The leadership of registered investment advisor firms apparently is getting younger, reversing a graying trend that had many advisors worried about the sustainability of the industry, according to a new benchmarking report.
And Gen Xers are increasingly on the receiving end of the torch passing. With a median age of 49 – three years younger than in 2015 – 6 out of 10 firms have at least one owner who expects to stay at the helm for at least another 12 years, TD Ameritrade Institutional notes in its report, “The 2019 FA Insight Study of Advisory Firms: People and Pay.”
Additionally, the overall median age of firm associates dropped to 42 from 44 in 2015, while the median age of lead advisors is now 46 years, down from 50, according to the study. Meanwhile, the number of owners who are age 40 or younger equals the number of firm owners who are over age 60.
Firm owners also remain confident about continuing growth in 2019. Consequently, firms are investing in senior-level experience to help boost growth, with lead advisor compensation up by 12% over the last two years.
“As the next generation of RIA leaders comes to the forefront, they’re investing in their firms with a long time horizon,” says Vanessa Oligino, Director of Business Performance Solutions at TD Ameritrade Institutional. “We expect to see different approaches to industry challenges – whether they be staffing and compensation, growth and organizational design, or technology and innovation.”
Growth and Profitability
Although 2018 ended with the major stock indexes posting their worst yearly performances since the 2008 global financial crisis, the report finds that shifting markets did not quell firm owners’ optimism, even as AUM growth slowed.
TD Ameritrade notes that the median revenue growth rate for firms was 14.3% in 2018, up slightly from 13.8% in 2017, which is still well above the 12.1% average rate across the firm’s studies in the preceding five years.
Median client growth rate was nearly the same at 7.4%, just missing last year’s record of 7.5% in 2017 and exceeding every other year dating back to the first FA Insight study in 2009. The rate of growth for AUM, meanwhile, dropped to 5.9%, but is expected to rebound significantly, the study notes.
Efficient operations management and increases in productivity from associates in revenue-generating roles also have helped firms continue their growth trajectory in 2018. At 21%, the study notes that a typical firm’s operating profit margin rose last year by more than a percentage point from 2017, while overhead expenses as a share of revenue fell slightly in 2018. This resulted in firm owners’ median total income rising 3.6% in 2018 to $633,000, the highest since 2014.
Revenues generated by revenue-generating roles were up 14% to $547,000 in 2018, while annual revenues per full-time equivalent (FTE) were up 13% over a two-year period.
Help Wanted
Advisory firms anticipate doubling their hiring rate in 2019 compared to 2018, with 61% making at least one hire last year. The largest firms, however, plan to increase headcount by 10% to 12%, taking on seven FTEs.
Compensation for senior revenue generators and advisory firm staff, meanwhile, has risen over the last two years, while compensation for less experienced revenue generators has fallen, the study further notes. Compensation of associate advisors – who are now generally younger and have less experience than in prior years – has gone down by 8.5%, yet operations manager compensation rose by 8% during this period.
The search for experience may also help explain why firms continue to recruit lateral hires from inside the RIA industry, though they may also consider recruiting from other financial services firms and wirehouses, TD Ameritrade notes. According to the findings, only 4% of firms are hiring recent college graduates for revenue-generating roles, while a slightly higher amount of 6% are hiring professionals from outside of the financial services industry.
Staffing costs were found to represent 77% of a typical firm’s expenses and 59% of total revenues. And for every dollar spent on cash compensation, firms on average spend an additional 14 cents on retirement programs, medical benefits, training and payroll taxes.
Looking ahead, TD Ameritrade notes that people will continue to be a firm’s most vital resource. “The most successful firms will maintain a plan for their organizational structure that offers the most efficient path for growth and broaden the diversity of their team,” the report emphasizes.
Findings in the study are based on responses to an online survey fielded between Feb. 5 and March 29, 2019, among 405 independent advisory firms that have a minimum of $100,000 in annual revenues and have been in business for at least one year.
