A Pivotal Moment to Invest for Growth

This year’s InvestmentNews Adviser Benchmarking Study uncovers significant growth by advisory firms during 2021, continuing a multi-year trend. The demand for talent was historically high—but in 2021, total compensation for advisory positions remained relatively flat. For example, practicing partners earned a median total compensation of $252,000, just $2,000 more than they earned the previous year. When inflation is factored in, advisers are actually learning less in 2022 than they did in 2019, despite firms’ robust growth.

In order to continue growing, firms will have to invest meaningfully both in attracting talent and winning new clients, says Gabriel Garcia, managing director, RIA client experience, business development and strategy for Independent Advisor Solutions by SEI. In an interview with InvestmentNews Create, Garcia talks about what stood out to him in this year’s benchmarking study and shares his thoughts on how firms can build on their success.

InvestmentNews Create: Is the asset and revenue growth advisory firms saw in 2021 sustainable given persistent inflationary pressures and the recent market volatility?

Gabriel Garcia: Inflation and market uncertainty are episodic. And the reality is that for the better part of the last decade, if not longer, firms have been bolstered by market tailwinds and have had great pricing stability, which has resulted in fantastic revenue growth year over year for most of that period. I think continued growth is achievable—not at the rates that we saw in 2021, but at a more sustainable rate. But firms will need to reimagine how they do business in order to achieve that growth.

InvestmentNews Create: What steps can firms do to sustain the growth they’ve grown used to?

Gabriel Garcia: Going forward, firms will need to invest more meaningfully in marketing and business development. In terms of the client base, boomers have been driving revenue for some time, and they are transitioning from wealth accumulators to de-cumulators. So how do firms attract new clients in a younger demographic who are wealth accumulators?

Last year, more than half of new clients came from client referrals, which has been the main driver of new client growth for firms historically. And I believe there's room for firms to gain efficiency and drive greater referral growth. But that needs to be supplemented with marketing initiatives to attract new prospective clients beyond just referrals and win those relationships. Firms spent an average of just 1.6% of revenues on marketing initiatives, according to the study. So, marketing in support of business development is something firms should emphasize.

Many firms have focused their marketing on traditional activities like community involvement, volunteering on boards, sponsoring community events and hosting networking events. But when you look at social and digital marketing activity, we see very low adoption. These are great areas to broaden your brand and highlight your value proposition and meet your audience where they are.

InvestmentNews Create: With compensation growth continuing to lag, especially for career-track positions, what steps can firms take to offer employees compensation at levels that will entice them to stay?

Gabriel Garcia: We believe firms need to rethink their compensation structure, with regard to both how and what they pay employees. For many firms, performance bonuses are very opaque and serendipitous. A quarterly or semi-annual incentive structure can help heighten employee engagement and happiness. In addition, firms should be thinking about long-term incentives around equity compensation and distributing equity to employees who are making meaningful contributions.

InvestmentNews Create: What does the growth of executive compensation say about the adviser landscape today?

Gabriel Garcia: It's very encouraging. For many firms, the need for professional management and executive roles is not being looked at as a cost, it's being looked at as an investment. And you can see it in this year’s study where professional management, specifically the COO role, and the clear connection in driving productivity gains and revenue per professional. So these may not be revenue producing roles, but they are certainly profitability and productivity generating roles.

When you begin to see productivity constrained and growth rates diminish, those are indicators that you should take a step back and think about how your organization is structured and how much time is actually being devoted to the critical work of managing the organization on a full-time basis. That may be the time where executive hires are required.

InvestmentNews Create: What can smaller, emerging firms learn from top-performing established firms when it comes to sustaining growth in today’s environment?

Gabriel Garcia: Larger firms are actually growing more quickly than midsize or smaller firms. Why? As firms grow, the investment in professional management can improve profitability and productivity. In addition, the top firms have pricing power. The study shows a differential in yield on assets from large firms to small firms based on average client size. We've heard a lot about pricing compression in the market, and quite frankly, it hasn't been visited on RIAs— we have seen compression in custodians, manufacturers of investment products and technology providers that support the RIA community. Firms should be confident in the value they provide and the price they charge for their services.

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).