by Melissa Klein
The financial advisory industry is growing up. While the flailing economy saw many industries downsizing, financial planning practices increased their full-time staff by 15 percent over the past two years, according to a study of 512 firms conducted by the Financial Planning Association.
“Advisors are beginning to recognize that they have to add productive capacity in order to grow,” said Mark Tibergien, partner-in-charge of the Securities & Insurance Niche for Seattle-based Moss Adams, which produced the study. “For so long, practitioners thought they could just build a book of business and surround themselves with administrative support people. They were adding overhead but not the ability to provide more advice to clients. Now they have the ability to grow.”
Tibergien noted that the staffing increase came at a time when “most firms are experiencing margin compression, and their gross and operating profit lines are getting squeezed.”
“It wasn’t a surprise to see compensation costs go up, but it was a surprise to see how many firms added staff during tough times,” said Tibergien. “We were pleased to see that the increases came mostly at the professional level. That’s something we’ve been advocating for a long time.”
The 512 firms in the study, sponsored by SEI Investments, employed a total of 3,200 people with cumulative payroll of nearly $200 million in 2002. Staffing increases were primarily in management, professional and support functions, and to a lesser degree in administrative functions.
“It’s a significant development for the advisory profession,” said Tibergien. “It’s still a relatively new industry, so in some respects, it’s a milestone. Firms are building real enterprises with real staff, and real compensation programs.”
“We would have expected this was a time where people would be hunkering down and sticking to what they know,” said Bethany Carlson, the lead analyst on the study. “Instead, the difficult market has been a catalyst for critical change from seeing being a financial planner as being a lifestyle to seeing it as a business.”
Depending of the staff position, firms saw median increases of from 5 percent to 23 percent in compensation, far greater than the rate of inflation during that period - 1.4 percent per annum, and 2.9 percent cumulative from July 2001 to July 2003.
“If I were a firm owner, I’d use this as an opportunity to reexamine my compensation philosophy,” Tibergien advised. “You can explain away the last couple of years as an anomaly. I would revisit my compensation plan and put it in alignment with measurable goals and my business strategy.”
Expanding their staff adds another challenge for advisors: managing people. “Now they have people who need to know about their career path, who need to know what’s driving their compensation, and what’s expected of them,” said Carlson. “A lot of owners would like to spend less time managing their practices, but as the industry evolves, they’ll have to spend more time.”
While total compensation grew, firms shifted away from bonuses and toward increases in base salaries. The percentage of employees who received a bonus or ownership distribution in 2003 fell to 53 percent, down from 76 percent in 2001.
“It’s primarily a lack of profitability driving the shift away from bonuses,” said Tibergien. “Many people had bonus systems in the past and treated them as a discretionary award, but employees tend to make mortgage payments and car payments based on this. It becomes an entitlement. Firms felt obligated to bump up base compensation.”
Bonuses are the most common incentive compensation, with 11 percent of firms awarding bonuses based on the owner’s discretion and 48 percent combining discretion with certain performance measures.
“There’s a correlation between firms that have true performance incentive plans and more successful financial performance over the period,” noted Carlson.
As compared to the median practice in the study, firms using only performance-based compensation plans (5 percent of participants) have more assets under management, more revenue, higher pretax income per owner, and higher operating profit per client.
In an effort to expand their offerings and reduce fixed overhead, more and more advisory firms are outsourcing at least some functions, according to the study. Ninety-three percent of the participating firms outsource at least one service, Carlson noted. Trust services, legal documents and payroll processing were the three most commonly outsourced functions.
“There’s a lot of pressure in the industry around the idea of the one-stop shop,” Carlson said. “There’s a lot of appeal to that concept, and some of these things would be expensive to build in house.”
“Outsourcing is an excellent way to manage any business,” added Tibergien. “It doesn’t make sense to invest in things that other people can do more efficiently. If it can be rented more cheaply, rent it. If it isn’t something all of your clients need and use all of the time, rent it, and think about the things you need to concentrate resources on in your business.”
“During the last three years, advisors had to be hand holders and tend to clients needs. That means that, in many cases, they were not providing additional services,” Tibergien continued. “The challenge that comes with that is, where do they find time to do that and to still do the other things they need to do to grow their practice? Advisors have to find a better way to leverage their time.”
Tibergien added, “There’s a concept in the wine industry called ‘free run.’ When you pierce the skin of a grape, what you get is called the free run, but when you apply pressure, you get the juice you need to make wine. Many advisors have been getting the free run - they’ve been reacting to opportunity instead of creating it, instead of thinking strategically about which clients they should serve and why.”
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