Compensation is a hot topic in the registered investment advisor space and firms are going to have to do a lot more balancing to attract and retain the best talent, Schwab’s RIA Benchmarking Study suggests.

The 2020 report, which reflects the compensation piece of the study, showed that 74% of a firm’s expenses is compensation costs, which leads to relatively smaller staffs at firms with a lower level of assets under management. For example, the report showed a firm with a median $250 million to $500 million in assets under management had seven employees, and a firm with a median $2.5 billion AUM had 55 employees.

Three-quarters of firms hired in 2019, with the median firm adding two new staffers. Thirty-nine percent pulled from other RIAs and 33% from colleges and universities. Moreover, 73% planned to hire in 2020, and most of them followed through on their plans even with the volatile environment, noted Lisa Salvi, vice president of business consulting and education at Schwab Advisor Services.

Such activity, the report said, emphasizes the need for a compelling compensation strategy and employee value proposition.

“The economics of our business right now is that we are in a growth industry. A lot of people want the services our clients offer and so you are going to see that reflected in the supply and demand dynamics in the labor pool available,” said Jerry Cobb, senior business management consultant at Schwab Advisor Services.

Salvi and Schwab shared the study’s insight Thursday during a virtual panel discussion. The study included 761 firms in the compensation portion, representing three-quarters of those who participated in the overall study of 1,010 firms. The data, which reflected 2019 activity, was collected on nearly 10,000 employees across 27 roles.

That so many firms were able to bring on new hires in 2020 speaks to creative solutions that firms have created through remote working, the panelists said. “I think that most firms now have a process that they didn’t have a year ago and it’s called new employee digital onboarding, Cobb said, adding that such practices will likely remain after the pandemic.

Cobb said remote working is just one of the many working issues advisors will need to balance this year as they grapple with compensation, which he said is the top category of inquiries the benchmarking team receives.

“I think 2021 is going to be the year advisors have a lot more they need to be balancing. There is the whole health and safety issue that was not on the horizon before, there is the whole remote working component that has to be figured out, and there is a flexibility issue that just burst on the scene in the last year that now has become some kind of expected attribute in some organizations.”

“So, figuring out those factors and determining how they weigh in that compensation challenge that every firm has, I think is going to be the No.1 story in practice management,” he said.

One of the key highlights of the report was a 4% increase in cash compensation across all roles from 2018 to 2019. The Bureau of Labor Statistics in comparison reported a 2.9% increase nationally during the same time, Salvi pointed out. “It’s a great story that the RIA industry outperformed across the board. Growth attracts talent and talent creates growth,” she said.

The report noted that certain areas such as client teams and specialized roles have seen a long-term increase in compensation. The increase in total cash compensation from 2015 to 2019 to operations director from $95,000 to $113,000 speaks to the gains in productivity technology is bringing to that part of the enterprise, noted Cobb.

The higher compensation also applies to client-facing roles, which Salvi noted are among the key roles at firms as they grow. For example, the compensation of a senior account manager jumped 19% to $240,000 from $202,000, and client account/relationship manager saw an 8% hike to $105,000 from $97,000.

One of trends Salvi said she is seeing is firms take an interest in career paths. “Firms that truly take the time to develop a career path and write it down really differentiate themselves in the marketplace,” she said.

She said career path should not only include training and certification but cultural attributes that a firm might want to instill in their people, such as leading a committee, community outreach recommending books to read.

Noting that she spends a lot of time creating awareness of the industry among college students, Salvi said graduates want to know that the firm they are joining will invest in their development. And while a lot of larger firms are already developing their staffs, mid-size and smaller firms must follow suit if they are trying to attract next generation of talent. “They can add this into their employee value propositioning during their interviewing process and really get a lot of mileage out of it,” she said.

“The best clients want to work at firms that are attracting the best clients, because that’s where all the opportunities are, that’s where the growth is, and that’s exactly why we are seeing top-performing firms leverage their websites and the other marketing assets they have to not just speak to those prospects and existing clients but also prospective employees” Cobb added.

Setting clear individual team and firm-based goals is another key trend Salvi said they are seeing, hence performance-based incentive pay, which 77% of firms have adopted, the report showed.   

“It’s a very important practice,” Salvi said, adding that two-thirds of the firms that compensate this way have a strategic plan, a key differentiator in advisory firms. She further noted that three out four roles are receiving performance-based incentive pay.

Equity ownership also is on the rise. Salvi pointed out that in the past five years, firms between $250 million and $1 billion started equity programs to allow more people to participate in future growth and that created options for firm owners, not just succession but also recruiting and retaining talent, she said.  

The report showed equity ownership increased to 33% from 29% in 2018 for firms between $250 million and $500 million, and 27% from 22% for firms between $500 million to $1 billion.

“We have to develop people for long term, we have to create that path and we have to show them the reward that accrues to people who progress down that path,” Cobb said.