The makeup of independent advisory firms has fundamentally changed

The following is an excerpt from the Executive Summary of the 2015 InvestmentNews Compensation & Staffing Study, which will publish next Monday.

Growth has changed the nature of the independent advisory firm. Adviser ownership used to define independence; however, today there are more employee advisers in independent firms than owner-advisers. This change amplifies the importance of career tracks and growing talent. It also poses difficult questions to the culture of the firm and its competitive positioning. With the influx of employee advisers, what does “independent” mean?

And as much as growth has created opportunity and brought a wave of hires, it does not seem to have affected compensation for most positions in the last two years. Salaries for employee advisers and other key positions remain virtually unchanged.

Employee Advisers Outnumber Owners

The dramatic increase seen over the past five years in owner income can be attributed, to a substantial degree, to one factor: leverage. Leverage is the use of non-owner professionals at lower levels of compensation to “leverage” the experience and skills of the highly-paid owners. The leverage effect allows owners to delegate on average $478,000 in revenue responsibility to a Lead Adviser who receives $143,000 in median total compensation, and achieve a 70% gross margin. This leverage effect is much more visible in larger firms, but even within smaller Ensemble firms we find owners using the help of Service Advisers and Paraplanners.

As a result, the overall composition of the independent advisory industry has changed. The single most common position today is not a “practicing owner” or “solo adviser,” but rather a Lead Adviser – meaning an employee who independently manages client relationships on behalf of the firm. The notion that only owners can manage client relationships or that employee advisers will “break out” with their clients has long been dispelled. Super Ensembles – the largest firms in the industry, with over $10 million in yearly revenue by definition – have been building their employee teams for many years and now we see the same effect among smaller Ensembles and Enterprise Ensembles (firms with $5 million to $10 million in annual revenue).

Salaries Remain Unchanged

The wave of new hires has swelled the staff ranks inside advisory firms but surprisingly it has not translated into salary growth. For most positions inside advisory firms, the level of salaries has either remained the same or grown only slightly. For example the Lead Adviser position had a median salary of $110,000 in 2013 and has remained unchanged in 2015. The same is essentially true for the Service Adviser position where in the last two years the median salary has only grown by 8% from $65,000 to $70,000.

There has been some growth in compensation across the industry, but in the form of incentive compensation rather than salaries. This trend of keeping salaries steady and growing bonuses is very prudent and beneficial for firms, but it is surprising that new hires have not had the leverage to negotiate higher levels of compensation. Perhaps the shortage of advisers is not as severe as we thought.

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Brandon Odell is director of business consulting with The Ensemble Practice, and Philip Palaveev is chief executive of The Ensemble Practice. The Ensemble Practice is a strategic partner to InvestmentNews Research and the 2015 Compensation and Staffing Study.