Demand for talent is putting upward pressure on compensation, with median total amounts rising by 19 per cent over a five-year period, a new report from Charles Schwab shows.

The war for talent is still raging and advisory firms are paying up.

“It’s safe that say that more demand [for talent] than supply is putting upward pressure on compensation,” said Jerry Cobb, senior business management consultant at Schwab Advisor Services.

Indeed, median total cash compensation, including profit distributions, jumped by an eye-popping 19 per cent over a five-year period for senior client account managers at US advisory firms, according to the recently released Charles Schwab RIA Compensation Report.

Senior managers brought home $240,000 in 2019, compared with $202,000 in 2015, according to Schwab’s survey of 761 US wealth management firms. Median compensation for relationship managers rose by 8 per cent for the same period from $97,000 to $105,000. Operations directors’ compensation spiked 18 per cent, to $113,000 in 2019 from $95,000 in 2015.

In 2019, median total cash compensation across all advisory firm positions increased by 4 per cent from the previous year. Compensation costs make up three-quarters of an RIA’s expenses, according to the Schwab study.

The fierce competition for talent has resulted in a hiring spree: 75 per cent of firms surveyed by Schwab hired staff in 2019, and 39 per cent of wealth managers recruited employees from other RIAs.

How can advisory firms hold their own in the war for talent?

“The most important advice I would give to firms is to tie compensation to a strategic plan,” said Lisa Salvi, vice president of business consulting and education at Schwab Advisor Services. “That’s a huge differentiator.”

What should a strategic plan include?

-- Career paths – Providing career paths supports staff development, improves engagement and builds bench strength, according to the Schwab report. Firms should have staff in at least two of these three roles: client service associate, client relationship manager and senior client relationship manager.

Slightly over 80 per cent of firms with $1 billion in AuM or more have set up career paths for advisors, according to the Schwab survey, double the percentage of firms with under $250 million in AuM. And while an operation career path is not as prevalent as a client service career path, it is becoming more critical as firms become more complex. 

Establishing career paths also helps advisory firms attract next generation talent, Salvi said. “Young people want to know that firms will invest in their development,” she explained. “Put the outlines of a career path in writing and employ it as part of your value proposition.”
 

-- Performance incentives - Attractive compensation packages include more than base salary, particularly for revenue-generating roles, the report states. Excluding executive managers, base salary made up 70 per cent of total cash compensation for staff with revenue roles at RIA firms in 2019, according to the Schwab survey. “Motivating staff with incentive compensation can impact the quality of talent, engage employees and advance the firm’s goals,” the report stated. “Compensation tied to revenue generation from new and existing clients can help ensure staff are aligned with the firm’s growth objectives.”

-- Equity - Offering equity ownership helps to attract and retain talent, and also supports firms’ succession strategies, the report concluded. Mid-level firms with between $250 million and $1 billion in AuM saw equity participation as a percentage of total staff rise by 5 per cent in 2019 from the previous year. “Firms are realizing that they have to develop people for the long-term and show them what the rewards will be,” said Cobb. The appeal of equity ownership was underscored by Salvi: “We’re seeing firms that offer equity to staffers getting cold calls from employees at other firms. Equity is definitely something that people want.” 

-- Benefits beyond salary - Health benefits “are a key element” of a competitive comp package, according to Schwab. Nearly all RIAs with AuM over $500 million in AuM surveyed by Schwab offer health insurance and around two-thirds also offer dental, vision and life insurance as benefits. 

-- Culture - “The best people want to work at the best firms that attract the best clients, and vice versa,” said Cobb. A firm’s culture, as well as job satisfaction, incentives and the opportunity for career advancement, can be as important as short-term compensation as a “motivational lever” that attracts top talent, according to industry consultant and investment banker Peter Nesvold, who heads the merchant bank Nesvold Capital Partners. 

“If you can only entice a high performer to your organization with a big pay check,” Nesvold warned, “it is only a matter of time before that person is lured away with a larger contract somewhere else. Relying on cash instead of culture and customized incentives only creates a kind of revolving door of star performers that is difficult to build upon.”

-- Growth projections - Firms should take growth rates into account when planning compensation, Salvi said. “This is a growth industry,” she explained. “If your AuM and revenue are going to increase by 20 per cent in five years, you have to be more intentional about what you will do to support future growth and think about hiring ahead.”

-- Look outside the industry - After competing RIAs, the most popular recruitment channels are colleges and universities (33 per cent), banks and trust companies (16 per cent), wirehouses (12 per cent) and independent broker-dealers (10 per cent). 

But as the war for talent gets increasingly competitive, RIAs are becoming more creative in their searches for qualified staff. “We’re seeing more diversity in hiring outside traditional recruiting channels with really good results,” Salvi said. Veterans and educators have been a particularly fruitful source of talent, Cobb added. “The mindset [from those groups] meshes favorably with our industry,” he said.

-- Don’t forget your website - A firm’s website should also be considered a “talent recruitment tool,” according to Salvi. Younger talent prospects are likely to spend time looking at the site, she said. Accordingly, advisory firms should make sure that the site lists the company’s awards, such as “Best places to Work,” describeing what it’s like to work at the firm and include a video of the workplace environment.