Financial advisers like to say they run a relationship-based business. It turns out that's true in more ways than they may realize.
A major factor in how well individual firms performed during and after the economic downturn is how well they managed human capital, according to the 2011
InvestmentNews/Moss Adams Adviser Compensation and Staffing Study.
If it sounds like a warm and fuzzy way to say that successful firms pay better, it's not that simple, according to advisers who beat the averages in growth and profitability. These firms have a number of traits in common regarding the ways they attract and retain a top-quality staff.
The concept is just common sense to Yonhee C. Gordon, a principal and chief administrative officer at JMG Financial Group Ltd., which has $1.25 billion in assets under management. The firm has 47 employees, with the average tenure 12 years.
JMG and other firms that outperformed industry averages tend to have comprehensive, individually tailored plans to attract, train, reward and retain “top performers,” not only among advisers and professional staff members but for all their employees, the survey found.
“Our advisers are out of the office a lot, and clients frequently talk to staff,” Ms. Gordon said. “It is important for our clients to feel they are being serviced at the highest level.”
Jeff Pierce, senior financial research analyst for
IN Adviser Solutions, which conducted the survey, said the goal this year was to “look at firms doing something different and see how they are doing profitwise.”
What he found was a clear correlation between personnel management and success. “Employee satisfaction, [and] finding, hiring and replacing staff, will all impact profitability,” Mr. Pierce said. “It won't be immediate gratification; it does take time to build.”
Surprisingly, size is not the determining factor for firms that do especially well, although once firms hit a “critical size” of at least $250,000 in annual revenue, it is more likely that they have recognized the need for a human-capital-management strategy and have developed the means to carry it out, Mr. Pierce said.
Overall, the advisory industry has recovered from the 2008 downturn, according to the 616 advisers surveyed online by
InvestmentNews/Moss Adams in the spring. The average profit margin and pretax income per owner in 2010 surpassed the previous high in 2007, although advisory firm growth slowed in 2010 over the year before.
Some firms continue to do better than others and are widening the profitability gap with their competitors. Firms identified in the survey as meeting 11 human-capital best practices have nearly 80% higher revenue, 15% higher profitability and nearly 50% higher pretax income per owner. The firms consistently win more clients and larger accounts, the survey found.
COMMON CRITERIA
Among the criteria top performers shared are high revenue per staff member, clearly defined individual and firm goals and objectives, and formal training programs and performance evaluations.
Employees at Ms. Gordon's firm get extensive training and constant feedback, she said. New employees get an informal three-month review, and all employees have formal evaluations every six months, with several senior staff members providing input.
It sounds like a lot of pressure, but Ms. Gordon said it actually improves function and increases confidence.
“Employees appreciate the feedback,” she said. “It gives them a target to shoot for.”
Thoughtfully planned and executed human-capital management is a common element among firms that have done well over the past few years.
Advisory firm Balasa Dinverno Foltz LLC, which manages $2 billion in assets, also puts a strong emphasis on hiring the right employees and helping them grow. The firm has increased its emphasis on growth and is on a hiring binge, with eight new hires so far this year, said president Armond Dinverno.
About three-quarters of advisers surveyed said they plan to hire in 2011, increasing competition for professionals and specialists.
Base salary has risen between about 1% and 4% annually since 2007 for most advisory firm employees, with a few notable exceptions. Tax specialists topped the list, with an average annual increase in base salary of 13% since 2007, and advisory firms listed specialists in general as their top hiring priority in 2011. Chief executives also did well, averaging 12% annual increases during the period.
RAISES MAINTAINED
Since the economic downturn began, Mr. Dinverno's firm has continued to give raises, even during the market crisis. The raises were above industry averages, he said, in order to retain top employees who worked hard during a “tough” market.
Average compensation varies widely, with experience and geographical differences accounting for some of the range, which is between $50,000 and $149,200 for advisers.
Firms that offer incentives perform better overall in managing human capital, the survey found. Both Ms. Gordon and Mr. Dinverno believe that pay encourages performance, and both firms make every employee eligible for incentive pay. They keep employees up-to-date, with Mr. Dinverno reporting monthly on company performance in terms of incentive pay. “People like to know where they stand,” he said.
In addition to pay and incentives, top-performing firms give employees a chance to move up without having to move on.
Ms. Gordon, who herself started at JMG in an entry-level position, said that she personally meets with each staff person after their semiannual evaluations to discuss their career objectives. It isn't empty talk, either. More than 40% of the firm's financial advisers started at the firm as an entry-level financial planning assistant.
POOR PERFORMERS
Ms. Gordon's firm doesn't have an “up or out” philosophy, but the emphasis on development underscores another element of top--performing firms. Firms that outperform their competitors tend to weed out poor performers in order to operate at a high efficiency level, with higher-than-average revenue per staff member.
Although the industry is in a growth phase, only a minority of firms said they are hiring recent college grads. Generally, they favor those with at least one to three years' experience.
Steven Check, president and chief investment officer of Check Capital Management Inc., which has $400 million in assets under management, voiced the most mentioned reason for shying away from inexperienced adviser hires.
“Firms that have more personnel are more likely to hire new graduates,” he said. “We are a pretty small shop,” which makes it more difficult to “train someone up from scratch,” he said.
Likewise, only about 43% of firms employ interns, but those that do cited the interns as a good source for eventual hires.
lkuykendall@investmentnews .com
