The RIA industry is growing and evolving at a remarkable pace. As the industry has matured, independent registered investment advisory (RIA) firms have grown in size and complexity along with it. Responses from more than one-third of firms participating in Schwab's 2014 RIA Benchmarking Study[i] indicate that they have doubled their assets under management (AUM) and revenues since 2009.
The rapid growth has made the industry landscape more competitive. RIA firms today are working harder not only to build and sustain their businesses, but also to secure and retain quality talent for their firms. Attracting and retaining top talent is more competitive than ever, but it's also more important than ever. Study results suggest that the firms who attract and retain quality employees are more profitable than average firms in their peer groups. They also report that they are growing faster, and as a result, they tend to be more focused on prioritizing talent as part of a strategic imperative. A competitive compensation plan for all employees is an essential element of a firm's overall strategic goals.
Attract Top Talent With a Competitive Compensation Strategy
Although it may seem basic, many firms struggle to develop a compensation strategy that is both competitive in the marketplace and cost effective for the firm. Compensation typically accounts for about three-quarters of an advisory firm's total expenses, so the importance of achieving this balance is critical.
Meanwhile, as growth in the RIA space has accelerated, an influx of new entrants to the independent channel has made the ability to attract quality staff across all levels of an RIA firm more challenging. In 2013, 50 percent of new hires at firms in our Study left one firm to join another, which makes apparent that the risk of losing key employees to competitors is very real. Retaining top performers will continue to be a key component of growth and sustainability for RIA firms in 2015.
We see that RIA firms are adapting to the ever-changing landscape by creating operational structure that supports their continued growth and helps them operate more efficiently. Top-performing firms are achieving this objective by casting a wider talent net to recruit top performers from professions with similar client-service philosophies. Among firms in our Study, dedicated management positions – chief operating officer, chief investment officer, chief compliance officer, etc. – are seen at nearly half of firms with more than $1 billion in assets, while 79% of firms report at least one certified financial planner on staff, 65% have at least one chartered financial analyst, and 51% have at least one certified public accountant on board.
Quality talent helps a firm grow and remain competitive, but firms must also compensate talent in ways that generate real value for employees across the organization. Among firms in our Study, shared characteristics emerged among top performers when establishing a competitive compensation strategy.
The top-performing and most successful RIA firms excel at planning: Employee compensation should be considered an investment in the firm's future. Compensation impacts multiple aspects of employee performance including motivation, productivity, employment cost, and talent quality – all of which ultimately impact overall success. Top-performing firms often excel at designing a compensation plan and a business strategy that are aligned with each other, which can result in greater profitability and increased operational efficiency.
Incentives are structured to recognize performance beyond expectations: A competitive base salary is central to an attractive compensation plan. But there are other elements firms should offer as well. Well-structured compensation plans link a firm's broader goals with employee behavior. Top-performing firms provide employees with clear responsibilities and measurable outcomes, and incentivize performance beyond expectations. Ninety-one percent of RIA employees in our Study report having received incentive compensation in 2013. Yet bonuses are only part of a complete compensation package; employees also reported benefit compensation including medical insurance (provided at 80% of firms), dental insurance (46%), vision insurance (31%), long-term disability (46%), life insurance (40%), and maternity or paternity leave (48%). Additionally, 73% of firms provide a 401(k) plan, and 41% offer profit-sharing.
Compensation plans should promote employee development: The opportunity for a talented employee to grow and develop along with a firm is critical to retaining that employee. Compensation plans should therefore encourage employees to improve their skills and contribute in meaningful ways to firm productivity. The strategic goals of top-performing firms translate into assigned responsibilities and measurable outcomes. Establishing regular evaluations to assess continued employee growth and rewarding individual effort help ensure ongoing employee development and engagement.
The value of a clear path to partnership: Perhaps the most compelling benefit for many employees is the opportunity to secure an ownership stake in the firm. Firms that create a path to partnership for their employees see it as important to establishing a sustainable business. By broadening ownership internally, founders can share responsibilities that contribute to the health of the firm, which can result in greater long-term growth and increased return on equity. As firms grow, expanding ownership can help them expand further by bringing in talented contributors interested in building the business. A formal path to partnership affects a firm's overall compensation policy and sets the tone for the entire firm.
As the RIA model continues to evolve and attract more investor assets, there will be greater competition to draw employees who want to join well-managed, growing firms with the best opportunities for growth. Effective compensation strategies are a critical tool to attract, motivate, and retain top talent. Understanding the competitive landscape and developing strategic compensation plans are more important than ever to helping RIAs continue to prosper and endure.
Nick Georgis is Vice President of Business Consulting and Field Experience for Schwab Advisor Services.
[i] Schwab designed this Study to capture insights in the RIA industry, based on survey responses from individual firms. The 2014 study provides information on topics such as asset and revenue growth, sources of new clients, products and pricing, staffing, compensation, marketing, technology, and financial performance. A total of 1,132 advisory firms representing three-quarters of a trillion dollars in AUM that custody their assets with Schwab participated this year, making this the leading study in the RIA industry.
The RIA Benchmarking Study comprises self-reported data from advisory firms that custody their assets with Schwab. Schwab did not independently verify the self-reported information. Participant firms represent various sizes and business models. The 2014 RIA Benchmarking Study collected detailed compensation information from nearly 900 advisory firms representing nearly 8,000 employees across 21 roles typically found at RIA firms.
Compensation details for each role are reported with base salary, additional compensation (incentive compensation and compensation tied to revenue), and total cash compensation independently. Total cash compensation is calculated as the median of the total cash compensation reported for each response (base salary plus additional compensation) and not as the sum of the medians of base salary and additional compensation (incentive compensation and compensation tied to revenue.) Base salary and additional pay are representative of only those positions reporting pay for that compensation component.
The Study is part of Schwab's Business Consulting Services, a practice management offering for RIAs. Grounded in the best practices of leading independent advisory firms, Business Consulting Services provides insight, guidance, tools, and resources to help RIAs strategically manage and grow their firm.
[ii] These firms are the top 20% of firms in the Study as determined by net organic growth (2009–2013 net organic CAGR). This cohort includes 108 firms out of 541, all of which have $250 million or more in AUM. This group represents 91% of the total assets of all firms in the study. Net organic growth—the change in assets from existing clients, new clients, and assets lost to client attrition—is the area over which RIAs have most control.
Meant for institutional investors.
Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Charles Schwab & Co. Inc. ("Schwab"). Independent investment advisors are not owned by, affiliated with or supervised by Schwab.
