After several difficult years, financial measures across the advisory industry have turned positive. Assets under management are up for the third year in a row — as is the average number of clients per firm. Profit growth, revenue growth and owner income all have returned to positive territory this year.
Now, as the industry looks forward, most firms are targeting moderate to very aggressive growth, even as the overall growth rate of the industry is slowing.
In our InvestmentNews/Moss Adams 2010 Financial Performance Study of Advisory Firms, sponsored by Pershing Advisor Solutions, we identified staff retention and human-capital investment as key paths to achieving that growth. This year's Adviser Compensation and Staffing Study builds on that finding, and highlights a wide range of trends and current practices that may help firms leverage human capital to outperform.
First, we saw an overall rise in hiring — with most firms adding positions rather than just replacing departing employees. We also saw a focus on professionals and specialists. In highest demand are advisory professionals. But the study also found heavy emphasis on technical specialists (e.g., estate planners, portfolio managers) who can support a firm's expanded value proposition. Competition for professionals and technical specialists is increasing, which is driving up the compensation for these roles.
Because we feel that the industry is at a critical point in terms of building a new generation of leaders, our study included questions about recruiting young talent. We were encouraged that firms are developing the next generation of talent by paying interns and recruiting recent college graduates.
But the industry could be doing more, and we encourage firms to expand their current efforts. In particular, advisory firms should familiarize themselves with the many top-quality personal financial planning programs at universities across the country, which currently account for 17% of new college graduate hires.
We also looked at trends in compensation. The data indicate that a combination of salary and incentives is the rule rather than the exception. The majority of employees — both professional and nonprofessional — receive a combination of salary and incentive compensation. And the ratio of fixed to variable compensation has remained stable for the past four years for all types of employees.
Combining fixed and variable compensation rounds out a firm's total compensation package, but it's important to tie variable compensation to specific objectives and outcomes. Top-performing human-capital firms do a much better job of this than other firms, and it helps them achieve stronger results.
CAREFUL WITH BONUSES
When compensation is tied directly to goals, it can motivate employees to improve behaviors and practices that drive success.
For this reason, we caution against using discretionary bonuses, which generally are paid out without regard for objective, measurable criteria. We believe that incentive compensation is by definition performance-driven and thus should never be discretionary, especially for key employees (e.g., advisers), whose performance is responsible for most of the performance of the entire firm. Spot bonuses for a job well done can get you a lot more mileage than paying a bonus that isn't tied to tangible results.
It also is important to assess compensation by its total cost — including the cost of benefits, which are on the rise at most firms. By breaking down the total compensation package into components, you are able to determine more accurately how much it costs to employ someone. And sharing this information in the form of an annual statement to your employees may help them to understand how much you're investing in them, which can drive loyalty and motivation.
The key lesson in all this data is that hiring, compensation and benefits are all increasing, so the market for top talent could get very tight in the coming years. Firms that do not have a deliberate strategy for hiring could fall behind in recruiting. You need to know whom you want to hire, how those positions are being compensated in the market and what specific goals and objectives those staff members are hired to deliver. Firms that are hiring anticipate higher growth and profit-ability, so you need to plan ahead if you want to be among them.
For more on the the latest trends in compensation, retention and recruiting strategies, watch Ms. Cruz's interview with Pershing's Mark Tibergien here:Kelli Cruz is director of research and consulting for IN Adviser Solutions. For more information on the 2011 InvestmentNews/Moss Adams Adviser Compensation and Staffing Study, click here.
