No Rising Labor Costs
Interestingly, while revenues have grown a lot, compensation has not followed suit. The result has been extraordinary profitability and flat compensation for most positions over the last three years, something we found in the annual compensation survey conducted by the Ensemble Practice.
Advisory firms may soon experience some shocking repricing, particularly where talent is “portable.” Employees in the areas of technology, business management, general support and administration are being recruited by other industries that are willing to pay a lot more to gain valuable team members in response to their own talent shortages.
According to our PULSE survey at the end of 2021, 50% of firms experienced resignations in 2021. And firms offered on average only 3.0% in cost-of-living increases in compensation for 2022. The Social Security Administration, meanwhile, adjusted its payments by more than 7%.
No Poaching
Advisory firms, unlike brokerage firms, are currently not accustomed to recruiting from one another, even though that behavior is typical in many other industries. But in the future, poaching might make a lot of sense. If you want to hire a good advisor, she is most likely working for another advisory firm, so you just have to recruit her out of there.
And those poaching efforts will tend to have a strong influence on compensation. All it takes is for a firm to lose one valuable advisor and it will immediately reprice all the remaining advisors.
The reason there’s not a lot of recruiting between firms now has a lot to do with the young age of the industry. It’s also perhaps a function of the industry’s fragmentation, which leads to inconsistent demand. The few recruiters who operate in our space mostly focus on moving people out of wirehouses rather than moving them from one independent firm to another.
That said, you can see the cloud forming on the horizon. The largest firms we work with are starting to hire “directors of talent acquisition.”
Low Levels Of Competition
Another factor that’s worked in advisors’ favor in the past is the lack of competition: Advisory firms today rarely compete with one another for clients. Most clients who come to a firm tend to be previously self-directed investors. In our consumer survey, 44% of clients reported not having an advisor before joining their current firm. The remaining clients came from other independents (31%) and large national firms (25%). This stands in stark contrast to industries such as consulting or accounting, where most clients are switching from some other provider. Still, those strong numbers reflect changes: Just seven years ago, around 75% of new clients were previously self-directed (much higher than 44%).
Up until now, the lack of direct competition for clients has likely allowed firms to be much more relaxed about pricing and services. Without that outside pressure, they likely haven’t been motivated to enhance the value they offer to clients.
The Rain Will Come Back
So obviously, when markets, revenues and profits are growing while costs stay the same, when competition is weak for both clients and employees, when private equity has given firms high multiples—when all this comes together, advisors are likely to get complacent. And why wouldn’t they? Life is good.
We must remember, though, that the assumptions upon which all our future plans rest may change. And while this is not a call to build a bunker, it certainly is a reminder that a successful firm hoping to continue being successful will have strategies in place should any of these variables change. Because as much as we would like to live in denial of it, the rain always comes back to Seattle.
Philip Palaveev is the CEO of the Ensemble Practice LLC. He’s an industry consultant, author of the books G2: Building the Next Generation and The Ensemble Practice and the lead faculty member for the G2 Leadership Institute.