Efficiency will have to become the new mantra at independent financial advisory firms as revenue continues to slide and compensation climbs.
Median annual revenue growth for advisory firms, which has been trending downward since peaking at 16% in 2013, was up just 5% last year. That's down from 8% in 2015 and 14% in 2014, according to the 2017 InvestmentNews Adviser Compensation & Staffing Study.
The research, sponsored by Pershing Advisor Solutions, found that average salaries for positions ranging from administrative assistant to chief executive are now increasing faster than firm revenue, a reality that is pinching firm owners.
"This is an industry with an oversupply of clients and an undersupply of people to provide advice," said Mark Tibergien, chief executive of Pershing Advisor Solutions. "In any industry, that supply-demand scenario puts you in the catbird seat, but the problem in a personal service industry like financial planning is that an issue of capacity limits has been created."
Essentially, advisers can only manage a certain number of relationships, and that means revenue growth is not increasing, he said.
Meanwhile, advisory firms are having to pay more to retain the best advisers and support staff.
Senior-level advisers saw the biggest spike in average salaries in 2017, with a gain of 23% from 2015. (The survey, which is fielded every two years, asks for current salary figures, whereas revenue reflects the previous year-end total: 2016 in this case. Revenue figures are gathered every year, as part of this survey and the complementary InvestmentNews Financial Performance Study.)
Support adviser and junior adviser salaries increased by an average of 13% and 14%, respectively, over the same period.
With an average annual compensation of $558,000, firm owners are still a long way from missing any meals, but that does represent a 2% decline from a $570,000 average in the 2015 study.
The research, based largely on a survey of 353 advisory firms conducted between April and June, found that firms do not appear to be recruiting aggressively or effectively enough, especially for positions that require more experience and expertise.
At Austin Asset, an $800 million advisory firm in Austin, Texas, financial planner Scott Ela's firm has changed the way it recruits people. It's shifted away from hiring people brand-new to the financial advice business.
"In the past, we just hired a good candidate and fit them into the roles where they were needed," he said.
Austin Asset now recruits individuals who have the experience and skills needed to fill particular roles.
Even though there are higher upfront costs involved in hiring more-experienced people, the switch has increased the firm's overall productivity, Mr. Ela said.
"In some ways the training is easier because they're already familiar with the way the industry works and terminology," he said. "Now instead of it taking two years until someone new is ready to sit with clients, it's more like four months."
Another challenge across the industry is whether to pay up for lead advisers or to "build a bench" of junior advisers who represent future growth.
Gabriel Garcia, a managing director at Pershing Advisor Solutions, said some firms are increasing their focus on junior-level advisers both to save money and increase their future capacity to serve more clients down the road.
"There's a shortage of veteran advisers, and it's going to be concerning if we don't see firms create capacity that will drive growth," he said.
Nearly 90% of firms surveyed said they are currently at or near capacity, which is the main roadblock to growth, but some firms are managing capacity better than others.
"The top-performing firms reported having 27% more capacity at the support and service adviser roles," Mr. Garcia said. "They are doing that by being strategic in creating a bench, and hiring at the lower levels."
Angie Herbers, who runs an eponymous consulting firm, said the slow squeeze of economics inside advisory firms is not surprising, but also not easily resolved.
As firms grow, veteran advisers move into C-suite management, which is a "cost center," she said.
"Those leaders transition their clients over to another lead adviser, and it's very common to see this happen, and it results in spending more money," Ms. Herbers said. "But lead adviser salaries are going up because service-level adviser salaries are so inflated, now starting between $75,000 and $95,000. For that reason, firms are saying they'd rather pay a little more for a lead adviser with some experience than pay the significant price for service advisers."
Ms. Herbers described it as a "perfect storm," and said that "supply and demand for advisers is way out of whack," which she attributed at least partially to the desire to grow larger firms.
"The idea that building a larger firm will make you more money is an illusion, because building a larger firm will take more of your money," she said. "The only thing you will gain is enterprise value, but you're betting that you can sell that illiquid asset down the road. At this point, the only way to solve this is to graduate more talent."
Brandon Odell, director of business consulting at The Ensemble Practice and one of the authors of the report, said "there needs to be some hiring." Planning for the future means adding the service- and support-level advisers "who will be leading three-to-five years from now," he said.
"You need to be hiring into a focus on growth, because when you're over capacity, you're saying nobody has time to do anything else, and that means you can't add another client, which slows down business development," he said. "Recruiting has not had the success it should, and it raises the question of whether a firm will be able to capture growth when it is available."
Anand Sekhar, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions, cited demographic trends, such as the retiring baby boom generation, as among the factors challenging firms and pushing down their revenue.
"There's a challenge of filling a leaking bucket as the baby boomers retire and assets move out," he said. "They're just not able to bring in new assets to keep up with the exiting assets."
The upside of that scenario, Mr. Sekhar said, is that some firms are starting to work on addressing their capacity issues by "creating cultures of growth."
"You hire a former teacher or nurse, or some other career changer, for example, and they're not necessarily a producer and they didn't grow up in the business dialing for dollars, but they can cultivate referrals from clients by creating exceptional experiences," he said. "The firms that are growing fast have an attitude that they're not just going to have normal client engagement moments."
While boomers are charging into and toward retirement at a growing clip, the study found that average firm assets under management grew by 16% last year.
The study showed that client referrals, professional referrals and business development combined to represent nine percentage points of that 16% growth rate.
The other drivers of asset growth included new hires and acquisitions (4.3%), contributions from existing and new clients (3.8%) and investment performance (5.1%).
Forces subtracting from AUM levels included client loss (-3.7%) and distributions (-2.5%).
Of course, improving the efficiency of firm operations and processes can help expand capacity.
"How many times do people in your firm touch the same document with the same information, and how many times is it handed off to somebody else?" Mr. Tibergien asked. "That all creates workflow stress."
Capacity levels, he said, are a delicate and important part of managing an advisory practice.
"Imagine you are the pilot of a container ship, and if you don't have enough containers you'll lose money, and if you have too many containers you will tip over," Mr. Tibergien said. "Envision an advisory firm as a physical structure like a container ship."
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