Articles About Human Capital

Back when the financial services industry was focused almost exclusively on product sales, the process of “training” new employees was relatively straightforward: either new hires were able to learn to sell enough to survive and build a book of business, or they didn’t… and moved on to do something else. However, as the industry has evolved into a more sustainable, advice-centric model, advisory firms are discovering that, unlike most other professions, there aren’t many standards when it comes to training new entrants to progress down a (well-defined) career path into the profession.

And in the modern era, the stakes are higher when it comes to training new advisors. As while in decades past, firms didn’t put much into training new advisors (beyond basic sales training) and therefore didn’t have much to lose if a new advisor “didn’t make it”, modern advisory firms trying to develop a new advisor to be able to manage ongoing relationships (for ongoing revenue) have to incur far more salary expenses until that new advisor develops the necessary skillets to be a productive member of the team.

Accordingly, advisory firms that are looking at steady and ongoing growth are increasingly focusing on developing a repeatable in-house training program, or “boot camp”, to accelerate a new advisory hire’s learning curve to get them through that process faster. Where systematization reduces the cost to the firm if the hire doesn’t work out. And in the extreme, can actually make newer employees so valuable, so quickly, that the firm might even assume that participants will actually move on to another firm at the end of the program and still be successful.

Yet, while a training program is certainly better than none at all, perhaps more important is inculcating into the firm’s culture a “Growth Mindset”, which fosters an environment that encourages learning and talent development, seeks out challenges, and understands that improvement is impossible without failure. Which is especially important in the advisory profession, where new entrants into the field might have a good amount of technical knowledge, but can only learn the (arguably more) important interpersonal skills through experience.

The real key to the Growth Mindset, though, is simply recognizing that if growth is natural, employees can learn anything they need to learn to be successful, as long as they have the right attitude that they can learn it in the first place. Which means it’s crucial that the firm itself is characterized by an attitude of, “I may not be able to do that now… but I can learn how!”

Ultimately, the key point is to realize that adopting a Growth Mindset can be an invaluable step towards helping an advisory firm better educate, retain, and grow a team that sets high expectations, challenges team members throughout the firm, and gives positive reinforcement, not in the context of innate personal ability, but against a backdrop of a process fosters their long-term success and reinforces the firm’s culture.

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In a recent study, Cerulli Associates points out that nearly 28% of financial advisors say that they plan on retiring in the next 10 years… but have yet to settle on a succession plan. In the aggregate, the financial services industry understands the need to develop the next generation of talent, but accomplishing that goal remains a challenge, both due to struggles for firms to retain top talent… and because it’s proven remarkably difficult to attract Millennials to the profession in the first place.

And despite a number of articles and industry studies about what firms should be doing to attract and develop next generation talent, remarkably little has been written from the Millennial viewpoint of what it takes to make the financial planning profession and industry firms more attractive in the first place – about what they’re looking for in a career, why they desire a sense of purpose and not just a job, and what the financial advisory industry looks like through their eyes.

In this guest post, Millennial consultant Janki Patel from The Ensemble Practice (a consulting firm serving the financial advisory industry) discusses why independent financial advisory firms are a great fit for Millennials, the challenges many Millennials face when trying to understand (and differentiate between) the varying service models within the industry, why advisory firms are having such a hard time attracting next-generation talent, and the specific steps advisory firms can take in order to bridge that gap.

Because the real challenge is not just the difficulty in attracting next generation Millennial talent, but that the financial services industry is competing with a myriad of other industries who are also trying to hire the same Millennial talent. And relative to other industries, the financial planning profession is still small, the industry is outrageously complex, and financial services in the aggregate doesn’t exactly have the best reputation (compounded by the perception that being a “financial advisor” is still largely a sales job). Simply put, even though there’s a lot of good in the financial planning profession, it just isn’t easy for young people to figure out who’s wearing the “white hats” when all they see are (very) negative headlines and job postings that are misleading at best!

Meanwhile, Millennials have been unfairly labeled as a spoiled and entitled generation that’s only interested in taking selfies and communicating with emojis. Instead, Millennials can actually be quite driven and passionate, and desperately want their careers to matter… in a manner that is an especially good fit to financial planning. They care less about perks and benefits, and more about a company’s mission, having a well-defined career path, and being challenged and mentored… which means there are opportunities for financial planning firms to attract Millennials not by what they pay, but by what they do, and why they do it for clients.

