The next generation of the RIA workforce has arrived, if the average age for advisors and lead advisors decreasing since 2015 is any indication.
New FA Insight benchmarking research from TD Ameritrade Institutional released July 30 finds the leadership of registered investment advisor firms (RIAs) is indeed getting younger.
The report, The 2019 FA Insight Study of Advisory Firms: People and Pay, found that the advisory community as a whole is getting younger, reversing a graying trend that had many advisors worried about the sustainability of the industry.
With a median age of 49 years—three years younger than in 2015—six out of 10 firms have at least one owner who expects to stay at the helm for at least another 12 years.
“As the next generation of RIA leaders comes to the forefront, they’re investing in their firms with a long time horizon,” said 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.”
Firm owners remain characteristically confident about continuing growth in 2019, the report finds. They’re investing in senior-level experience, with lead advisor compensation up by 12% over the last two years, in an effort to secure seasoned talent that can help fuel growth and navigate tomorrow’s challenges.
The report found that, although 2018 ended with the major stock indexes posting their worst yearly performances since the 2008 global financial crisis, choppy markets did not quell firm owners’ optimism, even as growth in assets under management (AUM) slowed.
The median revenue growth rate for firms was 14% in 2018, up slightly from 2017, while the median client growth rate of 7.4% was little changed. The rate of growth for AUM dropped to 5.9%.
Today’s Firms: Growing and Profitable
Firms continued on their growth trajectory in 2018, thanks to efficient operations management and the increase in productivity from RIA workforce associates in revenue-generating roles.
At 21%, a typical firm’s operating profit margin last year rose by more than a percentage point from 2017, and overhead expenses as a share of revenue fell slightly in 2018. This translated to rising income for firm owners, whose median total income rose 3.6% in 2018 to $633,000, the highest since 2014, or 55 cents for every dollar of firm revenue.
Despite market declines at the end of 2018, firm financial performance was also strong compared to the average of the previous five years. The rate of revenue growth increased to 14%, vs. 12%, while operating profit margin increased from 20% to 21%. Revenues generated by revenue-generating roles were up 14% to $547,000 in 2018.
Wanted: Seasoned Help
Advisory firms anticipate doubling their hiring rate in 2019 compared to 2018, with 61% making at least one hire last year. The largest firms plan to increase headcount by 10% to 12%, bringing on board seven full-time equivalents.
Senior revenue generators and advisory firm staff, who have a proven ability to navigate market volatility and ease client concerns, have seen compensation rise over the last two years, whereas compensation for less-experienced revenue generators has fallen. The compensation of associate advisors, who are now generally younger and have less experience than in prior years, has gone down by 8.5% and operations manager compensation rose by 8% percent during this period.
The quest for experience may also help explain why firms continue to recruit lateral hires from inside the industry. RIAs tend to hire predominately from other independent RIAs for revenue roles, though they may also consider recruiting from other financial services firms and wirehouses.
Only 4% of firms are hiring recent college graduates for revenue-generating roles. A slightly higher amount, 6%, are hiring professionals from outside of the financial services industry.
People costs represent 77% of a typical firm’s expenses and 59% of total revenues. For every dollar spent on cash compensation, firms spend an additional 14 cents, on average, on retirement programs, medical benefits, training and payroll taxes.
“Independent advisory firms are laser-focused on growth and profitability, keeping expenses in line, while generating healthy returns across market cycles,” said Oligino. “Entrepreneurial and optimistic, successful owners are making investments they believe will benefit their firm in the long-run.”
To learn more about RIA workforce trends, click here to read the executive summary of The 2019 FA Insight Study of Advisory Firms: People and Pay.