Better Human Capital, Better Financial Capital

While it might seem difficult to look at the long-term strategy amid a financial crisis, knowing how to better operate and recruit could be crucial to an advisory firm’s success.

Retaining clients is an important priority—but so is retaining human capital (see “How to Retain, Grow Your Book of Business in Today’s Market“). The two go hand in hand, after all. “This is the time when client satisfaction and effective servicing of your client is critical, and if you don’t have the right people in place … that’s going to come across loud and clear,” said Susan Theder, managing director at Pershing Advisor Solutions and coauthor of a Pershing report about operational efficiency in human capital (see “Pershing Releases Operational Efficiency Study for Advisers“).

Why else should you care about ensuring retention at your firm? Like any business, it’s costly not to. “Every time you experience turnover, there’s cost associated with it,” Theder told

Underscoring Theder’s point is an increased competition for advisers. Last year, research from Cerulli Associates found that the number of financial advisers is dwindling, and furthermore, fewer young people are entering the financial adviser industry (see “B/Ds Dealing with Dwindling Number of Advisers” and Recruiting Young Advisers Requires Less Traditional Approach“). In more recent months, shakeups at advisory firms are putting displaced advisers on the market or providing incentives to switch firms (see “Competition for Advisers Heats Up” and “Independent B/Ds Look to Recruiting“).

Not only is the advisory landscape competitive, but it is “ever-changing,” noted Karen Betts, vice president of Marketing for AUL Retirement Services. In order to retain advisers, choosing like-minded organizations as partners for products to provide to advisers is key. “Organizations need to be very selective about who they do business with…so that advisers feel like their organizations understand what their needs are and that they’re truly helping them build their practice,” Betts said.

Recruiting vs. Retention

Both recruiting and retention are important aspects of managing human capital. Theder suggests looking at the firm’s overall objective: If a firm’s main objective is to reduce expenses, it more likely relates to operational efficiency; if the objective is to increase revenue, it’s probably related to recruiting. Basically, recruiting will not be the solution if a firm’s goal is to be more efficient.

The exception is if there is leadership lacking at the firm, noted Kim Dellarocca, vice president at Pershing and coauthor of the report. Theder said the biggest mistake firms make is hesitating to create a professional organization with multiple levels of management. A firm might start as a one or two-man shop, and as it grows, it avoids creating a middle management level. “They are too slow to delegate and create managerial hierarchies,” she said.

Normally, when revenue is around $500,000, a firm should look to hire a new adviser; when it gets to be $700,000 or $800,000, it’s really time to hire a new adviser, according to Pershing. In the $1 million or more stratosphere, it means it’s time to seriously consider adding dedicated management.

Of course, there are variables, such as operational efficiency, that change those stats. One example is if an adviser has five clients that add up to $800,000 in revenue. Also, the ratio of support staff to adviser could be high, giving the adviser the ability to grow revenue and do more client-facing without worrying about back-office. Operational staff to adviser shouldn’t be lower than one to one, Theder said. She expects the ratio to trend up.

The retention of operational staff is another area to examine. According to the Pershing report, firms must continue to do more to raise retention for operations staff to levels closer to the norm for professional positions. For instance, moving from 80% to 90% retention doubles average tenure from five to 10 years. For a non-professional staff of five, that reduces replacement hires from once a year to one to two years—which can result in significant cost and efficiency savings.

Process Orientation

Another possible way firms can retain more advisers—particularly in the retirement plan space—is by providing more processes. The Pershing report highlights the importance of being process-centric over client-centric in most circumstances.

For instance, advisers working with qualified plans usually work in a heterogeneous environment, dealing with a wide range of needs, affluence, etc. “Process is going to be important to create scale, or they could be overwhelmed providing the same level of the advice,” Theder said.

Overall, financial success and performance is inextricably linked to efficiency of human capital, Theder said. She sees the advisory industry continuing to adapt as a professional industry, developing effective recruiting, management, and retention. “An engaged employee base is the key to success,” she said.

Dellarocca acknowledged that it’s hard to make managing for the long-term a priority, but doing so could help. “I think now because revenues have been so hammered…employing some of this operational efficiency is a great way to improve profitability,” she said.