Harnessing Human Capital

As much as we believe in the relevance of compensation research, our own experience has led us to the conclusion that compensation is but one component of successful human capital programs at financial advisory firms. As such, we are looking to address the myriad challenges and opportunities advisors face today as they hire, manage, compensate and advance their team members.

The reality is that many firms add staff or advisors to solve problems or capitalize on opportunities. However, without a sound human capital program in place, adding team members may solve one set of problems while creating entirely new ones.

With this in mind, we focused on studying each area of human capital to provide insight into the best practices that advisory firms can use to improve their investment in human capital (see Quantuvis Best Practices Study Series Part 3: Human Capital Findings Report). We discovered there are eight key tenets of a human capital program, each of which is reviewed in detail in the Findings Report:

* Firm vision and goals

* Organizational model

* Job descriptions

* Career ladders

* Firm compensation plan

* New hire process

* On-boarding and training

programs

* Performance reviews

Throughout this research, we look at the performance of top-quartile advisors, or 1QAs. These are the top 25% of financial advisors based on total owner income, measured by all owner job compensation plus all ownership returns. What we learned is that this group of advisors outperforms its peers by a margin of 10% to 20% on average when it comes to implementing best practices for human capital.

It is true, of course, that these differences aren't huge. But when they are added together, we see that 1QAs deliver incrementally higher investment yields and exponentially better performance. For example:

* 1QAs achieve five times greater total owner income, six times greater revenue and seven times greater base profit than their non-1QA counterparts.

* 1QAs demonstrate greater performance across every performance metric related to a firm's human assets (see "Human Capital Pays Off," page 86).

 

EVALUATING COSTS AND RETURNS

If 1QAs outperform their non-1QA peers in revenues, profits and key performance metrics, these gains can be attributed, at least in part, to better leveraging of a firm's human capital. With larger and better deployed teams, 1QAs create, sustain and scale growth by efficiently leveraging their time on revenue-producing activities. Key findings show that 1QAs:

* Have a higher headcount, which better leverages advisor time;

* Hire additional advisors to support owners and drive the firm's revenue growth;

* Are willing to invest in additional staff and higher compensation; and

* Focus on hiring more experienced and licensed staff members.

In addition, 1QAs more actively employ the tenets of a human capital program, helping to contribute to their 1QA performance. Given our work consulting with these top firms, our experience and the data suggest that even small, incremental improvements in harnessing human capital can yield extraordinary results.

 

INVESTING IN THE TEAM

1QAs tend to focus more time, energy and capital on firm staffing, particularly as it relates to hiring and compensation. In addition, these top-performing firms are making investments in human capital programs to more effectively manage teams and firm performance:

* 85% of 1QAs have established job descriptions for team members, compared with 67% of non-1QAs.

* 1QAs are more likely to review job descriptions as part of the ongoing process of managing people, with 72% of 1QAs reviewing job descriptions outside of hiring and promoting, compared with only 63% for their non-1QAs peers.

* 60% of 1QAs have some form of career advancement in place in their firm. By contrast, only 34% of non-1QAs are implementing career advancement strategies.

The increased focus on developing career stands out significantly. It often helps alleviate the "hire, train and leave phenomenon" that many financial advisors are facing as they look to transition their firms in the near future (nearly 33% of firms plan to transition over the next seven to 10 years). Investing the necessary time in developing job descriptions and career paths is difficult for everyone, but the firms that are making these kinds of investments are seeing the results-greater owner income, revenue and profit.

 

DEFINING COMPENSATION

In many ways, compensation drives behavior-for both individuals and the firms for which they work. Compensation is a key factor in an individual's decision to join a firm and an ongoing factor in their decision to stay. At the same time, compensation represents the most significant cost of doing business for the majority of advisory firms.

Compensation is more than a capital cost-or a cost of doing business. It is the single biggest investment most firms will make in leveraging their time, servicing their clients and ensuring the ongoing success of their businesses.

With this view, compensation becomes more than a cost; it is a business asset just waiting to be leveraged. That said, leveraging compensation requires more than simply depositing money into an employee's checking account every week. To leverage compensation, a practice must have a defined strategy and well-developed plan for how the dollars paid can make a material difference in its growth and development.

