How Do RIAs Compete For Talent Against Big Banks?
Family Wealth Report
December 22, 2015
In this article published by Family Wealth Report, Allan Starkie goes into detail about the competition for talent in the wealth management industry.
Starkie specializes in executive recruiting in wealth management, and also provides management consulting and merger and acquisition support for clients. Prior to joining Knightsbridge Advisors, he served as a partner at the executive search firm Riotto-Jones, where he led CEO and high net worth sales searches. Starkie is a graduate of West Point and Harvard Business School.
The views expressed below belong to the author, but Family Wealth Report is grateful for the right to publish them, and welcomes reader responses.
As recruiters of wealth management talent the owners of many RIAs come to us with various degrees of frustration, as they try to compete for client-facing professionals against their larger competitors, who naturally can compensate more generously.
The typical solution for this disparity in cash compensation has been the use of equity as an enticement to join a smaller, more entrepreneurial firm. The problem that has plagued the RIA industry is that, in most cases, equity has been offered in confusing and sometimes suspect configurations that rarely offer liquidity, or significant dividend payments. These awkward and sometimes nefarious attempts have undermined the inherent advantage that equity could offer as a recruiting tool, and created a creeping cynicism regarding the viability and tangible value of RIA minority ownership.
There are roughly 19,500 RIAs in the US right now. Their ranks are growing, and their share of AuM is growing as well. Most are quite small, with only 300 above the first glass ceiling of $1 billion in AuM. The vast majority suffer from limited cash flow, and the burden of growing regulatory costs. In a recent conference hosted by Fiduciary Network, Mark Tibergien of Pershing Advisor Solutions spoke of the future of the RIA market, predicting that we will soon see the evolution of “super-regional RIA’s” with revenues of $50 million to $75 million.
These RIAs will be forced to compete within the same limited talent pool as the banks and large trust companies. The question arises: with limited resources, what means do RIAs possess to win a talent war against their larger competitors?
There clearly is an industry-wide shortage of revenue-bearing, client-facing individuals. Since 2007 the total number of financial advisors has sharply declined from 330,909 in 2007 to 302,270 in 2013, with a continued drop to 280,859 projected by 2017. (Cerulli Associates Advisor Metrics July 2013). If we examine the Cerulli report we will note that perhaps only 92,000 of these advisors are actually focused on HNW and UHNW clients. Retail brokers within regional and community banks are obligated to turn-over relationships above $1 mm to their firm’s wealth management groups. The HNW and UHNW FAs are primarily found within the ever-shrinking world of the wirehouse. To make matters worse, 43 per cent of these advisors are over 55, and approaching retirement age (source: Cerulli).
On other fronts, both the large banks and the large national trust companies have been very tactical with managing headcount since the crash. Escalating compliance and regulatory costs have been subsidized by lowering of front-office costs, resulting in larger books of business and stagnant to lower compensation for client-facing professionals. As a result, advisor headcount has either remained stationary, or actually been reduced within this group.
This might not be so worrisome were it not that, during the same period of time, we have experienced an explosion in the creation of new wealth. CapGemini reported the largest increase in HNW assets since they began measuring it in 1997. US private HNW wealth has grown to $13.9 trillion with 4 million people now attaining HNW status (CapGemini World Wealth Report, 2014). With a population of 320 million, the one-percenters have proliferated into the one-and-a-quarter-percenters. To put this in perspective, in 2006 CapGemini had reported that there were 2.7 million US HNW individuals holding $9.3 trillion in private wealth. This 50 per cent increase in AuM, under normal production metrics, should have resulted in an addition of 65,000 to the national labor force; yet, in actuality it has reduced significantly.
The last seven years have been categorized by massive cost reduction across the industry, while the large banks and trust companies have tread-water on all but essential, or targeted recruiting; waiting for an increase in interest rates that would again swell the top line. When that event finally occurs, the demand for top-notch client-facing professionals will intensify with a vengeance.
