A new study has identified an "undercurrent of dissatisfaction" among advisors, reasons for which include compensation and a lack of confidence in their firm's leadership approach.

Organizations must not rely solely on short-term tactics such as contracts and deferred compensation to retain advisors – they need to build a culture that “inspires loyalty,” said Mike Foy, director of wealth management at JD Power, which has released its annual financial advisor satisfaction study.

The study measures employee and independent advisor satisfaction on a 1,000-point scale, looking at what JD Power believes are key drivers of this: advisor/professional support; client/customer-facing support; compensation; firm leadership; operational support; problem resolution; and technology support.

While the findings represent the views of advisors in the brokerage world, many of the issues raised reflect wider industry areas of focus such as the importance of culture when recruiting. Issues around recruitment and talent retention specifically have been noted as challenges by many players in the wealth management sector, while other research suggests that employers will likely be at a competitive disadvantage without an equity component in their compensation packages.

According to JD Power's latest study, the number of employee advisors saying they “probably” or “definitely” will stay at their current firm over the next year or so has taken a tumble, with issues around compensation and their firm's leadership culture among the main reasons why.

For 2015, overall satisfaction among these advisors is 701, down 20 points from last year, while the independent segment scored 773. Independents were also more optimistic regarding their current role and whether they envision retaining it over the next one-to-two years, at 89 per cent versus 83 per cent respectively. (The study defines "employee" advisors as those who are employed by their investment services firm and "independent" advisors as those who are affiliated with a broker-dealer but operate independently.)

Satisfaction with compensation also dropped more among employee advisors, with half indicating that they have experienced negative changes to their payout in the past year – up from 41 per cent in 2014. By contrast, 72 per cent of advisors in the independent segment said their compensation remained the same from 2014, while 11 per cent indicated that it improved. 

“A number of firms tweaked their compensation plans last year (as they frequently do) impacting for example, advisor payout on business from smaller asset households, new relationships, specific product types, etc.,” Foy told Family Wealth Report. “Whether or not individual advisors take a big hit to their paychecks these changes tend to be viewed negatively because they create confusion and uncertainty in the short term and also can represent a conflict - or at least limit the control - advisors feel they have to manage their client relationships in the way they think best.”     

He also noted that the overall higher level of optimism among independent advisors is partly due to the fact that these advisors have higher payout rates and feel a greater sense of control and flexibility in their work. “Actually though, if you look deeper at the data, the bigger split is not between independents and employee firms as much as it’s between wirehouses and non-wirehouses, as 'employee' firms like Raymond James and Edward Jones actually look much more like independents in terms of advisor satisfaction and loyalty,” he said.

Implications

JD Power's latest findings suggest that leadership at the executive and local/branch level plays a critical role in cultivating advisor satisfaction and loyalty - and room for improvement in this respect. For example, 42 per cent of employee advisors said their firms lack a strong culture of accountability, while others sense a lack of “top-down communication” (only 43 per cent of respondents saying that their firm's leadership clearly communicates strategic goals.)

“Management needs to clearly articulate a strategic vision for the firm and the role advisors play in that vision, as well as creating a strong culture of fairness where individuals are held accountable and rewarded based on performance,” Foy said. “Firms also need to make sure that branch managers – who represent management on a day-to-day level for most advisors – are effective and responsive to advisor needs and feedback.”

Besides leadership and compensation, Foy told this publication that having the right platform in place is critical. “That means providing the right operational, marketing and technology support to advisors,” he said. “Independent firms have closed the gap in some of these areas where large employee firms once had a clear advantage.”

He added: “Also, in thinking about the next generation of talent, firms need to figure out how to clear away some of the confusion and constraints around things like social media usage by advisors. There are obvious compliance challenges, but advisors need to be where their clients are […].”

Asked if he would agree that the findings are relevant to the wealth management industry as a whole, including the family office sector, for example, Foy said he thinks the lines are blurring between many traditional sectors – be them at the lower or higher ends of the wealth spectrum – when it comes to thinking about ways to serve clients effectively and efficiently.

“Given the demographics of the advisor market and the stated goal of many firms to continue to invest in and grow their wealth management business, the demand for proven, successful advisors is likely to increase over time,” Foy said. “While there is no evidence of an imminent mass exodus of financial advisors from their firms, we know that when advisors decide to leave their firm, they tend to take most of their clients and assets with them.”