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FA Growth, AUM Rose in 2016; Revenue Per Team Member Stalled

While growth in clients and assets under management (AUM) was relatively healthy and income-related metrics were largely favorable for advisory firms in 2016, revenue per team member failed to increase for the first time since 2009, according to a new report by TD Ameritrade Institutional.

This year’s study – “2017 FA Insight Study of Advisory Firms: People and Pay” – explores how productivity, organizational design, the scarcity of talent, compensation structure and succession planning all either contribute to or detract from a firm’s ability to meet its strategic objectives.

Despite dropping a percentage point in 2016 to a median of 6.4%, client growth remains a half percentage point above TD Ameritrade’s nine-year study average, and firms expect to finish 2017 with even stronger client growth. Security markets again “provided tailwinds” in 2016, driving annual firm AUM growth rate of 12.5% and a revenue growth rate of 6.7%. Firms also report that they expect their rate of revenue expansion to jump significantly in 2017.

Client and asset growth alone, however, are not indicative of a firm’s full potential to achieve sustainable growth over the long term, the report cautions, adding that the ability to generate income, in combination with revenue growth, are the “most important pieces of the puzzle.”

The most encouraging metric, according to the report, is firm profitability, which is trending upward again after a sharp drop in 2015. Coming in at 24.4%, the 2016 operating profit margin for the typical firm was the highest of any study year except for 2014, the report notes.

Productivity and Talent Gap

On the “watch list” for TD Ameritrade is productivity. After steadily rising throughout the economic recovery, revenue per revenue-generating role for the typical firm dropped 10% since 2014, and revenue per team member failed to increase for the first time since 2009, dropping 9% in 2016.

One possibility is that more firms are looking to hire recent college graduates and individuals from outside the industry with transferable skills. The report shows that 31% of firms are targeting recent college graduates for revenue-generating roles. In addition, the typical advisory firm reports that they plan to add one full-time equivalent in 2017, taking the medium up from six to seven FTE employees.

“Advisors are reinvesting in their future, opening their doors to the next generation and pursuing a range of strategies to attract and develop human capital,” says Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional. “The challenge for firms is to communicate the benefits they can offer, promote the growth prospects of a financial planning career and structure an organization that can help these new advisors develop and contribute to long-term growth.”

While firms are looking to hire more, industry research suggests that Baby Boomer retirements likely will outpace the expected arrival of young advisors, resulting in a talent gap shortfall. More than two-thirds of firms reported that hiring revenue-generating roles is becoming increasingly challenging.

As a result, more firms reportedly are outsourcing, with 6 out of 10 firms realizing labor savings as a result of some form of outsourcing. In addition, many firms are using third parties to offer additional services, such as tax preparation and insurance, even if they advertise these services as client offerings, the report notes.

Despite the high demand for talent, median lead adviser pay declined at an annual rate of 7%, to $168,500, over the past two years. However, median pay for support advisors rose by an annual rate of 6.2% since 2015. The report suggests that these trends reflect the increased hiring of younger, less-experienced advisors.

Succession Planning

Other issues that are of concern is that many firms lack long-term organizational planning and a formal succession plan. The study shows that just 19% of advisors have a documented plan for future staff structure. The report emphasizes that to “continue to deliver on their service promise to existing clients and increase capacity to take on new clients, firms need to approach organizational design with an eye toward supporting the firm’s growth and client experience objectives.”

The need for a formal succession plans only grows more critical as the ranks of advisers nearing retirement swell. The share of firms with an owner three years or less away from retirement increased from 7% in 2015 to 12% in 2017. The study shows that only 37% of advisory firms said they have a viable plan. The rest either do not have a plan or have plans with serious flaws, such as the lack of deal-financing details or no named successor.

The 2017 study draws from data received from 388 financial advisory firms that responded to an online survey fielded between Feb. 2 and March 30, and met a standard of having a minimum $150,000 in annual revenue and being in business for at least 12 months.