Moneyball for recruiting financial advisers? It exists

Data offer insight into future production of possible signings; what's the OBP?

Dec 13, 2012 @ 3:23 pm

By Andrew Osterland

Talented financial advisers don't come cheap. The largest Wall Street wealth management firms, which have been bidding up the signing bonuses for high-end advisers for years, can attest to that.

But are these star advisers worth the often huge upfront bonuses they now command in the marketplace?

One consultant says he can help firms answer that question. Just as Billy Beane, general manager of the Oakland Athletics baseball club and subject of the best-selling book 'Moneyball,' relies on statistics when making his decisions about players, brokerages can use data to make informed decisions about recruitment, claims Patrick Kennedy.

Mr. Kennedy is co-founder and vice president of product and client services at PriceMetrix Inc., which provides practice management software for financial advisers and aggregates data from more than 35,000 advisers managing about $3.5 trillion in investment assets for more than 6 million clients. The data yields a lot of useful information about optimal practice management strategies. It can also help advisory firms get a good return on the increasingly large investments they're making in advisers they recruit.

The first factor analyzed by PriceMetrix was the level of advisers' experience. One might assume that experience is a valuable asset for advisers — but it's not. The data found that advisers with average, below-average and above-average production were found in roughly equal numbers across all levels of experience. In fact, when other factors affecting adviser production were controlled, the length of experience actually had a negative correlation to future performance.

For every year of experience, an adviser's future production is expected to decrease by $12,700. The takeaway, said Mr. Kennedy, is that an adviser who gets to a given level of production in five years is a better prospect than one who took 20 years to get to that same level.

“The good thing about data like this is it allows you as a manager or adviser to put your energies into the right area,” said Earl Evans, deputy global head of Macquarie Private Wealth Inc. and chief executive of its Canadian subsidiary. While Mr. Evans assesses potential advisers to recruit on a case-by-case basis, he says the data assist in his decision making. “If you have the information, you know what you should be aspiring to.”

The three other most reliable predictors, according to PriceMetrix are the form of adviser production (fee or commission), the nature of advisers' book of business (large vs. small clients), and the depth of relationships with clients.

The advisory industry has been shifting toward fee-based relationships rather than transactional ones for years, and the data show that the switch is paying off. Flat out, fees are better for generating revenue than commissions. “The industry is right about this,” said Mr. Kennedy. “Our data is validation that the fee-based model is a better model.” Not only do fee-based advisers have to worry less about generating revenue, but it allows them to take a more comprehensive wealth management approach with their clients. Clients with fee-based accounts tend to have longer tenure than those who pay on a commission basis.

The data shows that wirehouses are also right about focusing on larger clients. An adviser can expect to see an annual bump-up in revenue of $1,650 for every client who has more than $250,000 in investible household assets. For every client with less than that amount, however, future revenue is expected to decrease by $270. What's more, small clients distract advisers from their more important clients. “The more small clients an adviser has," Mr. Kennedy noted, "the lower the retention rate of large clients they have.”

The depth of client relationships, as measured by the average number of accounts per household, is another strong predictor of future success. Those advisers with a greater number of accounts per household tend to make more money from the relationship and also retain the clients for longer periods. “If advisers are dealing with a lot of thin relationships, they're far less likely to outperform five years out,” said Mr. Kennedy.

The assessment of these four key factors could help managers and advisory firms get more bang for their buck when it comes to recruiting new advisers, said Mr. Kennedy. “The progressive firms are already playing Moneyball," he said. "And others have to catch up.”

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