The art of poaching senior investment managers and teams in the quest for new clients is nothing new in wealth management.
But as employments contracts get tighter, firms are being forced to ask whether the costs of hiring senior staff and teams provide value in terms of the potential assets that can follow.
Hiring has formed the mainstay of many wealth management companies’ growth strategies in recent years. However, Brewin Dolphin’s decision to sue six former senior employees who defected to Charles Stanley over alleged breaches of contracts underlines the difficulties now associated with senior hires.
It is no coincidence that the High Court battle follows Brewin’s decision to alter its growth strategy so that it no longer relies on team hires or buys. It marks a change for the national wealth manager, which has traditionally been opportunistic in its team hires.
The shift is evident elsewhere in the industry. Some firms have had their fingers burnt, hiring senior individuals only to see little money follow them.
Jonathan Polin (pictured), chief executive of Ashcourt Rowan, estimates investment managers typically bring over 65% to 70% of the client bank they promise.
Graham Auld, who recently set up consultancy firm Auld Investment, is more cynical, based on his experience of recruiting staff over a 45-year career in the industry.
‘A lot say they will bring 60-80%, but in reality they are lucky if they get 35%-40%,’ he said.
Nonetheless, he believes senior recruits and team hires are worthwhile over the long term if done properly.
However, the chief executive of a large wealth manager, who preferred to remain anonymous, suggests a figure as low as 20%. As contracts are now so tight, he suggests a shift away from poaching teams has driven M&A activity, as there is a higher chance of locking in the assets. He estimates hiring costs are generally around one times salary when recruitment, set-up and search fees are accounted for.
As a result, he prefers to focus on people who can support the growth of the business in other ways. To minimise costs, his firm seeks out individuals for senior roles themselves, cutting out recruitment consultants.
So at what point do hiring costs become viable? Ashcourt Rowan’s Polin suggests a minimum of 50% of a promised client bank is the cut-off point.
‘They have got to be able to properly secure 50% of assets to make it worthwhile. If you have got a team that is running £250 million, I would probably be happy if we got £100 million coming through the door,’ he said.
Watch your client bank
A recruitment consultant who specialises in wealth management suggests a conversion rate of 20% to 50% is typical.
He said clients can be deterred by a lack of alignment between the investment manager’s old and new firms. Paying close attention to the nature of the client bank is important.
‘Clients can have more of an association with institutions than investment managers think. If an investment manager inherited their client bank, the clients are very unlikely to come over with them. But if they have been with the investment manager for a long time, they are more likely to follow.’
Hiring costs depend on the business model but are generally more than one times salary.
The industry’s historic preoccupation with attracting new clients also begs the question: have firms lost sight of the costs associated with losing existing clients? The recruitment consultant suspects so, arguing that remuneration that is skewed towards generating new business has a role to play in this.
His sentiments are echoed by Brooks Macdonald chief Chris Macdonald, who said: ‘I think it is absolutely fundamental to look after existing clients first. It is an old analogy, but there is no point holding a bucket up if it has a hole in it. From our perspective, it is critical to look after your clients and get growth that way. They are your best marketers.’
Polin believes a focus on attracting new business and looking after existing clients have to go hand in hand. ‘You don’t want to lose your existing profitable clients, but it is incredibly hard to engender organic growth in the sector. Also, the dynamics of our business is you have to get new clients because you have an elderly client base,’ he added.