Last year, Exencial Wealth Advisors faced a familiar-sounding problem. Like many other financial advisory firms around the country, it had built up a solid business over the years. But the 40-something founders of the Oklahoma City-based firm realized they needed to make major changes to ensure that the firm could continue to grow.
Topping the list: Exencial's compensation structure.
"We had to break the status quo," says co-CEO John Burns. "We knew we needed outside talent, and building a compelling employee value proposition was a key element. We knew the compensation system of the past would not be effective in the future."
To date, the firm had used a traditional compensation model, with base salary plus discretionary year-end bonus - a holdover from the pay structure used by its two predecessor firms, Burns' Oklahoma City practice and co-CEO Jerry Georgopoulos' Executive Financial Group in Dallas.
But after building up $1.2 billion in total client assets, Burns and Georgopoulos wanted to step away from their roles as principal rainmakers to focus more on management and leadership. They needed to design a new compensation plan that would both motivate advisors to increase the firms' assets and develop Exencial's future leaders.
"We needed to shift the culture away from our personal brands as owners and toward a strong company brand," Burns explains. "We had run into roadblocks in the past due to the perception that everyone in the organization played a supporting role to the owners."
The solution Exencial chose was one that's growing in popularity within the industry: performance bonuses and incentives based on sales, relationship management and planning, and investment expertise. Those come on top of base salaries, which account for roughly 50% to 80% of total compensation at firms switching to bonus systems.
Incentives are becoming "more and more important as firms mature and become larger," adds George Tamer, head of strategic relationships for TD Ameritrade Institutional. "Net new assets, net new clients and revenue are the primary goals. But some firms are also looking at non-financial incentives, such as client satisfaction and attrition."
John Furey, principal of RIA consulting firm Advisor Growth Strategies, attributes the shift toward incentive pay - based on both team and individual accomplishments - to the need for "business continuity planning" in growing firms with baby boomer founders. Similar efforts to rethink firmwide compensation are among Furey's most requested projects, he says.
At Exencial, base salaries for senior-level advisors start at around $100,000. Advisors also receive 50% of the annual revenue of new business that they refer to the company in the first year, and 25% thereafter. And all of the firm's employees are eligible to participate in a bonus pool each year pinned to new revenue generated by the entire firm.
Upside for total compensation is unlimited, Burns says. "We have no cap," he explains. "Advisors can grow by increasing their revenue or becoming an owner and sharing in profits."
And the new system has earned praise from employees, Burns says: "This establishes a clear path to ownership, and we're already seeing success in driving revenues." In 2013, he adds, "compensation and bonuses were the highest we've ever had."
SURGE IN OVERALL PAY
Over the last few years, a perfect storm of factors rocking the advisory business - succession planning needs, a surge in equity markets, a growing client base of baby boomers approaching retirement and a more aggressive approach to growth by some new regional powerhouse firms - has increased demand for advisors as supply dwindles, driving up salaries.
"We're seeing compensation up dramatically," says industry consultant and researcher Angie Herbers. "There was a 20% growth rate last year. There's a severe talent shortage, and firms are paying top dollar to get the people they need."
Advisory firms paid 18% more to hire new senior advisors in 2013 than they did in 2012, according to research from Herbers' Salary Advisor service, with total compensation rising to $218,600 from $185,650. (See chart on page 53.) Total compensation for mid-level advisors also jumped, rising 16% to $135,250 from $116,720 in 2012.
Compensation for advisors already employed by firms also rose, but at a lower rate. Total compensation for senior advisors increased 4%, to $148,200 in 2013 from $142,250 in 2012, Herbers reports. For mid-level advisors, compensation rose 9% to $103,250.
The latest FPA compensation study found similar numbers, with mean total compensation nationwide for what it defined as senior financial advisors at $145,000, including bonus and incentives.
When surveyed earlier this year by Financial Planning, about 10% of advisors said their total compensation rose 30% or more in 2013 from 2012, and nearly half said their total compensation rose between 10% and 30%.
Asked how much they expected their total compensation to rise this year, nearly 75% said they expected a gain of between 1% and 29%, while only 3.5% expected an increase of 30% or more.
The overall pay increases are also contributing to the growing use of incentive pay, Herbers says, as owners seek a way to tie compensation to performance. "Firms can't afford to let people leave because it's so expensive to replace them," she says.
As part of its own effort to reshape advisor compensation, Savant Capital Management in Rockford, Ill., actually reduced base pay for advisors - which now starts at around $50,000 for new associates and around $150,000 for senior advisors - but then it raised incentive compensation in a variety of ways:
*Ongoing revenue: Advisors now receive 7.5% of revenue from clients with whom they work. "It's really a direct incentive to take care of clients well, and it's become an annuity," Savant CEO Brent Brodeski says.
