Though COVID-19 continues to spread, firms have largely adapted well to the new way of doing business, including recruiting, which most businesses had largely put on pause in the spring.
Now, firms have less than six months to reach the growth and recruiting goals set for the full year. That means more churn among independent advisors and more wirehouse advisors joining the independent ranks.
Why the disparity between advisor recruiting and so many other aspects of our economy, which are decidedly performing less well?
It boils down to two increasingly interconnected factors: the fundamentals of the independent wealth management industry today and the influence on our industry of private equity, which gears its investment decisions towards fast growth and exits within a tight timeframe. Not all the players need to be private-equity owned in a recruiting war; once one starts to raise payouts to prospective recruits, others must follow suit or risk being left in the dust.
It’s a ramp-up of a phenomenon that started well before the pandemic; firms, driven by an insatiable need to increase their top-line revenue, are showing that they’re willing to spend handsomely to do so, even if it means sacrificing some profitability.
A Shortened Time Frame
With fee compression progressively flattening profit margins with each passing year, the primary way for firms to maintain some semblance of profitability is to build scale. And the most effective way to add that scale is to grow advisor headcount through recruitment.
The influx of private equity money into the industry has stepped up the drive to get bigger. With typical investments of three, five or 10 years, private equity firms operate on the premise that if they generate hockey stick-style growth, they’ll be able to command greater valuations when it comes time to exit.
Put another way, if they can demonstrate robust, end-to-end growth on the top line, would-be buyers in 2023, 2025 and onward won’t mind that the bottom line took a dip in 2020. It’s a much bigger problem at exit, however, if overall growth is inconsistent or anemic.
Meanwhile, the pandemic has shortened the time frame for recruitment in 2020; whereas in a normal year, they would have 12 months to meet their recruiting targets, this year they will have nine, less if pandemic conditions prompt a more severe shutdown.
This means that firms will be more willing to open their checkbooks for recruits if it means they will be able to slip more successful recruitments in under the wire before the end of the year. Many transitions originally scheduled to take effect in January will likely take place in December.
Support During a Disruption
On the other side of the table, many advisors—independent and wirehouse alike—have by now had sufficient time to gauge if their current firms have the flexibility, resources and scale to weather a major disruption. That includes having the technology and infrastructure to accommodate the shift in advisors’ service-delivery and communications needs as they have transitioned to running their businesses remotely.
For their part, firms, to save money during the pandemic, have also been laying off support staff, trimming payouts to advisors and raising fees to keep themselves financially afloat, adding to a noticeable diminishment in service and infrastructure for some advisors.
Advisors, like anyone else, have had to navigate the ups and downs of the pandemic. Add to that less-than-ideal support from their current firms, and many advisors will be looking outward, making them prime targets for other firms and fueling the recruitment wars.
Growth Is the Name of the Game
Now more than ever, growth is the name of the game for firms in the independent wealth management space. True, some of the coming ramp-up in recruiting may be due to pent up demand being released, but it’s also clear that the pandemic, much as it has been for the country and the world, has been a turning point in the wealth management industry.
Well before anyone knew what COVID-19 was, wealth management firms were competing against each other for advisors. If anything, the pandemic, after putting recruitment on ice for a time, will intensify the rivalry between firms for prospective new recruits and increase advisor movement.
Jeff Nash is founder and CEO of BridgeMark Strategies, a strategic consultancy and advisor transitions firm for the independent wealth management space. He is also a partner and co-founder of Ignition Point Partners, a consultancy that works with financial firm executives to improve their recruiting and acquisition efforts.