Experience, training key for advisors

Over the years, firms have changed titles for their employees.   Broker, financial advisor, financial planner, investment executive, wealth advisor, and portfolio manager are a few you’ve probably heard.

But titles don’t always help people understand exactly what the person does – and it certainly doesn’t help in determining experience levels.  A person with two months experience may have the same title as someone with 30 years of experience.  Some people may translate age or greying hair to experience.  But the only way to really know is to ask the person how many years they have been in the industry, something that can be confirmed through the regulatory bodies.  This basic information will help you determine how many market cycles your advisor has helped manage clients through, if any.

We have included a few discussion points to consider when looking at different experience levels.  In order to do these calculations you will have to obtain the following:  years in the industry, assets managed, and expected retirement date of your advisor.

Years to Asset Ratio

In order to calculate this ratio we will assume that an advisor should increase investments managed by $5 million a year (assuming a practice is built up without buying another advisor’s clients).   In the early years (first ten years), the $5 million will be primarily through gathering new clients.  In the middle ten years the $5 million/year is gathered mostly through new clients and performance.  In the mature years (final ten years) the $5 million/year is gathered through some new clients and performance.

Assume that an advisor has been in the industry for 20 years.  At a minimum you could expect one advisor to be managing $100 million.  Assets managed = years x $5 million.  This can also be looked at in a ratio form as follows:  Assets Managed divided by (years x $5 million):1.

If an advisor is managing $100 million after 20 years then the ratio is 1:1.  If an advisor is managing $150 million then the ratio is 1.5:1 (exceeding expectations).  Does the ratio exceed 1:1?  When the ratio is significantly above 1:1, the common reasons are that clients are happy and not leaving, the advisor is receiving more referrals/new clients, and performance of investments.   If an advisor is managing only $30 million after 20 years then the ratio would be .3:1. In this situation we would recommend asking some specific questions regarding client retention and performance.

Capacity Ratio

Behind every successful advisor is a strong support individual or team. The above advisor with a Years to Asset Ratio of 1.5:1 appears to be more successful then the advisor with a ratio of 0.3:1.  Every successful advisor reaches a point where they either have to stop taking new clients or add support/team members to continue the same level of service.

In our opinion, the following provides an outline for people to evaluate whether or not an advisor has the capacity to take on new clients and to continue providing a high level service.  In the early to middle years of an advisor’s career, a general guideline may be one direct support staff for every $75 million managed.   In the middle stage, a general guideline may be one direct support staff for every $100 million managed.  In the mature stage, a general guideline may be one direct support staff for every $125 million managed.

Retirement Factor

With every year of experience an advisor becomes one year closer to retirement.  An advisor may have experience and capacity but may be within five years of retirement.  We feel it is worth asking the “retirement” question if it is on your mind.  There is a happy medium between finding an advisor with experience and also one that is not already mapping out their own retirement plan.  When an advisor retires, they often sell their book of business to another person to ensure continued service.  It is extremely important at this stage that you continue to get the best service you deserve and not to settle for only the person who has purchased your account.

Are you being assigned to another advisor with a lower level of experience then what you have been use to?   It can be an incredibly overwhelming experience for a new advisor who has purchased a book of business to manage all the “new” relationships, especially during difficult times.

With an aging advisor workforce, more and more will be retiring.   Not all advisors work full time and then stop on a retirement date.  Some transition out slowly although this is difficult in our opinion in the financial industry.  Staying current and reacting accordingly involves full time attention.

If you are roughly the same age as your advisor, chances are you will have adequate time to research your options for a new advisor.  People should be looking for an advisor that can assist them as they age and to ensure that all planning is complete before incapacitation becomes a concern.   This is even more important with couples when only one individual has either managed the money directly or been solely working with an advisor.