*Origination bonus: The firm pays an additional bonus of 12.5% from revenue generated by serving a client to whomever brought the client in. "It's a powerful incentive to go get a client and give yourself a pay raise," Brodeski says.
*Business development bonus: For every new client brought in, the originating advisor gets a onetime payment of 20% to 50% of annualized first-year fees. "The exact percentage paid depends on the advisor's total new annualized business development," Brodeski says.
Savant also has a companywide bonus pool tied to three annual 15% growth targets: in profit, revenue and new assets. Set dollar amounts are assigned to various roles: If the firm hits the targets, employees get their full amount, while lower growth rates trigger smaller bonuses. (And if Savant doesn't get to at least 5% on any of the metrics, that portion of the bonus is not paid out at all.)
With roughly $3.7 billion in assets under management, Savant designed its incentive pay structure to jumpstart a cultural shift, Brodeski says. "The three original partners were developing 85% of the business," he says, "but we realized that wasn't sustainable. We decided to transform our culture, and in doing so we supercharged the growth of the firm."
Another key compensation trend: a new focus on offering firm equity to valuable team members. At Boston-based Colony Group, for instance, nearly half of the firm's 66 advisors have equity in the firm, CEO Michael Nathanson says.
Although Colony, whose senior financial counselors have a base salary of $100,00, also makes bonus payouts based on "quantitative performance metrics" such as revenue and profits, Nathanson argues that the equity offer is, in fact, the "most important part" of being able to "attract the best people in the industry."
"There's clearly a movement away from subjective compensation decisions," he says. "As the advisory business becomes more professional and evolves from practices to businesses, more and more you're seeing the use of objectively determined compensation."
Exencial and Savant also offer advisors the opportunity to become equity shareholders, although with slightly different approaches.
Advisors coming to Exencial with a significant chunk of business - say, $100 million in AUM - would receive equity commensurate with their contribution, Burns says. "For example, a $100 million AUM advisor would contribute their business to Exencial in exchange for equity." Advisors already in the firm can receive equity based on a "predetermined system," he adds. "One of the criteria would be related to consistent business development over several years."
Savant, meanwhile, offers advisors who meet growth criteria the opportunity to buy in - albeit "at favorable pricing," Brodeski says.
"It's a way for advisors to get skin in the game," he explains, "and it's also a security thing for the firm, reducing the risk that top producers will leave."
Charles Paikert is a senior editor of Financial Planning. Follow him on Twitter at @Paikert.
HOW TO LURE YOUNG ADVISORS
As demand for advisors continues to soar, advisory firms are grappling with how to attract - and compensate - the industry's next generation.
"While the perceived talent shortage is causing rising levels of compensation across the board, we're seeing more emphasis on compensating young associate advisors and fostering career development," says Dan Inveen, principal and director of research for FAInsight, an industry consulting firm.
Median total compensation is now nearly $60,000 for support advisors and more than $80,000 for associate advisors, according to FA Insight's most recent salary study, People and Pay. A separate report, the Financial Planning Association's 2012-2013 compensation study, put median compensation for junior financial planners at $63,900 nationwide.
Firms had to pay nearly 10% more to hire new associates last year, according to Angie Herbers' Salary Advisor survey; she found total compensation rose to $71,250 for new junior-level hires.
But advisors grappling with hiring costs can take heart: Wooing and retaining young advisors goes beyond cash compensation, industry experts say. Younger workers are motivated by a variety of other factors, many of which require less upfront cash outlay.
Consider including some of these benefits in your recruiting pitch:
* Career development: Young advisors "want to know what their career path will be," says Linda Leitz, chairwoman of NAPFA's national board and principal of Colorado Springs, Colo., RIA It's Not Just Money. "Young people out of college want a rewarding job, structured development and honest feedback," adds Craig Pfeiffer, founder and CEO of Advisors Ahead, a company that places college graduates with advisory firms.
* Flexible schedules: "Time balance is an important incentive for young people," Pfeiffer notes. "They're willing to work on Saturday night, but if something comes up on a Wednesday afternoon that's important to them, they want to be able to go."
* Health club memberships: Lifestyle benefits are key, says industry consultant and researcher Angie Herbers.
* Connection with clients - and the broader community. "If you want to get good associates, give them contact with clients from the outset," Herbers recommends. "This is a generation that wants to be involved." Firms should also consider offering young associates paid time off to do volunteer or charity work, suggests George Tamer, head of strategic relationships for TD Ameritrade Institutional. "This is a generation that wants to give back, and employers need to recognize that."
Across the board, Pfeiffer says, advisory firms should think beyond traditional incentives based on assets and revenue generation.
"They need to change their lens and incent young people for all that they contribute, whether it's social media, client retention or bringing goodwill to the firm by community volunteer work." - Charles Paikert