The recent success of the independent advisor industry is also the source of one of its greatest challenges. Over the past three years, a typical independent advisor has grown more than 20% in assets and revenues per year, according to Schwab Institutional's 2007 RIA Benchmarking Study. While current market conditions might slow those growth rates to a degree, the long-term growth outlook for independent advisors remains very strong.
However, managing growth can be challenging. According to the same study, during the same three-year period, advisory firms have experienced 10% annual growth in their numbers of both clients and employees. And while asset growth and revenue growth may slow, the underlying growth in clients and staff are likely to continue apace. If those rates hold up, a typical advisor firm today can expect to see two to three times the number of employees by 2015, if not sooner. While the recent asset and revenue growth may seem like a windfall, the growth in clients and employees could create a serious headwind for future growth.
At its core, the advisory business is a relationship business, and without the right people on the team, clients do not get the service they need and expect. With 70% of advisory firms' costs attributed to staffing, and with many advisory firms now employing 10, 15 or even more than 20 employees, managing this asset-what many call human capital-is just as important to the future of an advisory firm as managing clients. (See Figure 1.)
Capitalize On Human Capital
So what are advisors doing to overcome these challenges? Firms that do the best managing their human capital can generate 50% to 80% more revenue per professional and 30% to 35% greater revenue per total number of employees, according to research in a 2007 Market Knowledge Tools report by Schwab Institutional called Best-Managed Firms: Time Management and Organizational Effectiveness.
In other words, there is tremendous upside potential-well beyond the inherent growth in the advisory business-to being as thoughtful and effective as possible in recruiting and managing employees. This means strategic recruiting is a battle that has to be fought and won.
The dramatic difference in productivity realized by the most successful firms is driven by a number of factors, but three key practices stand out when firms are managing human capital:
Delegation: As successful firms grow, they proactively shift responsibility from principals to professionals, and then from professionals to support staff.
Defined roles and responsibilities: These firms also map out specific responsibilities for each job in the firm and recruit and hire talent to fill a specific role.
Planning: Successful firms also take a proactive approach to planning for future growth, including multiyear capacity planning that aligns with their long-term vision and goals and includes staffing needs.
Ultimately, all this planning ahead relies on finding great people. That can and will continue to be a challenge.
There will be 11.5 million more jobs than workers by 2010, according to the "Business Implications of the New Reality 2008" survey from Stanton Chase International and Birkman. Firms have limited time and financial resources to dedicate to hiring and retaining talent. And let's face it, most advisors start their own firms or join independent firms to focus on working with clients, not to be human resources managers.
Unfortunately, many advisors still hire in an emergency or by serendipity. This may work every now and then, but ultimately the odds catch up with them. One bad hire can hurt the team, client service and the bottom line.
If a firm is growing, it should be recruiting all of the time. It should always be on the lookout for the best people-even if there isn't a current position to fill. Recruiting, hiring and integrating new talent into an organization is a deliberate, multistep process. Let's take a closer look at one of the most important steps of human capital management: recruiting the right people to match a firm's specific needs.
Maximize Networking And Referrals To Find Talent
Though general recruiting Web sites have been very helpful in the high-tech age, the reality is that networking remains the cornerstone of recruiting. Taking the time to meet with people and expand contacts is a time-tested way to cast a net for the right candidates and make valuable connections. It also increases a firm's visibility.
Even the younger, tech-savvy generation still relies on good old-fashioned word-of-mouth networking. According to a Schwab Institutional 2008 survey of graduate and undergraduate students in Texas Tech University's division of financial planning program, nearly 90% of students said that word-of-mouth networking with professional contacts, family and friends is the most useful tool in their job search.
While word-of-mouth is one of the most popular tactics used by job seekers, only 41% of firms reported using it to find candidates, according to another 2007 Market Knowledge Tools report: Best-Managed Firms: Recruiting and Retaining Top Talent. That's a big opportunity gap for advisors.
Word-of-mouth doesn't have to be passive. Advisors can reach out to their network-other advisors, professional associations, local community relationships and friends. (See Figure 2.)
Don't Forget To Look Inside
Many advisors overlook two of the best networking resources-their clients and their employees. To reach clients, advisors must use newsletters, e-mails or client advisory boards to communicate their recruiting needs.
