In their zeal to acquire and keep top producers, b/ds may be setting themselves up for a major talent squeeze down the line.
The talent wars for so-called top producers have gotten stiffer in the past two years, and don't show any sign of abating. Of course, who qualifies as a top producer varies by broker/dealer and by channel: At the smaller end, it applies to reps with $500,000 in production, but most larger firms are really after advisors with $750,000 to $1 million. Sure, top producers have always been hot property within both the retail brokerage industry and the retail registered investment advisor (RIA) market. After all, while they may represent only 10 to 20 percent of a firm's advisor base, they tend to drive the bulk of the firm's revenues.
But this time around, the war for talent is more intense, and it could have negative consequences down the line. For one thing, the cost of acquiring top advisors has risen to often unprofitable levels for the firms. It has also required b/ds to shift critical resources away from less experienced advisors and from training recruits who are new to the business. But as the population of experienced advisors ages, the pool of talented candidates for acquisition is shrinking.
Roots Of The Race
There are a few things that have led to today's talent race: As firms shift from investment management to a more costly wealth management orientation, they are also trying to offset that cost by moving up-market to serve more affluent clients. But providing wealth management services to the wealthy successfully (and profitably) takes an experienced advisor. That's where the top producers come in: Firms are both hiring big game, and increasing support of their most experienced advisors, while flushing out struggling lower-end brokers.
To woo these top producing advisors, wirehouses as well as independent firms have expanded their recruiting efforts and staff. Recruiting incentives in the form of deferred compensation and sign-on bonuses have become standard offerings, and the deals continue to accelerate. Packages for top producers now total as high as 200 percent of trailing 12-months production — up from 80 to 120 percent a few years ago. Broker/dealers are also helping to defray the costs of advisors transitioning their practices from one b/d to another, or from one custodian to another. Retention is critical, so deferred compensation packages are also being provided to b/ds' existing experienced advisors. But recouping all these costs can take five to seven years per advisor.
Beyond deferred compensation, the firms are also spending vast amounts to create competitive product and service offerings that will help them recruit and retain talent. Top producers often require more sophisticated support and additional services to compete for clients. Advisory services including unified managed accounts and model-based advisory programs, estate planning, trust, stock optimization, hedge funds and real estate require expensive home office tools and personnel, and are difficult and costly to build.
For the retail brokerage industry, the question becomes whether the focus on top producers is sustainable for the long term, given the fact that the pool of viable candidates is shrinking, and the cost associated with support and acquisition is increasing. The amount of money being thrown at these top men and women is beginning to offset the contribution to revenues that they provide.
What's more, mirroring the boomers, the advisor population is graying and some experts predict a shortage of experienced reps within the next 10 years; more top advisors are beginning to retire and exit the business faster than they can be replaced. The shortage of talent will be exacerbated by the lack of new entrants and younger advisors into the business, which is partly a function of the longer lead times required to train advisors in a complex discipline (like wealth management). Training programs have been in decline over the past several years because of the rising costs of maintaining them, estimated to total around $200,000 to $300,000 plus per advisor. Couple that with high attrition rates in these programs, of 40 to 60 percent over a three to four year period, and you've got another unprofitable equation. The market downturn following 9/11 led to even further training reductions.
Training is beginning to pick up again, but today the focus is on quality over quantity. B/ds are focusing their training programs on developing planners and wealth managers, and are encouraging the formation of team practices. Today's training strategies incorporate more mentoring and take longer. They also focus on older, more experienced new entrants, with an average age of 30 to 35.
With fewer new recruits, and insufficient support for mid-tier producers, the concern is that too few advisors will emerge from these trainee groups to offset the number of top producers retiring or exiting the business. Without a strong home team, b/ds risk losing clients, assets and market-share — not to mention incurring the cost of playing catch up. But the shortfall of experienced advisors is an industrywide dilemma, and it comes at a time when the need for advice among consumers is reaching an all-time high. Filling the gap will not be easy or quick.
The development of more sophisticated training programs is inevitable, but so is increasing support for mid-tier advisors. The question is ultimately one of balance. In the long run, b/ds need to determine the appropriate levels of support for advisors in different tiers so that they can both recruit competitively, and maintain a highly productive force of advisors over time.
Making this kind of assessment requires understanding the key attributes of various advisory practices-average client assets and product usage, for example. In the past, b/ds largely broke advisors into groups based solely on production levels. But they've gotten more sophisticated about it in the last few years, pairing together those advisors who have similar business models, practice types and client profiles. Still, to increase the effectiveness of such a process, b/ds and advisors need to collaborate to identify a wider range of advisor practice and client attributes that are accurate and relevant.
Moving forward, b/ds will have to break loose from the top producer syndrome, and develop the next generation of advisors. Firms should continue to focus on the top 20 percent of their advisor base, but not at the expense of the other 80 percent-because they will be the source of tomorrow's riches.
Writer's BIO: Dennis Gallant founder of Gallant Distribution Consulting (GDC), a boutique research and consulting firm to U.S. and international financial service companies.
THE VICIOUS CYCLE
The singleminded focus on top producers feeds on itself and weakens firms.
Resulting in reduced margins due to increasing top producer acquisition and retention costs
Need to increase revenues and profitability
Increase focus on top performers due to high cost of support
Reduce support for mid-tier reps: cut low-end reps & new recruits to save cost
Resulting in reduced organic revenue growth
Increase focus on top producer recruitment to offset reduced growth