The financial advice industry continues to thrive, although at lower rates of growth than a few years ago, according to a recent study by InvestmentNews Research and The Ensemble Practice sponsored by Pershing. This could be a sign that wealth management companies may need to reevaluate how they do business, InvestmentNews writes.
Median Growth Rates Down But Salaries Continue to Rise
The median revenue growth in 2016 was 5%, but that’s down from 8% the year prior and far smaller than the 14% rate of growth in 2014 and 16% in 2013, according to the report. What’s more, 2016 was the second year in a row that growth rates were below the 10% goal reported by most firms, the survey found. According to InvestmentNews Research, if 2016’s growth rates continue to be the industry norm, it could be a sign of that the industry is maturing and that times of rapid growth could be at an end.
At the same time, InvestmentNews found, salaries have been growing faster than revenue. Advisors across the board, including lead, service and support advisors, have experienced double-digit growth in their salaries from 2015 to 2017, according to the report. Lead advisors had a 23% jump in their salaries between 2015 and 2017, CEO salaries grew 14%, as did those of service advisors, InvestmentNews writes. Administrative assistance saw their salaries grow 16% from 2015 and 2017, meanwhile, according to the report. And that growth isn’t likely to slow any time soon as demand remains high for professionals, InvestmentNews writes.
At the same time, 2016 was the first time in five years that partner income decreased from the year prior, according to the report. While partners pulled in a still very impressive $558,000 on average, that’s off from $570,000 they made in 2015, InvestmentNews writes. The drop could be due to a growing number of partners — 8% of the firms that responded to InvestmentNews’ survey say they have promoted a staff member to partner. After all, partner salaries actually grow by 7%, which means they’re receiving lower profits as owners, InvestmentNews writes. And the growth in compensation for other positions could also play a role here, according to the report.
The disparity between salary and revenue growth will clearly lead to lower profitability, which suggests that wealth management practices will need to revisit various elements of their operations, from compensation and training to their firm’s culture, InvestmentNews writes. While during times of rapid growth, it’s the innovative and the opportunistic firms that tend to come out on top, a more mature stage of growth in the industry favors practices that are more disciplined, according to the report.
One of the most pressing issues for advisory firms, meanwhile, is capacity, InvestmentNews writes. Of the companies responding to its survey, 60% say they’ve very near capacity and 20% say they’re at capacity and can’t grow any more. At solo practices, the median number of clients per practicing partner — lead advisors who are also owners — is now 124, according to the report. The median number of client relationships at ensemble firms (those with several professionals producing less than $5 million in annual revenue) is 80 for lead advisors and 98 for practicing partners, InvestmentNews found. At enterprise ensemble firms, or those with several professionals producing $5 million to $10 million, the median number of clients is 100 for lead advisors and 133 for practicing partners, according to the report. And at super ensemble practices — those with several professionals producing $10 million or more annually — the media numbers of clients is 92 for lead advisors and 74 for practicing partners, InvestmentNews writes. The report stresses the fact that lead advisors have more clients than practicing partners only at super ensembles, although this is typically how most accounting and consulting business operate, by letting their partners focus on business development through managing fewer client relationships.
At the same time, however, not enough firms appear to be monitoring how they use their resources, according to the report. The majority of respondents do not turn to capacity measures such as assets, number of clients and revenue as priority figures to measure performance, InvestmentNews writes. Only 44% of the firms surveyed use revenues or assets under management to assess the performance of their practicing partners and just 41% use the measures to assess the performance of their lead advisors, according to the report. But only 5% of the companies in the survey use take into account the number of a practicing partner’s clients to asses their performance, while 11% use it to assess lead advisors, InvestmentNews writes.
Financial advice firms should also be thinking ahead of their staffing needs, according to the report. Firms of all sizes had positions that were not filled by the end of 2016, InvestmentNews found. At the same time, because it takes four to six months to bring on a candidate, companies need to be thinking and planning half a year ahead, according to the report.
Likewise, wealth management practices need to be focused on staff development, InvestmentNews writes. And while more businesses are helping train their people in client service, little has changed in how they they provide business development and leadership training, according to the report. Close to half of the firms rely on mentoring by a senior lead advisor when it comes to leadership training, InvestmentNews found. One in five have nothing in place for leadership development and 31% have no programs have no programs for business development, according to the report.
While the advice industry continues to grow, it’s all about managing the details that will determine who succeeds in the current competitive landscape, InvestmentNews writes.
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