherf irms.
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Standoutf irms,thestudynotes,“clearlydef inetheirorganizationalstructuresf orablueprintthat
canbetteraccommodatehiringandgrowth.”Andlargerstandoutf irmsare“morepronetouse
perf ormance-basedincentivepaytobettermotivateteammembers.”
Usingincentive-basedpayf oradvisors,aswellasmanagementandtechnicalpositions,is
especiallyvaluable,thestudyconcludes,becauseof the“greaterability”of thepeopleinthose
jobsto“inf luencef irmsuccess.”Andasstandoutf irmsgrowlarger,resultsf romthestudyindicate,
“perf ormance-basedpaybecomesevenmoreintegraltosuccess.”Amongalltheadvisoryf irms
surveyed,however,just33%rewardprof essionalsexclusivelythroughperf ormance-based
incentives.
InItTogether
Thosewhoareusingincentivesendorsetheprocessenthusiastically.SavantCapitalManagement
inRockf ord,Illinois,hasacompanywidebonusprogramdubbedTeamSavant,whereeveryone
f romtheCEOtoadministrativestaf f istiedtothesamemetrics:thef irm’srevenue,prof it,and
AUMgrowth.If thegrowthmetricsreachthe15%target,employeesreceiveaf ullbonus.If growth
exceeds15%,alargerbonusispaid;if growthcomesinat10%,employeesgettwo-thirdsof their
potentialbonus.
Theprogramispartof ashif tatSavantawayf romabase-salarycompensationmodeltoahybrid
modelthatcombinesbaseandincentivepay.“Everybody’sinittogether,”saysSavantCEOBrent
Brodeski.“We’vebeenverypleased.”
Theincentiveprogramhasabigadvantageonthedownsideaswell.Morevariablecompensation
meanslowerf ixedcosts,puttingthef irminabetterpositiontoabsorbadropinrevenue,should
thisoccur.If mostlaborcostsweref ixed,Brodeskipointsout,adeclineinassetswould“come
rightof f thebottomline.”
Likewise,advisorcompensationatFJYFinancial,of Reston,Virginia,includesbasepay,individual
incentives,andf irmincentives“f romDayOne,”saysJonYankee,partnerandchief executive.
Criteriaf orreceivingadditionalcompensationincludesecuringnewref erralsf orthef irmand
generatingmorerevenuef romexistingclients.
Equityisalsoapowerf ulincentive,thestudynotes,andYonheeGordon,principalandchief
operatingof f icerof JMGFinancialGroupinOakBrook,Illinois,agrees.“Wehave13owners,and
theyareallemployees,”Gordonexplains.“Criteriaf oranequitystakeincludeperf ormance,
leadership,revenuetheybringin,andbusinessdevelopment.Wehavesemiannualevaluations,
andemployeeswhoareontrackf oranequitystakearevotedinbythecurrentowners.”
“Don’tunderestimatethepowerof perf ormance-basedpaytoalignworkbehaviorwithf irm
strategy,”Inveensays.“Thekeyistosettherightbalanceinlinkingincentivestobothindividual
andf irm-relatedobjectives.Thiswillensurethatindividualef f ortcomplements,ratherthanconf licts
withf irmgoals.”
Brodeskiagrees.“Thebalancingactisanart,notascience,”hesays.“If compensationistoo
f ormulaic,youcan’trewardyourrealrockstars,andyourtopperf ormerswillleave.Butif it’stoo
discretionaryandpersonalized,itcanbecomeallaboutmeandnotthef irm,andthat’snotgood.”
Technologyplaysaroleaswell.Newsof twarehelpedFJYreduceitsoverhead.“Whatoncetook
usanhournowtakesaboutf iveto10minutes,”Yankeesays.“That’sasignif icantenhancement.
Asaresult,insteadof havingtopayf orback-of f icestaf f ,wecanhiremoreclient-f acingadvisors.”
DearthofTalent
Butbef oretheycanmotivatethemwithincentives,advisoryf irmsalsoneedtoensurethatthey
canrecruittoptalentinthef irstplace.AccordingtoInveen,agingownerssaytheshortageof
qualif iedpersonneltomeettheburgeoningdemandf ortalentposesthe“biggestthreat”to
advisors’currentgoodf ortune.
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AsBrodeskiputsit,“It’sreallydif f iculttof indexperiencedadvisoryhelp.Top-qualitypeopleare
notonstreetcornershandingoutresumes.They’reusuallyalreadyhappywheretheyare.”
Inresponse,advisorsplacegreatstressonthehiringprocess.“Wewanttomakesurethereare
nosurprisesaboutwhatthejobis,”saysJMG’sGordon.“Wegivecandidatesassessmentsto
conveywhatthejobislike.Forexample,wewillgivethematimedassignmentthatisrelatedtothe
jobtheywillbedoing.Theiranswersorsolutionsdon’thavetobecorrect,butwewanttoseehow
theythinkandhowtheygottotheanswer.”
Inveenagreesthatadvisorsaremoving“intherightdirection”whenitcomestotheirhiring
practices.“WeseethatRIAsarebeingweanedawayf romtheirlongstandingrelianceonhiring
experiencedadvisorsandf ocusingmoreonanewgeneration,”hesays.
Justf ouryearsago,moref irmslookedtootherRIAsf ornewtalentthananyothersource,the
studyreports.Butthisyear,lessthanone-thirdof thef irmssurveyedareturningtootherRIAsf or
newtalent,andtheshareof f irmstargetingwirehousesasaprimarysourceof newhiresdropped
bymorethanhalf .
Instead,f irmsarenow“morelikelytolookatrecentcollegegraduatesthananyothersource,”
accordingtothestudy.FJYFinancialisacaseinpoint.CEOYankeesaysitworkscloselywitha
numberof schoolswithf inancialplanninggraduateprogramstorecruitinternsandnewhires.
“We’vehadgreatsuccessandhavehiredgreatpeople,”Yankeesays.“We’vedevelopedagood
internshipprogramthatemphasizeshightouchwithclients,andIthinkthat’shelpedusestablisha
reputationasaplacewhereyoungpeoplewhoarereallyseriousaboutalong-termcareerwantto
go.”
Theshortsupplyof laboroutstrippedbydemandis“oneof thebiggestcloudsonthehorizon”f or
advisoryf irms,agreesJessicaMaldonado,vicepresidentf orSearcyFinancialServices,in
OverlandPark,Kansas.
Tointroducecollegestudentstotheindustry,Maldonadoworkswithanumberof schools,
includingKansasStateUniversityandtheUniversityof MissouriatKansasCity,tosupplyits
internshipprogram.“Evenif wedon’tgetimmediateproductivity,”shesays,“we’replantingthe
seedsf oraf utureharvest.”
Asf ornewrecruits,Maldonadosaysshehirespeoplemoref ortheirattitudethantheirexperience.
“Threeof ourlastf ivehireshavebeenstudentsjustoutof college,”shereports.“I’minterestedin
therightkindof personwhoisagoodculturalf it.Icanteachthemthebusiness.”
—CharlesPaikert
CharlesPaikertisasenioreditorofFinancialPlanning.
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