We contrast this view with research showing that less than half of advisory firms have a developed compensation plan, formal or otherwise. In most cases, practices address compensation on a subjective, individualized basis rather than developing a defined strategy and structure for using compensation to promote firm growth and success.

Even with most firms lacking a compensation plan, 1QAs are investing more in their teams in order to promote growth. For example:

* 1QAs spend more than twice the amount on a per-staff-member basis than non-1QA firms.

* On average, 1QA advisors earn one-third more than their non-1QAs peers, and lead or senior advisors earn at least twice as much as their more junior counterparts.

* 1QAs are much more likely to invest in benefits for their team than non-1QAs, with more than 80% doing so. Less than 50% of non-1QAs provide benefits. The most common benefits 1QAs provide are medical plans, followed by retirement contributions and licensing or professional designation costs.

* 63% of 1QAs and 42% of non-1QAs provide incentive compensation in their firms. On a percentage basis, 50% more 1QAs are providing incentive compensation than their non-1QA counterparts.

Given the data, it is not difficult to determine that compensation is a key contributor to an advisory firm's ability to effectively recruit, retain and reward talent. What is less obvious to some, however, is that compensation affects how practices drive individual success and even firm success.

 

GEARING UP FOR GROWTH

When the financial markets cratered in 2008-2009, advisory firms reduced expenses as they braced for the worst. This resulted in a near total freeze of hiring and, in some cases, reductions in staff size. As 2011 unfolds, we see firms turning the corner once again to focus on expanding human capital:

* Fewer than 50% of financial advisors were hiring in 2010, a 10% increase from 2009 and a trend that we expect to see continue this year.

* 1QAs are more likely to have developed and put in place a formalized process for hiring.

* A majority of firms are still utilizing self-taught training methods, an area in need of improvement across the profession.

* Less than one-third of non-1QAs conduct advisor performance reviews, while 53% of 1QAs monitor advisor performance.

Although we understand that hiring and training are not favorite activities of most advisors, that does not discount the importance of these human capital functions. Who is hired and how they are trained play as big a role in whether firms see a return on their investment as it does in the success and overall satisfaction of the individuals and the firms for which they work.

 

MANAGING PEOPLE PERFORMANCE

How advisors engage their people in the delivery of services to their clients is a crucial element to an advisory firm's success, as well as the ability to sustain and scale it. However, the ability to manage people and their performance effectively, in ways that fully tap their potential, requires knowledge, skill and a visible commitment from the top.

Given their entrepreneurial nature, financial advisors often lack the time, talent and temperament for managing people. Our data shows many more firms can benefit from conducting staff and advisor performance reviews. In addition, those that currently do so can likely benefit by studying and implementing best-practice standards. Consider the following:

* 83% of 1QAs conduct staff performance reviews, compared with only 61% of non-1QA advisory firms.

* Only a slight majority (53%) of 1QAs conduct performance reviews of financial advisors.

* 63% of 1QAs conduct performance reviews annually, 15% semiannually and 10% quarterly.

* For advisory firms that conduct reviews, a strong majority already include industry best practices in their review discussions.

* An overwhelming majority of firms rate themselves satisfactory or excellent across key employee retention criteria.

Most important, there is not yet a discernible industry standard for managing advisors and no clear standard for measuring advisor performance beyond production-related goals. Given the pending transition of advisors and the likely increase in the need for advice over the coming decades, a clear and compelling need to train and manage the next generation of advisors more effectively is obvious.

Capital can make a significant difference in an advisory firm's performance. Our study findings clearly show that 1QAs invest more in human capital, but not by significant margins. Seemingly, it is the sum of these incremental performance gains across the spectrum of human capital that helps to deliver exponentially better results.

With that in mind, imagine the possibilities for all financial advisors-1QAs and otherwise-as they explore the many opportunities to put into practice strategies that will help them better harness their human capital. With strong commitment from their owners, practices will be able to realize increased revenue growth, improved service and higher levels of satisfaction.

 

Stephanie Bogan is CEO of Quantuvis Consulting (stephanie@quantuvis.com). Natalie Doss is research manager (natalie@quantuvis.com). For a discounted copy of Quantuvis Best Practices Study Series Part 3: Human Capital Findings Report and a free online Human Capital Dashboard with customizable benchmark comparisons, log in/register at www.quantuvis.com and use promo code HCS50 at checkout.

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