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How should firms distribute, determine and design compensation packages for advisors and support staff?

Compensation makes up the single largest cost for RIAs, according Schwab’s most-recent RIA Benchmarking Study, yet many firms do not have a well-defined incentive package in place to reward and retain talent.

Putting a plan in place may seem intimidating at first, three compensation experts who spoke at a Financial Planning webinar on best practices for structuring firm-wide compensation plans acknowledged.

But it can be done, they said, if owners focus on aligning compensation with measurable performance targets that contribute to the overall goals of the firm.


Many advisory firms still take a bottoms-up approach by consulting benchmark data and paying employees whatever the market rate is, said John Furey, founder and principal of Advisor Growth Strategies, a Phoenix-based consulting firm that specializes in RIA management.

That strategy is not the most effective however, as benchmark reports only provide you with set compensation figures, but don’t actually reveal how that number is constructed, Furey explained. As a result, their adaptability is limited, he said.

Instead, a better way to build incentive plans is via a top-down approach, Furey said. Start by defining what the firm is trying to achieve. Then, use that to establish specific targets for professionals such as advisors and senior management, and another set of targets for the support staff.

“Manage it strategically rather than tactically,” he advised.

There is no one-size-fits-all formula when it comes to compensation, Furey stressed. The incentives that will drive business growth at a measured pace, compared to maximizing returns for the owners or boosting the market value of a firm for potential sale, are all completely different, he declared.


Setting performance targets is tricky. Indeed, 56.8% of webinar participants, responding to a live poll, do not document measurable performance goals and 67% lack a defined career path for new recruits.

The absence of such components can be detrimental to a firm’s success in attracting and keeping talent, said Grant Rawdin, founder and CEO of Wescott Financial Advisory Group, a Philadelphia-based RIA with $2 billion in AUM.

While compensation is obviously about money, it is also about job satisfaction, which comes from knowing where your career is going and how to get there, Rawdin said. “Lack of job satisfaction is the number one reason people leave,” he added.

Losing staff, especially top-producing advisors, is a difficult and costly process. Not only does it drain the time of owners who are tasked with finding replacements, Rawdin said, the loss is also highly disruptive to firm culture and clients.


Rawdin agreed with Furey that compensation structures should be based on internal factors rather than external metrics. Wescott employs what they call “advisor profitability analysis” to determine the margin each advisor is required to produce to earn a certain tier of compensation.

They do this by assigning revenue gained from every client to the advisor in charge of servicing that client, and then subtracting overhead as well as other support costs such as marketing from that revenue to arrive at a net profit figure.

“Treat advisors as independent business units,” Rawdin said. “Think about their contribution and how to enable them to do better.”


Wescott also has a career roadmap that shows how much experience and clients an advisor must have to earn a promotion, as well as the additional compensation that follows.

For example, a full-fledged financial advisor must have a CFP certification or be working towards an advanced degree, four years of experience at Wescott or equivalent, as well as 20 primary client relationships, 20 secondary relationships and 10 reviewer relationships. At this level, the advisor will earn X salary and Y% in bonuses.

To become a principal, an advisor would need an additional 10 years of experience and 20-to-30 more client relationships. Once the advisor reaches this milestone, he or she will be eligible for profit sharing in addition to a raised salary plus bonus.

“When someone comes in and they understand that there’s a defined career path and what they have to achieve and how we as owners are going to participate, it’s very helpful and increases job satisfaction,” Rawdin said.


In addition to conventional incentives like salary and bonus, Furey urged owners to consider equity compensation if the tradeoff is worth the rewards in the long run. He acknowledged that a lot of owners are hesitant to do so because they don’t want to share economics about the firm or dilute their ownership.

Indeed, 64% of webinar participants do not currently offer equity compensation. However, 94% said they think it's important for employees to have “skin in the game.”

Activating key professionals through equity is important because it provides a retention effect Furey said. If the equity distribution is minor, he added, it won’t impact the firm’s bottom line that much.

Neal Simon, chief executive of Bronfman E.L. Rothschild, agreed. After selling his previous firm, Highline Wealth Management, last year, he now oversees 75 employees, including 31 advisors.


At each stage of major business development for his firms, Simon used some form of profit-sharing to incentivize key partners and employees. In 2010, he distributed phantom equity to three top advisors, which allowed them to directly benefit from current cash flow and gain a tangible sense of ownership in the firm.

Simon has also issued equity appreciation rights, options, restricted LP units and LLC units, all of which have their individual pros and cons, but were effective nevertheless in giving top employees a vested interest in seeing the firm perform well.

Conversely, the outright grant of real equity and company-financed equity purchases are compensations Simon does not believe in. According to him, they tend to be less valued by employees and are tax inefficient.

Simon added that if owners oversimplify compensation structures, then they have to be willing to live with the result. Rewarding employees on percent of revenue or assets alone will inevitably lead to a heavy sales culture, he explained. On the other hand, introducing equity or profit sharing will encourage people to grow the firm as a whole.

“Try to combine the best of both worlds,” he said.

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