Demand for top young talent has outstripped supply, and that has some independent advisors worried about the future of the profession.
By any measure, Charlie Haines, president and CEO of
Charles D. Haines LLC in Birmingham, Ala., runs a thriving advisory
business. With $400 million in assets under management, 20 employees,
seven equity partners on staff plus three outside shareholders, three
junior planners under age 40, an open-book management style, and
formalized recruiting, training and career development programs,
Haines' shop would seem to be the envy of his colleagues.
Yet Charlie Haines has a problem. "We have more
business than we can handle," he says. "Yet we still have a shortage of
talent, and we're having trouble recruiting even the two to three new
hires planned for this year." Haines puts it bluntly: "Our industry has
a supply-and-demand train wreck coming."
Haines is not alone in his assessment of the
industry's future. "The need for professional employees is the Achilles
heel of this industry," says Mark Hurley, a senior advisor with
investment bank Headwaters MB. He is co-author of the controversial
white paper, Back to the Future: The Continuing Evolution of the
Financial Advisory Business, published by JPMorgan Asset Management and
Undiscovered Managers, a sequel to Undiscovered Managers' 1999
state-of-the-industry report that was equally controversial-and
prophetic. In Hurley's opinion, the industry is on the verge of a labor
market disruption comparable to the boom and subsequent bust of the
tech sector in the late 1990s and 2000.
A constellation of factors has contributed to the
crisis, but the core problem is simple. The advisory business has seen
a flood of new entrants from banks, trust companies, insurance agencies
and brokerages repackaging themselves as "financial planners" to
accounting and even law firms wanting a piece of the pie. There is
simply not enough professional talent to go around, especially of the
caliber required at top firms.
More than 50% of the membership of the FPA is over
50, and most have spent so much time building their businesses that
they have simply not had the time or money to take their noses away
from the grindstone and smell the winds of change. Many are operating
under such tight margins that they can't compete with deep-pocketed
banks and wirehouses when it comes to marketing, recruiting, training
and compensating staff. Even minus the behemoths, there are simply not
enough young planners to replace the baby boomer generation, which is
growing older with its clients.
Demographics are a key issue in recruiting, but an
even more insidious obstacle is the generational disconnect. Many
first-generation planners who built their practices from scratch can't
understand the "entitlement" mindset of young planners who scoff at
starting salaries under $60,000 and want immediate access to clients,
not to mention an equity stake in the business. Ten years ago, a
freshly minted CFP would have been happy to just get a job. Today,
paraplanners with three years' experience, some still studying for the
CFP exam, can expect to draw $60,000 to $90,000 at a major bank,
depending on the region, says Tim Spidel, a Chicago-based executive
recruiter with SBR Inc., who specializes in the wealth management
industry.
And money isn't the only thing young planners want.
They want to be challenged and stimulated, too. "I get hundreds of
e-mails from young planners expressing frustration that their talents
aren't being utilized," says Angela Herbers, owner of Financial Advisor
Resource Inc., a consulting firm in Manhattan, Kan. "They complain that
they're not given enough responsibility or access to clients, that
there's no defined career path, and that they aren't given a blueprint
for achieving equity within the firm."
At 27, with a CFP license and several years as a
financial planner under her belt, Herbers can relate to younger and
older advisors alike. "Most CFP programs didn't exist when
first-generation planners started, and they lack experience in sharing
knowledge, delegating authority and managing young planners'
expectations." And those expectations are high indeed. There's no
roadmap to success in the industry, and a lack of direction at many
firms. Spidel expresses surprise at the lack of formal career
development at even some of the nation's top firms.
"Mea culpa," Haines says, speaking for his
generation as a whole. "Our generation is making a lot of mistakes when
it comes to younger planners. What they hear from us is that we used to
walk three miles in the snow both ways. We older guys and gals need to
get over it, stop looking backward and deal with the fact that the
industry has changed."
Indeed, once a cottage industry, financial planning
has grown into a big business, and most firms never developed training
programs for the next generation of personnel. The omission is
understandable because most were building businesses, and proper
training and career development programs require scale. In addition,
many were lulled into complacency by a lack of competition, a ready
supply of clients and robust markets in the 1990s. The firms that have
been most successful in recruiting and retaining talent grew quickly
earlier than most, and had the foresight to reinvest in their
businesses so that that they could create career paths, solidify
operations and institutionalize client relationships.
The single biggest obstacle in recruiting is the
incredibly long lead-time required to train new staff. "It takes years
to train or retrain personnel," Hurley says. " If you don't have them,
you can't grow, but in order to grow, you need personnel." That creates
a vicious cycle, with more and more money spent on marketing,
recruiting, training and skyrocketing salaries. Operating costs are
higher than ever now that markets aren't routinely returning 18%, a
figure he refers to as a "hidden subsidy" that allowed many firms to
grow revenue quickly with little attention to cost structure.
