The Rise of the NextGen Adviser

Transcription

1 CLASS OF 1986 The Rise of the NextGen Adviser LASS OF 2016

2 You ve heard it all before. Hiring a NextGen advisor is the right thing to do. The industry is graying. There is a large talent shortage of advisors. Your clients are getting younger. Millennials only work with other millennials. How about your business will grow more profitable? You dedicate time and resources toward running your business efficiently and ensuring your technology and processes are optimized. But, as this study shows, it is the next generation of talent that may have the biggest impact on your business. Developing the NextGen of advisors can be a key component to building a dynamic, viable long-term business with real enterprise value. There is an immediate need to introduce a new generation of talent to the financial advice profession and not simply as a means for the industry to get younger or to reverse the decline in the overall population of advisors. As this paper illustrates, there is an emerging economic case that can be made for introducing NextGen advisors into your business. The firms that have NextGen advisors, and invest in them are often some of the most successful firms in the RIA industry. The experiences you create for young advisors today can pay big dividends for your firm and the next generation of investors. Importantly, they are also well-positioned to see continued growth and high-performance as a result of their NextGen strategies. TD Ameritrade continues to advocate for NextGen advisors, and this InvestmentNews research makes our support even more compelling. To learn more about the additional resources we have to help you engage the next generation of advisors, visit the TD Ameritrade RIA Intern Network. Kate Healy Managing Director, Marketing TD Ameritrade Institutional

3 Introduction Over the last several years, there has been a significant and well-chronicled movement in the financial advice industry to develop a Next Generation of talent and leaders. With just 21% of the current population of financial advisers under the age of 40, the need for new entrants and the long-term implications on the business of providing advice has become a priority item. However, only a small group of the current generation of advisers has actually invested in the NextGen. Those who have made these investments are seeing a real economic impact associated with having a younger (NextGen) group of professionals as part of their businesses. In particular, looking specifically at firms that have adopted and embraced a NextGen strategy, we have noticed that they are growing faster than firms that have not yet invested in a next generation of employees. Figure 1 Age Range of Financial Planners 24.14% % % % % Source: CFP Board of Standards, Inc. as of August 2015

4 The financial and business rationale for NextGen A close look at research fielded by InvestmentNews in multiple 2015 surveys shows that there is a trending movement toward the addition of NextGen talent as well as some clear differences that are emerging in the performance of firms that leveraged NextGen talent. Specifically: >> Looking ahead, in 2016, 21.5% of advisers anticipate hiring a NextGen adviser, compared with 11.1% that actually did so in 2015* >> The No. 1 reason advisers would consider hiring a NextGen adviser in 2016 would be to improve client service (61%), followed by a desire to acquire younger clients (50%)* >> Firms that already had a NextGen adviser in place saw their assets increase by an average of 20% annually between , compared with 11% for firms that did not have a NextGen adviser** A small but growing portion of the industry has directly experienced the benefits of including NextGen advisers within their organization. These firms may well be positioned to grow at faster rate over the long-term than their counterparts who have yet to invest in and execute a NextGen strategy. For these reasons, it is important to understand two global developments in the overall industry that are setting up The rise of Next- Gen Advisers : 1. The emergence of support Multiple industry studies have noted in 2015 that for the first time, there are now more employee advisers in the advice industry than actual owners. This is a significant change in the overall composition of the independent advisory industry, and is re-defining the shape of the independent channel. Now, the most common position in the 2015 InvestmentNews Adviser Compensation & Staffing Study, for example, is not a practicing owner or solo adviser. Rather, it is a Lead Adviser, or a firm employee who independently manages client relationships on behalf of a firm. The second most common position is a service adviser, or an employee who works with clients on implementing and maintaining a plan, but does not serve as clients primary adviser. Firms of all sizes are beginning to embrace the concept of teaming and shared services creating a tremendous opportunity for a new generation of talent to enter the industry and take on a range of responsibilities that can help a firm take on more clients and provide a higher level of service. 2. The importance of scale Looking at the fastest growing and most successful firms in the industry, they typically have one thing in in common: They have a firm structure that allows owners and top talent to delegate operational and administrative tasks and ultimately allow a firm s most valuable employees to focus on the most valuable business activities (namely working with current and prospective clients). In short, not only are these firm efficient, but they are scalable and designed for growth. For a direct proof point, look no further than the margins on a lead adviser in Investment- News Adviser Compensation & Staffing Study: Firm owners now delegate on average $478,000 in revenue responsibility to a lead adviser who is paid $143,000 in median total compensation a 68% gross margin. The owners, by not acting as the primary contact on all accounts, have the ability to focus more on business development and 2 *Source: 2016 InvestmentNews Outlook Survey **Source: 2015 InvestmentNews Adviser Compensation & Staffing Study

