What the small can teach the large

Judging by the recent 2009 Moss Adams/ InvestmentNews Adviser Compensation and Staffing Study, financial planning, investment advisory and independent-brokerage firms could teach companies in many other fields how to manage in tough times.

The survey showed that 66% of the 757 registered advisers and investment advisers who responded cut compensation costs in 2008, and 41% focused their cost-cutting efforts on the owners’ salaries.

In fact, the heads of almost 70% of those firms surveyed cut their own salaries, in many cases to a greater degree than they cut employee salaries.

The owners and top managers of these firms apparently understand that in leading by example — taking an equal or bigger hit to their compensation than the cuts imposed on their employees — they were preserving, if not boosting, employee morale in tough times.

They apparently understand that in a service business, staff morale affects the level of customer service and satisfaction — just as the airline industry has discovered the hard way over the past decade.

Only 16% of the advisers surveyed said they have cut staff since September 2008, showing that most probably they were running lean firms to begin with and were concerned about maintaining client service.

The owners and top managers of the firms that have resisted cutting staff also apparently understand that managing so as to maximize profits in lean times can lead to suboptimal long-term earnings. That’s because client service may suffer from understaffing, just when clients are likely to need hand-holding the most. Nothing can turn off stressed clients more quickly than finding that a trusted adviser has left, or receiving a slow response to a question or request for a document. This may lead to client defections when the crisis is over.

The damage to client service from cutting staff can linger even when good times return, and the employees who were let go have to be replaced, often with new people who will take months to bring up to speed.

Perhaps it was easier for the financial-advice industry to resist layoffs, because many firms actually gained clients as frightened investors looked for expert guidance.

Nevertheless, most firms took a hit: Average assets under management dropped 13.6%, and pretax income per owner dropped to $332,208, from $370,982 in 2006. While revenue remained flat versus 2007, revenue declines may be expected this year, as income sometimes follows the asset declines with a lag.

Contrast the behavior of small-firm managers to that of the heads of the remaining large investment/ commercial banks, such as The Goldman Sachs Group Inc. and JPMorgan Chase & Co. It’s truly a pity the heads of these giants don’t pick up the management concepts of the firms in the survey.

If they did, we would see these firms truly managed for the long-term interests of shareholders rather than for the short-term demands of top management and their stock options.

We would see the institutions being more judicious in their risk taking, and we would see top management taking a significant hit to their own compensation and perks in difficult times. As a result, layoffs could be limited to a bare minimum, thereby maintaining client service and customer satisfaction.

We would see such institutions managed to achieve greater profitability by being the most efficient at raising capital and making that capital available to productive enterprises, rather than risking capital for the short term.