For advisory firms, younger advisers are key

Advisory firms are growing at a good clip, and while it doesn't seem as though the trend will grind to a stop anytime soon, leaders are wondering how they can keep it up. The most successful firms are the ones looking at their practice as chief executives, not advisers, with their eyes on continuity, said Philip Pavaleev, chief executive of The Ensemble Practice, during InvestmentNews' Best Practices Workshop in New York on Tuesday. According to the InvestmentNews 2015 Adviser Compensation & Staffing Study, advisory firms' revenue is growing at double digit rates, Mr. Palaveev said. From 2010 to 2014, the average advisory firm has nearly doubled in size. Though growth has slowed down a bit since 2010, the rate is still in the double digits: in 2010 it was 22% and in 2014 it was 13.5%. That means double the clients, assets and employees. "We are successful," Mr. Palaveev said. "In order to create longevity, we need to continue building out the firm." There are a few elements in particular that can get a firm in the lead: adding and motivating employee advisers and compensating accordingly. Perhaps the most important group to consider is younger advisers. Mr. Palaveev said they should not only work with smaller clients, but be included in working with larger clients as well, which sets the stage for those advisers' future in the practice.

#BPA2015 @Palaveev quotes @JunxureCEO: "I knew I had a real business when I saw a client in the lobby whom I had never met."

— Marion Asnes (@marionasnes) October 13, 2015

There are three levels of an adviser employee within a firm: lead advisers, who usually control client relationships; service advisers, who provide service to many clients but do not manage them; and support advisers, usually the youngest employees, who will work behind the scenes in creating and drafting plans. That third level yields returns, Mark Bruno, associate publisher of InvestmentNews said. According to the study, a support-level adviser who earns approximately $61,000, with $17,000 in associated costs, brings in yearly returns of 20.6% of additional income. "They are not bringing in business but supporting the business you bring in, and allowing you to continue to bring in more," Mr. Bruno said.

Leveraging your team is the most influential aspect of a growing firm. Economies of scale, yes but not as significant as leverage. #BPA2015

— Gabe Muller (@GabeMuller_) October 13, 2015

He said three out of four firms are not actively seeking younger advisers, but they should. Eventually, those third-level advisers move up the ranks, and some eventually become owners. But salaries for advisers across the board have remained nearly constant, Mr. Palaveev said, which presents a problem. Salaries need to climb for the firm to grow. Today's second- and third-level advisers won't be able to buy out the current owner if they are not compensated more for their work.

"advisory firm should be 40% salaries, 35% overhead => 25% profit, and the data reflects that" -@Palaveev speaking at @newsfromIN #BPA2015

— Tim Welsh (@NexusStrategy) October 13, 2015

That is where larger firms have noticed a difference. As they leverage their resources and employees, attract large clients, which keeps the business going. "Building a large firm means you can create a firm that endures beyond you," Mr. Pavaleev said.