5 Figure 2 Percentage of Revenue Managed by Typical Adviser (Typical lead adviser manages $478K in revenue) Gross Profit: $324,000 Compensation Costs : $154, % 29.9% 2.3% Gross Profit Typical Lead Adviser Total Comp Typical Advisory Firm Employee Overhead Costs servicing a firm s top clients, the two core elements frequently fueling firm growth. This, of course, positions the firm for immediate returns on its human capital investments, but also sets the firm up for accelerated growth and an increased overall client base. Figure 3 Adviser Promotions, % The rise of NextGen There is a clear trend emerging as it relates to NextGen Advisers, who are commonly referred to as paraplanners, support advisers or analysts, depending on the firm type. For the purposes of this paper, we will refer to them as NextGen Advisers throughout. A few fast facts about NextGen and their increased visibility in the industry from the 2015 InvestmentNews Adviser Compensation & Staffing Study: 80.9% 71.1% >> In 2013, NextGen Advisers comprised 6.2% of all of the positions in the 2015 InvestmentNews Adviser Compensation & Staffing Study. In 2015, NextGen Advisers made up 8.6% of all reported positions >> In 2013, 43% of responding firms reported utilizing the position at their firm in both study years. In 2015, however, large firms were more likely to have hired a second and a third associate than firms in % Lead Adviser 18% 17% Service Adviser NextGen Adviser >> 67% of firms with $5M or more in revenue have at least one NextGen adviser % Promoted in 2014 % Increase in Reported Positions 3

6 While we are in the early days of the use and adoption of NextGen advisers, we expect that the influence of these positions will increase, particularly as more firms have committed to both hiring and developing these employees. Nearly 20% of intermediate advisers were promoted from NextGen positions in 2014 more than any other single position in the industry, according to InvestmentNews research. While the ranks are growing steadily, so too are the roles of these NextGen advisers many of who are now taking on increased client-facing responsibilities. So what exactly are NextGen advisers tasked with? Let s take a closer look and define their roles in more detail: Defining the roles of NextGen advisers >> They focus on technical and support tasks such as entering data and drafting financial plans, researching portfolios or investments, putting together reports, custom analysis and other projects in support of a lead adviser or team >> They tend to be more back office than client-facing and typically work on teams with multiple advisers, who can also groom Next- Gen advisers to eventually assume responsibility for his or her own accounts and clients >> Roughly 20% of the individuals employed in NextGen positions are CFPs and typically have four years of experience at a financial advisory firm >> One NextGen adviser typically supports three or four advisers, depending on firm size. Figure 4 Percentage of firms with NextGen Advisers, by firm revenue 73.9% 80% 58.8% 61.5% 50% 41.9% 42.9% 32.6% 23.1% 11.8% $100K- $250K $250K- $500K $500K- $1M $1M- $2M $2M- $3M $3M- $5M $5M- $7M $7M- $10M $10M- $15M >$15M 4

7 NextGen Positions: Compensation The base salaries and incentive compensation for NextGen has largely remained level in recent years, although of course varies by region. At the national level: >> 2015 base salary for NextGen positions was between a median of $53,637 and a third quartile of $60,438. >> 2013 base salary was between a median of $50,000 and a 3rd quartile of $60,000. >> 2015 median incentive compensation was $6,000 and the third quartile was $10,000 >> 2013 the median bonus was $5,496 and the third quartile bonus was $8,075. Looking strictly at these compensation levels, while the investments in NextGen talent are relatively small, they can often have significant returns for the firms that employ them over those who do not. This becomes apparent when we look at firms that have at least seven full-time employees, the threshold at which most firms appear to be adding a NextGen position: Firms of seven or more full-time individuals, that employ at least one NextGen adviser generated: >> Revenues of $5.6M at the end of 2014, vs. $4.2M for firms that do not have a Next- Gen adviser a 33% difference >> Gross profits of $3.191M, vs. $2.638M for firms that do not have a NextGen adviser a 20% difference >> Total operating income, or profits, of $1.235M, vs. total operating income of $1.023M for firms that do not have a Next- Gen adviser a 21% difference Analyzing the data on a historical basis, firms with NextGen advisers are clearly growing faster: Figure 5 NextGen Advisers & Firm Growth Compound Annual Growth ( ) 19.9% 2014 New Client AUM Growth 10.2% 15.2% 12.1% 10.6% 5.3% revenue AUM Has NextGen No NextGen 5