The larger institutions can outbid RIAs on base pay, and certainly offer large grants of restricted stock. On the incentive side, there are virtually no RIAs capable of competing with a 45 per cent brokerage payout, or the heady top-tier sales incentives used by national trust companies and most regional banks, that crescendo at 75 per cent of first-year revenues, in some cases. How, then, will RIAs continue to source and win top talent?
First, let us consider that there are some fundamental, general differences between the type of person an RIA would wish to hire (as opposed to a bank), as well as a self-selection mechanism among the candidates themselves.
Big banks versus independents respectively: Referral-based sales expectations/necessity to be more outward bound in sourcing AuM; reliance on lending products/more focused on planning and holistic wealth management; typically risk-averse personalities/more entrepreneurial; require large team, extensive support/”roll up sleeves” mentality; very general level of skills/deeper level of comprehensive understanding of WM tools; more likely to change firms often/ more embedded in culture and suture of firm; motivated by cash compensation over/motivated by equity over cash restricted stock.
The RIAs themselves, different as they might be from each other, are surprisingly consistent in terms of their wish-list for client-facing professionals.
Almost all independents, with whom we deal, are focused on the same type of client-facing professionals. The most significant traits of which are:
- Strong financial planning skills (A CFP is often a prerequisite)
- Very strong client-service skills
- Track-record of sound business development success
- A network of COIs (ideally accretive to that of the hiring firm)
- Good knowledge of investment management
- Good knowledge of tax, and estate planning
- Team-player mentality
- Compatible personality to firm culture
- The Holy Grail: The hope of portable assets
RIAs tend to source these candidates from slightly different places than their larger competitors. Most large banks and trust companies primarily source their candidate pool from each other; RIAs are often skeptical about hiring from big banks. They tend to focus more on:
- Other independents
- CPA and law firms
- Home grown talent, starting with internships
- Big banks and wirehouses come in last place as a source of candidates; although they are sometimes targeted
As a result of the motivational differences that draw particular candidates to RIAs, as well as the fact that the hunting grounds are generally other RIAs (with similar compensation limitations), RIAs should not even try to compete on a cash basis with their larger competitors. Those RIAs with the most successful recruiting programs are leveraging the appeal of potential wealth creation to draw ambitious, entrepreneurial candidates. And the most significant means of fulfilling such a promise is the sensible, and transparent use of ownership.
Since the crash my firm has placed an equal number of client-facing professionals within the RIA/MFO/SFO space as we have among the large banks/trust companies. Although the cash compensation has generally been significantly less at the RIAs, we have been successful in placing professionals of, at least comparable talent, for lower costs. And another interesting factor is the stick-rate (three- and five-year candidate retention numbers) are 12 per cent higher within the RIAs.
The real differentiator and major advantage that independents have over other wealth management firms is the ability to create wealth for their key employees. Those wealth advisors, drawn to the independents, generally want to create personal wealth and become HNW and ultimately UHNW clients themselves. They want to resemble the people they serve, and recognize that this will rarely happen within a bank.
As clear as this may seem, very few RIAs are using this advantage effectively. Often partnership is guarded too carefully, or given in a manner that is incomprehensible and complex. And the greatest challenge is creating and articulating a liquidity strategy that will offer new employees a believable roadmap to carry them to the point of monetization.
If equity is to be used as an effective tool for both recruiting and retention the following characteristics need to exist for the equity that will be offered:
- Simple in terms of designation (complex multiple levels and classes of shares become meaningless and even suspect);
- Equity must be offered along with a clear and understandable business plan that projects its potential appreciation;
- Some form of liquidity event/monetization strategy needs to be clearly described;
- Intermediate forms of liquidity associated with the equity are important (real dividends, ability to borrow against the value, or sell it back); and
- Ability to source capital for a potential partner to be able to afford purchasing the equity.
Surprisingly, very few firms conform to these important guidelines. As a result, those firms that can use equity effectively have a huge talent pool upon which they can draw from their less enlightened peers. “Partner” looks awfully nice engraved below one’s name on a business card. But the word loses its luster when it becomes clear that it is, after all, only a word.