Some successful advisory firms have put in place formal employee referral programs, which draw on the existing employees' contacts. This rewards the current staff for participating in building the firm. Rewards can range from $250 to more than $1,000 for a successful referral. A common practice is to pay the reward 60 or 90 days after the start date to ensure the new hire sticks. A referral from a top-performing employee can be ideal, because the best employees understand their firm's cultures and can help locate candidates who have the qualities and skills to excel and contribute to the firm's growth and success.
Successful firms emphasize internal employee development and provide their employees with opportunities to grow professionally. Clear career paths and a policy focused on promoting internally are powerful retention tools. Many firms have created a career track for relationship managers that starts with entry-level positions where they learn the key back-office functions, progress to client-facing roles as client-service representatives and then work through multiple levels of relationship management. Having a defined internal career path also helps a firm attract career-minded talent that often looks at the long-term potential of joining a new organization.
Tap The Next Generation Of Advisors
College recruiting can help advisory firms overcome the shortage in skilled professionals predicted by demographic trends. Schools that have Certified Financial Planning Board-registered programs are turning out graduates who are well trained in the foundational skills of the industry.
While many firms recruit on campus, the most successful firms studied in Schwab Institutional's recruiting and retention report are much more likely to focus on schools with CFP programs. Eighty-two percent of successful fee-based firms say they are seeking candidates with CFP credentials, while only 51% of other fee-based firms are. (See Figure 3.)
Internships are an excellent way to connect with younger talent and can help a firm evaluate prospective employees' technical skills and decide if they are a cultural match. More than 80% of Texas Tech students surveyed by Schwab indicated that they planned to or already had participated in an internship program. Similarly, advisors have found success with internships. Nineteen percent of the firms with the best recruiting track record in the recruiting and retention report said that they used interns, and of those firms, nearly 60% hired a former intern, as opposed to just 40% of other fee-based firms.
Hire For Culture, Train For Skill
How new employees match up against a firm's culture and internal team dynamics is critical. According to the recruitment and retention report, the firms that are the most successful at recruiting hire for qualities that are not necessarily trainable-honesty, dependability and interpersonal skills vital to a client service business. Additional technical skills such as portfolio management, planning or technology skills can be acquired in formal training and professional development programs.
Too often there is a tendency for firms to focus solely on technical credentials while ignoring how well a potential employee fits from a cultural standpoint. Most managers recruit, hire and retain employees who can do the job, even though this does not guarantee they will be hiring and keeping someone who wants to do the job. To do this, firms must find a cultural fit. Culture is what drives how things are done in an organization.
The first step in recruiting and hiring for culture fit is to get to know your great employees. What job experience do they have? What attracted them to the financial advisor business and to the firm? What characteristics or traits do the best employees have in common? Are they analytical, competitive or outgoing? What are the top core beliefs or attitudes-about customer focus or teamwork, for example-that they all share? Knowing the answers to these questions gives firms the information they need to focus their interviewing and screening efforts in the right places.
More than two-thirds of the successful firms in the recruiting and retention report said they use personality screening (tests such as the Myers-Briggs Type Indicator or the Predictive Index) and psychometric tests (such as the Kolbe A Index). These testing methods can gauge a prospective employee's personality and cultural fit with a firm and can be helpful tools for measuring important characteristics for career development.
Use Multiple Channels And Recruit All The Time
There is no quick fix to the hiring problem. Success requires persistence and diligence and a willingness to use all the arrows in your quiver to find the right candidates. The top firms make use of every method available-from networking to Web sites to campus recruiting-and do so more consistently than their peers. The key is to conduct a number of different recruiting strategies, or all of them, on an ongoing basis, not just when there is an opening to fill.
While demographic trends and the need for quality, independent advice are expected to drive the future growth of independent advisors, the industry will need to overcome challenges in recruiting, managing and retaining talent. Victory in the war for talent means taking a deliberate, consistent approach to human capital management that enables advisors to stay ahead of the growth curve and outpace competitors.
David Welling is vice president of advisor practice management at Schwab Institutional, a leading provider of custodial, operational and trading support for approximately 5,500 independent fee-based investment advisor firms. Schwab Institutional is a division of Charles Schwab & Co. Inc. Member SIPC.