Today, training has become an umbrella term that
encompasses not only the transfer of knowledge, but also a clear
articulation of the firm's mission and expectations, constant
intellectual stimulation and career feedback, written performance
objectives and incentives, gradually increasing responsibility and
client contact, and a clear roadmap of where they stand in the
organization's hierarchy and what they must do to reach the next level.
"We don't see recruiting as a problem, but as a
challenge to be met," says Tim Kochis of Kochis Fitz Wealth Management
in San Francisco. "The most important feature is that we've always had
a culture of equity and opportunity. From the beginning, we set out to
bring on people who would share ownership as the firm grew, rather than
simply use junior associates to leverage our own wealth." Kochis and
founding partner Linda Fitz correctly wagered that ownership would
attract ambitious talent, reward performance and in turn drive growth.
Today, nine of the firm's 30 staff members are owners, and there are no
structural barriers for other staff to achieve shareholder status.
Four years ago the firm hired Michael Kossman, CPA,
as chief financial and administrative officer in part to help develop
and institutionalize an HR strategy. "Our compensation structure
includes base compensation, individual performance incentives, and
firm-wide profit-sharing based on rigorous goal-setting at the
beginning of the year and several job evaluations," Kochis says. The
system demonstrates that we're willing to provide opportunity, and
gives us early warning if someone is not performing well. Our talented
people have not left."
Yet Kochis and the other advisors quoted in this
article are not representative of the industry. With $1.5 billion in
assets under management, Kochis Fitz exists in that elite stratosphere
of advisory practices described in the JPMorgan-Undiscovered Managers
white paper. The vast majority of the industry-more than 90%, according
to the report-consists of small, marginalized businesses, with less
than $25 million of assets under management and little enterprise
value.
A big question is whether many solo practitioners
will eventually farm themselves out as employees-a tense proposition
for any entrepreneur-or simply fold. They're certainly in demand.
"Ideally, we would like to hire experienced advisors who have run their
own shops, are tired of doing that and want to come under our
umbrella," says Lou Stanasolovich, president and CEO of Legend
Financial Advisors Inc. in Pittsburgh. "But so far we haven't had
any luck."
Given the high cost of training, it would seem
logical to poach professional staff from other firms. Yet the quality
of candidates, especially from the perspective of a sophisticated
financial planning firm, is mixed, Stanasolovich adds, "Programs are
churning out CFPs but the quality varies. Even if we grab someone from
another firm, they often don't have the experience. We have 25
so-called competitors in Pittsburgh, but only three to four actually do
financial planning; the others just handle investments." Training and
experience combine to create the single most important skill in an
advisor, and one that can't be rushed-judgment. "We're not talking just
a couple hundred hours of training," Stanasolovich says, "but several
years of a couple hundred hours."
As a result, most top-notch firms prefer to hire raw
talent they can groom. "We would rather recruit someone straight out of
college with little or no experience but a lot of talent and ambition,"
Kochis says. "That allows us to recruit early and frankly
inexpensively, before making any final decisions. We get to observe
them and train them over a long period of time, and get a sense of
their work ethic, talent and liabilities without taking a lot of risk."
A deliberate program of internal promotion rewards
the best candidates, who in turn find an outlet for their creativity
and ambition. "Someone who joins the firm as a back-office investment
person can move quickly to face-to-face client relationships if they
have the right skills," Kochis says. What's more, the firm pays for all
staff training, including conferences, continuing education and exam
fees, a practice that has become de rigueur at top firms. "We expect
all our staff to be in hot pursuit of either a CFP or CFA degree," says
Kochis.
Peggy Ruhlin, principal of Budros, Ruhlin & Roe
Inc., in Columbus, Ohio, which manages $750 million in assets, also
prefers professional recruits with little experience. "Beginners
understand your business philosophy and culture, your concept of client
service, and your way of delivering advice faster than seasoned
professionals from other firms," Ruhlin says.
Besides a competitive salary, she says, the key to
retaining talent is empowerment. That means immediate access to
clients, even if only to observe at first, and challenging assignments.
For example, all trainees must attend-and occasionally present-a
monthly continuing education subject approved for credit by the CFP
Board. "We always start with an overview, then what kind of client this
would be appropriate for, and finally the really valuable, nitty-gritty
of how this would work for clients in our firm."
Requiring assistant and associate planners to master
a topic and communicate it to others keeps them intellectually
stimulated, she says, and develops skills they will one day use with
clients. In addition, a clear hierarchy of job titles-assistant
planner, associate planner, financial planner, senior planner and
partner-offers a defined career path. While the firm does not offer
equity shares in the business, it awards personal incentives based on
performance, as well as a firm-wide form of profit sharing based on
annual growth.
