Threats Seem Minimal

Early in September, I was lucky enough to hear Rebecca Pomering and Philip Palaveev of Moss Adams present their latest compensation and staffing study of advisory firms at the Financial Planning Association‚s annual conference in Seattle. It‚s safe to say most of the obvious challenges are so miniscule as to be scary.
Why? Because such a confluence of different factors are conspiring to fuel this business‚s growth that it looks unstoppable. It should be remembered that back in 1991, when this profession was about to explode, its future looked bleak because independents seemed too small and fragmented to marshal sufficient resources to compete with wirehouses. So appearances can be deceiving.
Success spawns its own challenges, and now the biggest problem confronting the advisory business is the availability and supply of labor. Sources tell me that there are currently 36 unfilled entry-level advisory positions being offered at one university, Texas Tech.
It‚s not even the recruiting season and 40% of all the firms surveyed by Moss Adams say they are looking to hire skilled employees. As a result, compensation is suddenly going through the roof. Total comp for a lead advisor/non-owner has climbed 41% in the past two years to the $150,000 area, while owners at the larger firms can earn seven-figure incomes.
Equity remains the final frontier, according to Palaveev. About 55% of the largest firms surveyed by Moss Adams now offer equity to their best people, so making partner is starting to become the norm. However, the value of today‚s larger advisory firms is rising as fast as salaries, and equity isn‚t coming free or cheap.
How firms retain non-owner advisors is yet another challenge, although some young advisors actually might prefer to opt out of the benefits, costs and handcuffs that come with partnership. Greater use of incentive pay is one solution.
Ultimately, advisors‚ success rides upon the reputation and quality of their people. But growth requires developing new business, and the first generation of financial advisors emerged from a sales culture. Even if they rebelled against the production quota, the proprietary product mentality endemic at giant financial services businesses, they knew how to sell, particularly if they were competing against former employers who they believed were running broken business models.
Today‚s new generation of advisors lack these sales skills, although right now they‚re not essential because there‚s so much business to go around. But the success of this business is no longer a secret, and as competitors learn to use the language of independent RIAs, the need for those skills could change.
At an 8% annual rate, advisors‚ client turnover remains significantly lower than the 12%-to-15% level that is more typical of a professional services firm. Eventually, as the profession grows and as you face another similar firm across the street instead of across town, competition will start to come from folks who look and act just like you. As Palaveev explained, suddenly young MBAs are coming straight out of the Wharton School of Finance and Harvard Business School and becoming RIAs. Many CPAs are also leaving their accounting practices and moving into this space.
One last obstacle to the growth of this business is an aging client base. Currently, most firms are experiencing a 3-to-1 ratio in new assets coming in versus what‚s going out the door in distributions. If that ratio were to reverse, the economic dynamics could change radically as well.
But all these problems seem modest when contrasted against the backdrop of a demographic tidal wave in an affluent society with constantly increasing life expectancies.