Advisers are rolling in dough, study concludes

Compensation for financial advisers continues to skyrocket, and the profession will become even more lucrative, according to a study released last week. The median salary of an adviser, including those with an ownership stake in their company and those without, jumped almost 41% to $142,000 last year, from $101,000 in 2004, according to the 2007 Moss Adams Compensation and Staffing Study of Advisory Firms. The Seattle-based firm collects these data on advisory firms every other year. About half the advisory firms polled were registered investment advisers, and the other half worked through independent broker-dealers. The study was based on a survey of 822 advisers from 738 firms. Out of balance The spike in compensation is likely a sign that the supply of and demand for advisers is out of balance, said Philip Palaveev, senior analyst at Moss Adams LLP. “If demand continues to grow at this pace, it’s evidence we don’t have enough advisers,” he said.
This is already an issue, according to Mark Soehn, co-principal of Financial Solutions Advisory Group Inc. of Chicago, which manages $125 million. “We would like to hire a new-business-development person with investment responsibilities,” he said. “We’ve interviewed multiple individuals over the past year, and it’s difficult.” And the scarcity of talent may worsen after this year, according to the study. Although 23.1% of the firms surveyed hired advisers last year, the percentage making a hire is projected to hit 37% this year, according to the study. “That’s very high,” historically, Mr. Palaveev said. The study’s findings reflect the experiences of Robert Trenner, chief executive of Cornerstone Advisors Inc., a Bellevue, Wash., firm that manages $2 billion.
“We did a compensation study and realigned our salaries across the board, and it was most notable at the service level,” he said. But despite frustratingly higher compensation costs, owners who pay these costs are also benefiting. The return on labor costs hit 34% last year, up from 31% in 2005 and 22% in 2001. This return on labor is contributing to one of the more astounding findings of the compensation study, Mr. Palaveev said. “The average partner in big firms made $1 million,” he said. “The partners in the largest firms are becoming millionaires each and every year.” But owners of midsize firms are raking it in, too, according to the study. Upside pay potential The mean average pretax annual income of advisers who shared in company profits, including salary, was $370,982, up 41.4% from $262,438 in 2004. With competition for hiring advisers heating up, owners are restructuring the pay packages of advisers to give them more upside pay potential, the study found. The study showed that 48% of advisory practices paid staff advisers based on their performance last year, up from 44% in 2004, and the number of advisers receiving no incentive pay fell to 32%, from 38%. But over time, advisers need to do more than just offer token incentives and raise salaries, Mr. Palaveev said. “To grow, you have to share that growth” with employees by giving them an equity stake in the firm, he said. “You don’t see accounting firms of any size owned by one person,” Mr. Palaveev said. “With law firms, you don’t see any.” Steve Graubart, chairman and chief executive of U.S. Fiduciary Inc. of Houston, which serves as the broker-dealer for 120 advisers, agrees. “You can’t have a compensation structure that’s incongruous with your revenue model. It’s a question of who owns the client. The one who does the servicing owns the relationship,” Mr. Graubart said. The ability to share ownership has allowed Cornerstone to grow to $2 billion in assets, said Bruce Duff, the company’s chief operating officer. “It’s a huge leg up for us,” he said. Mr. Duff stressed, however, that the advantage is more than just a higher rate of employee retention. “It’s a different class of employee that’s looking to build for the future.” Paying for equity But Mr. Soehn of Financial Solutions Advisory Group said he is wary of prospective employees who want ownership at the outset. “They want ownership right off the bat. We’d love to give ownership, but there’s a process, and it’s not going to happen [upon hiring],” Mr. Soehn said. One way that Cornerstone gets around this issue is to have employees pay for their equity. “Our employees actually write us a check” for the equity stake rather than having it granted, Mr. Trenner said. It is certainly better to receive checks than to write them, according to Mr. Palaveev. “It’s the problem with the wirehouses,” he said. “Brokers can leave, and they can leave with their clients. Instead of paying them a big bonus once in a while, shouldn’t you make them a partner?”