The rapid expansion of the wealth management industry is driving registered investment advisers to poach talent from their competitors, according to the latest installment of the Schwab RIA Compensation Report.
Among the findings in the report, which is part of Schwab’s ongoing RIA Benchmarking research, it shows that RIAs, at nearly 40%, represent the most popular source of employee recruitment.
The compensation and staffing study, published Thursday, is based on a survey of 761 advisory firms last year, which means the data reflect 2019 activity. But many of the surveys were completed after the pandemic had already taken hold early last year.
“It’s safe that say that more demand [for staff] than supply is putting upward pressure on compensation,” said Jerry Cobb, senior business management consultant at Schwab Advisor Services.
In 2019, 75% of firms surveyed added staff, with the median firm hiring two people. That pace of hiring was projected to continue in 2020.
After competing RIAs, the most popular recruitment channels are colleges and universities (33%), banks and trust companies (16%), wirehouses (12%) and independent broker-dealers (10%).
Lisa Salvi, vice president of business consulting and education at Schwab Advisor Services, said that as demand increases, RIAs have gotten more creative in their searches for qualified staff.
“These are the main responses we get, but I know more firms are willing to look outside of financial services for hiring,” Salvi said.
Perhaps not surprisingly, the need for staff increased with firm size, and firm size and scale are a direct result of the record-level pace of merger and acquisition activity across the wealth management space.
Compensation represents 74% of an RIA’s total expenses, which explains the pattern of smaller firms having significantly smaller workforces.
For example, according to the study, the median number of staff at an RIA with up to $100 million under management is three, which compares to a median of 55 employees for a firm managing more than $2.5 billion at the opposite end of the spectrum.
“There is a true war for talent in the RIA channel as demand for high-quality advisers is at an all-time high and the supply is limited,” said Mark Bruno, managing director at Echelon Partners.
“You absolutely see more RIAs going head-to-head to attract and retain advisers and that has translated to notable increases in adviser compensation over the last several years,” Bruno said. “It’s also worth noting that RIAs are making a concerted effort to expand the talent pool. As they grow in size, mature in their hiring processes and put real career development programs in place, I have seen an increasing number of firms source talent directly from the top financial planning universities and create new roles as paraplanners or client service associates.”
The growing demand for talent led to a 4% increase in cash compensation from 2018 to 2019 across all roles, according to the study. That compares to a 2.9% increase for wages nationally over the same period, according to the Bureau of Labor.
The biggest bump was for senior client account and relationship managers, whose median total cash compensation was $240,000, representing a 19% increase over 2018.
The second-highest percentage increase was for operations managers, who saw median total compensation climb 18% to $113,000.
Salvi talked about the importance of creating formal career paths for employees at all levels and in every position in order to provide an realistic perspective on where they fit into the organization.
“We’re seeing more career pathing with the operational roles,” she said. “Usually, firms will start with client-facing roles and then move to the operational roles. This is another area where firms can take the time to put career path in writing.”
Across all positions, the base salary represents 81% of total compensation, but the percentage dropped for revenue-generating roles, where base salary makes up 70% of total compensation.
In terms of motivation, 77% of firms compensated staff with performance-based incentive pay.
Equity ownership as a percentage of total compensation was unchanged at 33% of firms with between $100 million and $250 million under management, and at 22% for firms managing more than $1 billion.
But for RIAs in the middle, there was an increase in ownership as a form of compensation, which Salvi attributed to midsize firms giving people more opportunities to participate in the growth of the business.
Firms with between $250 million and $500 million saw equity ownership increase to 33% from 29% in 2018, and firms with $500 million to $1 billion saw equity ownership increase to 27% from 22%.
“They have started adding equity programs that give more people opportunities to participate,” Salvi said. “This gives so many more options to the firm owners by having that next generation of leader who is committed to growth.”
Another trend cited in the report was the use of health benefits as part of the compensation package, which is still dominated by the larger firms but is seeing traction among smaller practices.
For firms managing more than $1 billion, 99% offer health insurance, 85% offer dental insurance, 81% offer life insurance and 72% offer vision insurance. By contrast, for firms with up to $100 million, 40% offer health insurance, 11% offer dental insurance, 14% offer life insurance and 10% offer vision insurance.
Charles Failla, principal at Sovereign Financial Group, described noncash benefits as an “absolute.”
“I actually have a call today with a health benefits consultant to discuss adding group health, dental and vision to our benefits package,” he said. “We’ve had a 401(k) and other benefits for years, but as we have been interviewing over the past couple of weeks, it became clear that offering health benefits is an absolute must.”
Schwab’s Cobb said compensation-related questions are the No. 1 topic he hears about from RIAs.
“2021 is going be to the year advisers will have a lot more they need to be balancing with remote working and flexibility bursting onto the scene,” he said. “You have a create a compensation philosophy of how people are paid.”
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