8 When we look at the industry s largest firms and compare those that have at least one NextGen adviser with those that do not, we see, on average, a difference of 20% in Income per Owner at NextGen firms. In 2015, firms with 7 or more employees and at least one NextGen adviser reported income per owner of $700K, vs. $597K for firms that do not have a NextGen adviser a 17% difference. The bottom line: When we look at the industry s largest firms and compare those that have at least one NextGen adviser with those that do not, we see, on average, a difference of 20% in Income per Owner at NextGen firms. These firms are growing faster and appear to be better positioned for long-term success, and are also providing a short-term return on the NextGen investment. They allow partners and lead advisers to devote more time to growing and expanding their business, while the NextGen advisers are dedicated to supporting and maintaining this increased client base and operational work load. Career tracking and developing NextGen The firms that have been most successful in maximizing their investments in NextGen talent are those that have structured long-term career tracks and development plans. Two-thirds of the top firms or those firms posting the highest productivity, growth, and profitability measures in the 2015 InvestmentNews Adviser Compensation & Staffing Study indicated that they offer formal career tracks for their professionals and staff, compared to 56% of all other firms who offer career tracks for professionals and 47% who offer career tracks for all other staff. The combination of better clients, well-trained staff and growth drives the high productivity and profitability of the top-performing firms, as table below illustrates: Figure 6 Prevalence of Career Tracks and Firm Productivity 64% $257,078 64% $236,847 57% 47% Top Performers All Others Adviser Career Track Administrative Career Track Revenue Per Staff 6

9 So what does a typical progression and career track look like? While the development of an adviser will, of course, vary from one firm to the next, there are several common career tracks. NextGen Adviser Service Adviser Lead Adviser Partner Expertise Technical tasks: software, data, analysis. Works with clients on implementing and maintaining an established plan. Establishes and leads new relationships. Develops opportunities and manages the firm. Client relationships Contact with clients but no decisions. Extensive contact and relationships with clients. Client loyalty and ability to manage the clients. Serves as Lead Adviser, business manager, and/or both. Measures of performance Quality of work, efficiency in producing drafts, and analysis. Ability to maintain relationships with clients independently. Number of clients managed and revenue under management. Profits of the firm, revenue generated and staff performance. Metrics Supports two or three Lead Advisers Works with 80 to 120 clients in general firms in wealth management firms Leads 80 to 120 clients in wealth management firms Revenue, profit, value Conclusion The need to develop the Next Generation of talent for the financial advice business is more than simply solving a demographic issue. At its core, it is part of a broader and more immediate strategy for growth. While a NextGen adviser may not bring clients with him or her when they join your firm, there are different economics in play when evaluating these positions. As more advisers consider the need to add new talent to their businesses, the recent returns on NextGen advisers outlined in this paper should reinforce the short-term benefits of adding a support or service adviser to a practice. As noted, NextGen advisers are, on average, producing returns that more than cover their compensation costs. The firms that employ NextGen are growing at a faster rate, increasing assets at steadier clip than their peers and ultimately factoring into increased profits for both the firms and the owners that employ them.

10 The mission of InvestmentNews Research is to provide financial advisers with the industry s most informative practice management studies and benchmarking reports. Our benchmarking studies are a leading source of market intelligence for advisory firms and industry partners, such as custodians, broker-dealers, service providers and professional organizations. In 2009, InvestmentNews acquired two bellwether benchmarking studies from Moss Adams LLP the Adviser Compensation & Staffing Study and the Financial Performance Study of Advisory Firms. We continue to improve and expand these two critical industry studies, while we have also introduced new studies on technology and succession planning that support the growth and development of financial advisory firms. In addition to our research studies, InvestmentNews Research also produces regular webcasts and regional workshops that arm advisers with actionable insights. Our events allow advisers to hear directly from some of the industry s leading experts - and also network with other advisers who are looking to improve their practices and grow their businesses. For more information, please visit InvestmentNews.com/research. TD Ameritrade Institutional is a leading provider of comprehensive brokerage and custody services to more than 5,000 fee-based, independent Registered Investment Advisors and their clients. Our advanced technology platform, coupled with personal support from our dedicated service teams, helps investment advisors to grow their businesses more efficiently and effectively, while optimizing time spent with clients. We provide a robust offering of products, programs, and services designed to help advisors build their businesses and help their clients pursue their financial goals. Learn more at tdainstitutional.com or call us at TD Ameritrade and InvestmentNews are separate and unaffiliated firms, and are not responsible for each other s services or policies. TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission.