Now that profits are at record highs, financial advisors' next priority should be better people management, a new industry study suggests.
Cost control, solid productivity and soaring client profitability, helped the typical advisory firm reach a profit margin in excess of 20% in 2012, according to an annual survey by FA Insight, a Tacoma, Wash., research and consulting firm. That's the highest margin in the survey's five-year history.
Median total owner income also hit a five-year high, with growth in owner income significantly outpacing growth in firm revenue.
Nonetheless, advisory firms face significant challenges when it comes to maximizing their investment in people, according to the 2013 FA Insight Study of Advisory Firms: People and Pay.
Firms are doing slightly better when it comes to human capital and organizational planning, but theres a great deal of room for improvement, says Dan Inveen, FA Insights principal and director of research. Firms with a good organizational approach remain a minority.
Nearly 80% of firms surveyed said they have no documented organizational plan for the future. More than half of the firms lack documented and up-to-date position descriptions, and more than two-thirds fail to define their organizational structure in a way that effectively supports hiring decisions, according to the study.
Whats more, the declining use of incentive compensation is an especially glaring shortcoming for sustaining and motivating talent, the report states. The share of firms making incentive pay available to professional positions dropped from 56% in 2009 to 52% by 2013.
Nor is ownership being offered as an incentive: 85% of the surveyed firms reported that they had no ownership distribution plan. Among the studys largest firms, only about one in 10 team members are owners.
Advisory firms should reconsider how they position and develop lead advisors, FA Insight recommends. For example, simply hiring another lead advisor isnt necessarily the most effective way to expand lead advisor capacity, the report maintains.
Associate advisors and non-professional support represent a more plentiful and cost-efficient labor pool for leveraging lead advisor time, the study says. Further, these roles can form a ready collection of candidates for grooming future lead advisors. At present only three support or associate advisors exist for approximately every five lead advisors.
That's a problem not just for productivity but also for succession planning, Inveen says: Firms need to put plans in place to better internally groom and develop successors to take the place of experienced, aging advisors.
Assigning dedicated managers to work with lead advisors also allows the advisors to spend more time on revenue generation, he adds.
Firms that used a team-based approach to work with clients proved to be more profitable and productive, increasing revenue 50% faster than their peers, the study found. Revenue for team-based firms increased 14.6% last year, according to the study, while firms with an individual approach grew only 9.7%.
Weve been hearing about the benefits of using teams, but this years study may be the first time its been quantified, Inveen says.
Advisory firms should also reconsider incentive pay, the study suggests.
Many firms view incentive pay simply as an additional expense rather than an effective way to boost individual performance, according to the report.
The key, Inveen says, is a strict incentive program that aligns awarding of incentive pay with achieving goals of the firm. So a firm that has growing revenues but trouble with profitability or client retention should reward employees who can help the firm overcome those problem areas, Inveen suggests.
Another incentive goal may be helping acquire clients with a predefined profile that is best suited to the firms target market.
But Inveen cautions firms to think carefully about the behaviors they want to reward. Incentives can be tricky things," he says. "You dont want to incent behaviors that are counterproductive to the firm at large. Just getting new clients and growing revenue without clarifying what specifically is needed might be stimulating in the short term but damaging in the long term.
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