We don't have to tell you how ugly the financial crisis of 2008 was. Client portfolios took a big hit — many of them dropping double-digits. In some cases, years of investment growth were wiped out. And yet 2008 represented something of a high-water mark for our readers. In fact, 2009 income — while lower than 2008, in some cases by a lot — rebounded fairly nicely, bringing earnings back to 2007 levels.
Of course, our RIA respondents — who are primarily paid a fee on assets — endured a year that might have tried the patience of Job. In 2009, the median income for independent RIAs was $212,000; that's the highest comp of any advisor cohort (including the storied wirehouse rep) but it's also a significant drop from 2008, when the median income for the group was $320,000. The other cohort to take the biggest hit last year was the 30- to 39-year-old age group, whose median comp fell to $127,999 in 2009 from $163,333 in 2008.
We asked Philip Palaveev, president of Fusion Advisor Network, a consultancy to financial advisors, and a compensation expert, to help us interpret our survey results. Palaveev was surprised by the 13 percent gap between the compensation of wirehouse advisors and RIA advisors — enough to ask about the survey's margin of error, which is +/-4.7 percent for a 95 percent confidence level. But he says it also “speaks to the increasing importance and success of the independent firms.” He continues, “I am sure someone will say that these respondents are small producers and not representative for the wirehouses. But if you reverse calculate their production — compensation should be about 40 percent of the gross dealer concessions — they are producing on average about $463,000 — probably close to my notion of average production inside a wirehouse.”
Palaveev felt it was also noteworthy that independent reps trailed behind RIA advisors in compensation. “There is certainly a bias here since it takes a certain size to function as an RIA, operationally and financially, but still it seems that RIAs are taking some of the best advisors from the IBD channel as well as getting the larger wirehouse breakaways.”
Certainly, the rise of the RIA has been a phenomenon that is being closely watched. (See page 20 of for more on market share gains by RIAs.) An Aite Group survey published in April of this year says wirehouse reps (of which there are 55,186) are still dominant, of course, with $4.7 trillion in client assets; independent RIAs (of which there are 63,000) manage $1.5 trillion in assets. The results of Aite's survey agree with ours: In 2009, RIA and self-clearing retail brokerage segments exceeded their year-end 2007 AUMs. Meanwhile, wirehouse assets are in decline and have not reached 2006 levels. Considering the carnage of the financial crisis — Wall Street firms and big banks embarrassed themselves on a colossal scale — it isn't surprising.
The Curse of the Move
One particularly surprising finding: FAs who stay at their firms fared better than those who move. “It is very telling that those who move around from firm to firm are making less than those who are loyal to one firm,” says Palaveev. “You could say that the ‘grass-is-greener’ mentality does not pay off and in fact takes away from the practice. Many factors contribute to this result — changing firms results in losses of revenue and clients in the moving process. It takes away from the advisor's time. More importantly, it seems that advisors who are successful tend to be happier with the services they receive from their firm.”
Also, dually registered practices seem to be the most lucrative: those with 50 to 89 percent in fees have the highest compensation, according to our results. “This suggests that a lot of the RIAs also have a b/d relationship — otherwise they would be 100 percent fee-based,” says Palaveev. “And it suggests that a 5 percent upfront commission is not better than a 1 percent yearly fee even though the math may seem obvious. Longer term, advisors who have transitioned to fees have larger and more successful practices.”
Our survey results also show the growth patterns of careers in this business. “The struggles for FAs to establish themselves in their 30s, the growth and ambition of the 30s, the established practice of the 40s and 50s and the amazing success and longevity of advisors in their 60s,” says Palaveev. “With the high incomes in the 60s age group, we can expect most advisors to work for as long as they physically can and not retire.”
One final surprise: College seems to be a waste of time for financial advisors (except for the partying). Among our survey respondents, the highest grossing category were those who do not even have a college degree. “There are many good advisors who did not go to college, and I don't want to be judgmental,” Pavaleev says. “Still, considering the amount of financial knowledge and general education necessary in our industry I am surprised by this result and find it somewhat sad.” Perhaps the guys who don't go to college have more time to establish themselves in the business, are hungrier for it, and have less debt to worry about paying back.
Other interesting tidbits:
- 42 percent of the respondents were from wirehouse firms; 30 percent said they were independent (affiliated with an IBD or an RIA).
- Half said they were registered reps, 17 percent said they were investment advisor reps of an RIA and 15 percent described themselves as financial planners.
- The hybrid model was most popular, with 68 percent of the respondents saying they take a mix of fees and commission; 21 percent said they were fee only and just 11 percent said they were commission only.
- Commission-only respondents had the lowest median compensation ($141,000) and fee-based FAs using third-party managers scored highest ($216,666 in median comp).
- Independent RIAs said that 81 percent of their AUM is fee based, followed by 39 percent for wirehouses and 35 percent by IBDs, 23 percent for regional firms and 20 percent for banks.
- Half of the respondents from RIAs said they only act as fiduciaries.
- Nearly 2/3rds said they serve more clients now than 12 months ago.
- Just one percent said their average account size was $5 million or more, 25 percent said average account size was between $250,000 to less than $500,000 and 32 percent said the average account size was between $100,000 and $249,000.
- Our survey also found that job title does not have as large an impact on comp as the role within the firm. But, comp levels for those owners or principals were nearly 50 percent higher than the level of those who were not.