Because the reality is that good financial planning advice can make deep and meaningful impacts on people’s lives, and that resonates with Millennials. Which means that by focusing on doing a better job of honing their mission statement, communicating how they make the world a better place, and creating well-defined career paths, advisory firms can better position themselves to attract and retain the next generation of talent.

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Economists have long studied the importance of property rights in a wide range of settings. From collectively avoiding circumstances that may lead to an inefficient use of resources (e.g., the "tragedy of the commons"), to simply understanding what conditions best promote the development of a wealthy and prosperous society, property rights are an important economic concept that can be applied in many contexts. Of interest to financial advisors, a recent study by Chris Clifford and William Gerken examined whether and how who "owns" a client relationship in a financial advisory firm - the firm, or the advisor themselves - influences that financial advisor in the future, based on the behavior of financial advisors at firms that joined the Broker Protocol (versus those that did not).

In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – takes a deep dive into this recent Broker Protocol study, examining how "ownership" of a client relationship in a financial advisory firm impacts not just the success of the firm, but whether and how much the advisor reinvests into themselves, consumer well-being and advisor misconduct rates, and even the development of the advisory industry as a whole!

The development of the Broker Protocol was significant because it, for the first time, formalized exactly what information brokers can (and cannot!) take with them when changing from one firm to another, which not only helped provide a pathway for brokers to change firms without getting sued, but effectively shifted the "ownership rights" of the client relationship from the firm to the advisor (who can now take the information and relationship with them when switching to a new firm). Accordingly, Clifford and Gerkin utilized publicly available data on broker-dealers in conjunction with their timing of joining the Broker Protocol to evaluate how broker behavior changed before and after being given greater ownership over the client relationship. The astounding results: giving a greater level of ownership in the client relationship to the broker resulted in less broker misconduct, more broker investment in their general human capital, and an increase in firm revenue, client assets, and the number of client accounts (even though brokers did invest less into firm-specific human capital along the way).

Notably, the dynamics which led to the creation of Broker Protocol among broker-dealers largely exist within RIAs as well. Restrictive covenants commonly found at RIAs (such as non-solicits, or, less commonly, non-competes), can influence the level of advisor "ownership" over client relationships. Of course, both firms and advisors can have good reasons to accept such agreements (e.g., firms may be hesitant to give inexperienced advisors opportunities to work with clients if they could just "steal" clients without recourse), but it's important to understand and carefully consider the implications of such arrangements. As ultimately these arrangements impact factors such as the level of advisor talent across the entire industry (as advisors are more inclined to invest in their own human capital when they have greater ownership of client relationships), firm success (as a more talented workforce can be a net improvement for firms, even if employee turnover is higher), consumer well-being (as policies which restrict advisor mobility keep talented advisors "trapped" in lower-quality firms, which ultimately leads to lower service for consumers), and even industry regulatory and ethical concerns (as consumers themselves may not be aware that restrictive covenants may influence their ability to work with their trusted advisor, and consumers may not consent to such arrangements if they were disclosed).

Ultimately, there are steps that firms can take to reduce the harmful elements of restrictive covenants... from adopting an RIA equivalent to Broker Protocol, to regulatory intervention to restrict certain practices, and even pre-arranged terms for buying an advisor's client base if they wish to a leave a firm... but the key point is to acknowledge that advisor ownership of client relationships does influence advisor behavior in important ways, and that while it may be scary for a firm to vest more ownership in the client relationship to their advisors, the data shows that doing so is on average a benefit to both the advisor and their firm, as well as the consumer, and the industry as a whole!

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One of the foundational principles of retirement success is to start saving early. After all, the longer that money can stay invested, the more compounding growth can work in your favor; all the better if your savings grow inside a Roth IRA and avoid the grinding impact of taxation.

Yet the reality is that clients really have two major assets: their financial assets, and their human capital asset. And when the client is young, the human capital asset is actually the bigger of the two by far. As a result, allocating savings towards human capital in ways that increase its value or growth rate can actually have far more impact than investments in financial assets; spending $2,000 on classes that produce a $1,000 raise in base salary can, over the next 40 years, generate nearly 20 times the wealth of merely saving the $2,000 in a Roth IRA and growing it for decades.

Does that mean that clients who allocate savings to retirement accounts when they're young are actually making an inferior long-term investment?

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