Haines uses a similar strategy by giving young
planners access to clients early in their tenure. "By sitting in on
client meetings from the beginning, they gain not just technical
knowledge, but also a real sense of what's going on beneath the
surface," he says. "They learn to pay attention to intangibles such as
the body language of the senior advisor, the learning styles of
clients, and how the advisor adapts his communication to each of these
styles."
As junior planners demonstrate initiative, they earn
greater access to clients. Haines calls his apprenticeship approach the
"dentist's office model," where eventually, he says, "the senior
advisor will pop in at the end to add the gray hair and make the final
check." His clinical metaphor makes sense. "I'm 50 and frankly, I may
be starting to look a little old to some clients, especially those who
will be inheriting tremendous wealth in the next few years," Haines
says. "Just like with doctors and lawyers, clients want people who are
going to be around when they need them."
Stanasolovich has come up with a creative way to
hedge the investment risk in new hires while cutting operating costs.
"We take on a lot of college interns relative to staff," he says.
Currently, the firm has 15 core staff members and 12 interns, seven of
whom are in finance, three in marketing and two high school interns who
perform administrative duties.
The interns start preferably as college sophomores,
and work 1,100 to 1,200 hours a year, of which 150 to 200 hours is pure
training. The finance interns are trained on Morningstar Centerpiece,
BNA Income Tax Planner, a Bloomberg Terminal, and Thomson Financial.
While they don't interact with clients, they do sit in on investment
meetings with portfolio managers, as well as learn the basics of stock
picking and risk analysis. They also perform cost-basis calculations,
pull together cash-flow projections, balance sheets and college-funding
projections, and analyze property and casualty, as well as life,
disability and long-term care insurance policies. Stanasolovich alone
devotes six to seven hours each week to training the advisory staff and
interns on investment topics (others devote far more). So far, he's not
worried that they tend to scatter and are in high demand for all kinds
of jobs by the time they graduate. "We get a lot of production out of
our interns after the first six months or so," he says. "It doesn't
cost us a lot, yet with bonuses they could be earning $10 to $11 an
hour by their senior year. So they tell their friends, and the result
is a large pool of smart kids to choose from."
Stanasolovich is proud of his interns, offers one or
two a job each year, and keeps in touch with many of them. "I'll stack
our senior interns against three-year people in other firms any day,"
he says. He sees the program as a way of seeding the industry and
promoting financial education, while in the meantime benefiting from
low-cost labor that frees the professional staff to bill more hours-and
learn to delegate. The goodwill he creates tends to come back around.
Four former interns currently work at the company, and two will be
buying into the firm within the next few months.
Yet even the top players will not be immune from the
labor market juggernaut. "I don't have to take your employees to change
your economics," Hurley says. "I can just force you to meet my offer,
even by half." Plus, many of the big Johnny-come-lately players can't
differentiate quality, Hurley says. "Imagine they poach your fourth
best employee at double the salary. What do you think the rest of your
employees will say?" Planners who switch firms need not even steal
clients to disrupt client confidence and put pressure on operating
costs.
Geography is another problem for high-end firms.
Herbers, given her proximity to big CFP programs at Kansas State
and Texas Tech, finds it easier to place candidates in the Midwest.
(The CFP program at Virginia Tech will graduate its final class in
2006.) "Many young planners want to work close to their families and
friends. They want to start building a client base among people they
know," she says. Hiring the right candidate willing to relocate is
especially important to a planner like Haines, who runs a top shop with
an all-star cast, and is very selective in finding someone who fits-and
is willing to move to Alabama.
Of course, geography works both ways. Chris Johnson
of Capitol Investment Counsel Inc. in Denver has seen his assets under
management triple in three years to $675 million, thanks to Invesco's
relocation to Houston and the downsizing of Janus Investments, which
displaced many investment advisors. "Eight to ten CVs come across my
desk every week, and many are high quality," he says. "We're now
interviewing for two more positions, and have six people coming in for
interviews, four of them unemployed."
Kochis believes that planners who complain about the
flight of junior staff are simply not providing enough opportunity. "If
they see greater opportunity elsewhere, then that's your problem to
solve," he says.
As for professional hires, they expect-no, demand-a
clear roadmap of where they stand in the organization's hierarchy, and
what they must do to reach the next stage. "We need to establish
reasonable expectations between the two generations," Haines says.
"People want intellectual challenges, constant feedback, the ability to
choose and show initiative in an area of interest and the opportunity
to make mistakes in a safe environment," Haines says. "I'm like a new
nonsmoker. I've had to learn to let go, to delegate, and encourage
others in the organization to do the same. I have to have faith that
we'll grow and offer opportunities to these young stallions that are
trying to kick the barn door down. Our industry has so many small firms
because we're control freaks. I'm saying, let's just open the barn
door-but there are certain ways to run around the corral."