How Advisory Firms Can Maintain Momentum in an Uncertain Environment

Shauna Mace, CHPC
Head of Practice Management

2021 was a good year for advisory firms. That’s one of the takeaways from the newly released 2022 InvestmentNews Benchmarking Study, which provides unique insight into firms’ compensation, staffing, pricing and profitability. 2021 was a year of historical growth, as markets rebounded from the initial shock to the system dealt by the onset of the COVID-19 pandemic in 2020. The typical operating profit margin for firms in 2021 was 30.6%, seven percentage points higher than that in 2020. Firms gained an average of 21.4% in AUM, due largely to the appreciation of client portfolios. And revenue per staff was $320,659, a 12.4% increase from 2020.

Despite these numbers, advisers have reason for concern heading into the final months of 2022, says Shauna Mace, head of practice management for Independent Advisor Solutions by SEI, which sponsored the study. In the past three years, a worldwide pandemic combined with significant geopolitical instability has created uncertainty and instability in markets and economies at large. The market tailwind that has supported two decades of growth for advisory firms is finally showing signs of letting up.

The message, Mace says, is clear: Most firms will have to make adjustments to maintain the high numbers they have grown used to in recent years. In an interview with InvestmentNews Creates, Mace shares her key insights from the study and lays out steps advisory firms can take to thrive in the coming years.

InvestmentNews Create: What is your biggest takeaway from the study?

Shauna Mace: The market tailwind that we’ve had for the last 10 or 12 years is ending. Advisory firms need to be intentional around how they are managing their business and understand what’s driving expenses. Firms that do that and understand they can gain capacity and scale through the right investments will navigate future uncertainty best.

The reality is that markets have lifted firms for so long that advisors are now going to face some challenges. Today, organic growth is just under 7%, but there’s also about 4.5% of assets leaving. We’re not keeping up as an industry. We’ve been relying heavily on the markets, which have been great. Now, they’re not so great.

InvestmentNews Create: Is this a time for firms to stop doing business as usual?

Shauna Mace: We’re seeing this wait-and-watch mentality at many firms. Even though profitability is very high, they haven’t been reinvesting. That’s helping drive high profitability, but if you don’t reinvest, you are limiting your ability to grow. Firms need to figure out where the key investments are and how to make the most of them.

InvestmentNews Create: What is top of mind for you as you think about reinvestment?

Shauna Mace: The largest driver of capacity is people. Firms should invest in their talent. That might mean investing in the team they have, or it might mean investing in new people through additional hires. Think about it as a long-term investment.

InvestmentNews Create: What are the best tactics for retaining talent in today’s human-capital environment?

Shauna Mace: The first one is simple: Compensate people fairly. The study showed that compensation has been relatively flat for many roles, especially the adviser role. Someone may be willing to pay them more than you pay. You can use benchmark studies like this one to understand the going rate.

In addition to compensation, be thoughtful around what career paths look like. How can you invest in people so that they gain the skills they need to continue a trajectory based on not only what the firm needs but also what they want? It’s crucial too, especially since COVID, to understand what flexibility means to employees’ wellbeing.

InvestmentNews Create: What steps can firms take to ramp up recruiting and make it a sustainable part of their long-term growth strategy?

Shauna Mace: It starts with understanding some of the metrics around your talent. People are the largest driver of capacity, but they also tend to be the largest expense. Understanding how efficient you are versus your peers can help you understand whether you need to hire or invest in process and technology. What is your profitability and your revenue per staff and per professional? You can find these metrics in the study to help you gauge how you’re doing versus your peers, based on size.

Next, have a people plan. Understand your next hires based on your capacity and needs. Will it be an adviser or an operational person? Understanding the sequence of hires helps you make the most of a hire. It also gives you runway to start recruiting earlier.

You can fill a lot of the less senior, non-technical roles with your network. Firms are finding candidates by looking outside the industry, hiring for the experience and skills needed for the job instead of just people who have experience in that role. You may find some great people who are really motivated and excited to learn something new.

Internships are another driver of the early talent funnel. You can give people exposure to an industry and develop them early. Keeping people over the long run and developing them can be much more cost effective than going out and hiring a senior person.

InvestmentNews Create: How can firms stand out in today’s environment?

Shauna Mace: We’re at this this inflection point where it’s not just about doing more. It’s about really providing differentiated, specialized service. You’re not just providing more services for the same price. That’s unsustainable. I’d advise firms to lean into specialization. It can help drive revenue and profitability. Also, lean into partnerships. What aspects of the firm can you outsource and what aspects should you maintain? Finally, lean into technology and operations. How can you support relationships and delivery of advice with technology and operations? Really figure out how to amplify the humanness, that subset of people that add the most differentiated value to clients.

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).