This is the 13th installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
Registered investment advisory firms that hire new staff members can harness much greater productivity, but the first employee in the door after a founder represents a costly investment.
For financial advisors who have recently launched RIAs or another solo advisory practice, that raises the stakes for picking the right person at the correct time — an essential step for growth-minded firms seeking to gain value as a business and boost their client services. Like many practice management and professional development quandaries facing RIA founders, the pivotal question leads to no single answer that fits every company.
Rather, the solution lies in every single RIA’s approach to issues such as whether to outsource tasks with vendors like brokerages, aggregators, custodians or financial technology firms, the number of clients that an advisor can serve before they have topped their capacity and the extent that automation or artificial intelligence could obviate the need for more employees.
An RIA’s staffing will affect the future course of its business. And the imperative to hire more employees becomes even more crucial, the closer that the founder moves toward retiring from the industry someday, according to David Grau, the CEO of M&A deal consulting firm Succession Resource Group. At a basic level, a succession entails hiring more staff so an RIA owner can “reduce their workload to be doing more mentoring, more training,” he said.
“From the succession lens, staffing and hiring decisions are probably one of the most impactful elements on succession planning and its viability for a firm,” Grau said. “By the time they effectively realize they need these people, it’s already too late.”
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Is now the right time?
To be sure, that timing depends a lot on the degree that an RIA founder is trying to carry out an entrepreneurial ambition to transform the business into an enterprise from a startup. And interviewing and hiring prospective team members may sometimes prove enticing before there is truly a requirement to spend the time and money necessary on doing so.
Gen Next Wealth
Before they embark on that quest, RIA owners must nail down the role and duties for any potential new employee, said Emlen Miles-Mattingly, founder of Madera, California-based RIA firm Gen Next Wealth.
“You’re driving your business, or you’re riding your business — that’s what I always say — because it can take you places that you don’t want to be,” Miles-Mattingly said. “A lot of people like the idea of having someone work with them or for them but don’t quite understand exactly what that means and how to get the most out of a person. That’s a tough one and I see that happen a lot.”
At Philadelphia-based RIA firm Zenith Wealth Partners, the process of figuring out when to hire more staff is “more of an art than a science,” but the firm would “rather have the right person with imperfect timing” than vice versa, according to Partheev Shah, a managing partner and the firm’s chief operating officer. Since the firm aims to ensure clients “have access to our advisors and our advisory team,” the number of clients with each one and the availability on their calendar for customer meetings will often dictate whether to add more staff, Shah said.
“For our service model, we have a general sense of, what does approaching capacity, at capacity or over capacity look like, and we want to make sure we’re on the right side of the equation,” he said. “Thats a sign for us that we’re starting to approach an inflection point.”
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The numbers in support of support staff
And advisors will likely welcome those signals as a positive metric, if they check the available data.
A lead advisor using the “1+2 triangle” structure with two support employees generates over six times more revenue per year than a solo practitioner without any staff and roughly two times more than teams with at least two planners. That’s according to a survey of more than 600 advisory practices in the latest annual “Financial Planner Productivity Study,” by planning entrepreneur and writer Michael Kitces and his Kitces Research co-authors.
New staff members drive that productivity — as well as some hefty costs. Annual revenue per team member jumped by nearly a quarter, 24%, last year to $459,655, according to a survey of 230 advisory practices released earlier this month by The Ensemble Practice consultancy and software firm ActiFi. But personnel costs represent 76% of an RIA’s expenses — easily the biggest item detracting from the top line. Advisors and senior advisors at the participating firms manage an average of $1.28 million in assets across 164 client relationships, the study found.
Bringing on support staff simply increases the possible reach of a firm. Practices with revenue per advisor above the median level have an average of 1.3 support staff members for each of them, compared to 0.9 for those below, according to another study with over 500 participants issued this month by consulting firm Deloitte and the Wells Fargo Advisors Financial Network.
At 57% of the firms in the study, the role of “client service associate” was the most common support job, followed by 53% that have “administrative or executive assistants,” 40% that have a “branch manager,” 18% that have a “bookkeeper” and 12% that have a “client portfolio manager.” Hiring forms a critical foundation for organic growth, the report concluded.
“Many practice owners are initially reluctant to hire support staff because these roles do not directly contribute to revenue generation and represent a fixed cost in a capital-light business,” the report said. “Additionally, because these owners built their businesses themselves, often wearing many hats along the way, there can be cultural inertia to delegating tasks. Our findings indicate that by hiring appropriate non-advisor staff, practices can make their advisors more productive by effectively centralizing administrative tasks and allowing advisors to spend more time with their clients and in the market drumming up new business.”
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Parsing numbers with personalities
So it’s no wonder that growing RIAs, in particular the larger ones, are “watching that household-per-advisor metric like a hawk,” Grau said. Many restrict the number to no more than 150 or 200, although some solo practitioners could get up into the range of 225 to 250 and other firms could keep the ratio far lower on the other end as a result of focusing on high net worth or ultrahigh net worth clients or the simple desire to limit their size, he noted.
On the plus side, advisors frequently enjoy dropping the administrative tasks. But hiring up also presents another aspect of the challenges of being the CEO of a business rather than simply being an advisor.
“They are entering the very unknown realm where they’re no longer doing the thing that they’re expert at,” Grau said. “That first 12 months that they’re figuring that out, it’s probably the most uncomfortable 12 months of their career. But those on the other side of it, they never look back.”
In the pursuit of new staff or even an intern, RIAs may struggle to confirm that the team member fits their personality or has a full assortment of tasks, according to Miles-Mattingly.
As one of the co-founders of the BLX Internship Program, he has seen other RIA owners “start to realize, ‘I don’t even know what I’m going to have them do,” which is why the organization provides participating firms with a template summer internship for the aspiring planning professionals, he said.
When Miles-Mattingly is interviewing candidates, he typically includes “a lot of situational question-asking” to see how they would communicate with clients in one scenario or another, he noted. At the outset, interns and other incoming employees benefit from getting an understanding of their roles and the necessary deadlines for each task.
“You learn a lot about your firm that you didn’t know, because now you’re having to explain it to someone else with no industry experience,” Miles-Mattingly said. “Sometimes you still get it wrong. Sometimes it’s just not a good fit. … When you don’t have those clear-cut expectations, you set yourself up for failure.”
Zenith Wealth Partners
A candidate’s understanding of Zenith’s goals and mission as a company looms large in whether the potential employee could fit for the long term, alongside their technical licenses and skills, Shah said. In the latter stages of interviews, a client case study and simulation is a “really meaningful part of our talent screening process,” since that exercise “gives us a sense of how they would approach a client meeting, which, in our work, is really the most telling,” he said.
“The applicability to how we do planning or how we deliver advice is really important,” Shah said. “It gives them a sense of who we are, who we serve and how we do it.”
