You’re not the only one dealing with turnover.  The pandemic spawned the Great Resignation, and rising inflation means there’s probably a better salary (or signing bonus) out there for anyone that’s looking.  The ensuing talent war has created more industry turnover than the end of broker protocol in 2017, and RIA principals are having to invest more time and resources into recruitment and retention than ever before.

This trend actually started last year when the RIA industry was relatively healthy.  Favorable market conditions and rising AUM levels meant that most investment management firms could easily afford to replenish departing staff members to service a growing revenue base.  So far this year, the fixed income and equity markets have reversed course, and most RIAs are suddenly having to deal with declining assets under management and fee income.  Add inflationary labor and overhead costs into the mix, and declining margins and profitability seem almost inevitable this year.

This doesn’t necessarily have to be all bad for you and your firm.  As Petyr ‘Littlefinger’ Baelish once proudly reassured Lord Varys during particularly turbulent times at King’s Landing in Season 3 of Game of Thrones, “Chaos isn’t a pit. Chaos is a ladder.”  Fidelity Investments seems to agree and plans to make 28,000 hires in 2021 and 2022 to increase industry dominance as its competitors struggle with thinning margins and a fleeting workforce.  James Lowell, editor-in-chief of Fidelity Investor, elaborates, “The discrepancy in the numbers of Fidelity hires suggests a new game is afoot: gaining market share of talent which will, in turn, better enable them to out-compete on service, not just products.”

That’s probably easier for a firm like Fidelity which has $11 trillion under management and countless resources at its disposal. There are still ways for smaller RIAs to capitalize on this chaos or at least minimize the damage until normalcy is restored:

1. Increase the payout percentage to leading advisors. In all likelihood, their compensation is falling with AUM and management fees.  Increasing their payout will soften the blow and incentivize them to continue growing their book of business and servicing clients.  If you don’t, there’s a good chance a competitor will.
2. Offer some sort of equity compensation to key staffers. Our RIA contacts continue to tell us that an increasing number of tenured employees (and sometimes even prospective hires) are asking about ownership or some form of equity consideration as part of their total compensation package.  In some cases, their inability to offer equity or a clear path to ownership has led to retention issues since many of their competitors can offer these benefits.  Equity ownership is the best way to strengthen employees’ ties with the firm and align their interests with other RIA principals.
3. Don’t offer the same raise to all staffers (in percentage or absolute terms). It’s highly unlikely any RIA’s employees are equally productive and deserving of the same bump in pay.  Your revenue is likely declining with the markets, so an across-the-board increase in salary (at currently elevated rates of inflation) will compound the adverse effect on margins and profitability.  Varying raises and shifting towards more performance-based forms of compensation should minimize undesired turnover and further declines in profitability.
4. Consider establishing a bonus pool for key employees tied to firm profitability. Many RIAs have established a bonus pool that sets aside a certain percentage of pre-bonus operating income for its management team.  This structure will incentivize them to run the business efficiently and maintain profitability when revenue hits.
5. Articulate a plan on how the firm will weather the storm and potentially come out stronger. This probably isn’t the first market downturn that your firm has endured.  Your AUM, revenue and earnings are still probably higher than the COVID bear market and almost certainly higher than the last Financial Crisis.  The next few months (and maybe even quarters) will likely be rough, but there’s no reason to believe you can’t endure this cycle and be in a better position when the market recovers.  Your staff needs to be reminded of that.

Many of these suggestions may dampen your distribution or ownership in the short run, but it’s likely a worthy sacrifice to avoid losing key staffers in addition to AUM and management fees.  It may not be a ladder, but it’s certainly a lifeline.