RIAs rethink compensation, benefits amid pandemic
As RIAs slog through a year marked by a pandemic, economic volatility and a rapid transition to all-remote work, many firms have been rethinking their approach to advisor compensation.
It’s a process that has involved a review of the structure and balance of variable compensation. It’s also prompted many advisory practices to take a fresh look at their benefits packages, an important — if often overlooked — element of advisor compensation.
"Definitely the trend is more and more firms offering benefits," says Lisa Salvi, vice president of business consulting and education at Schwab Advisor Services. "That is becoming very important."
To be sure, the coronavirus pandemic has accelerated such industry trends that were already underway, particularly the transition from a model of individual producers toward a team-oriented approach where multiple advisors and associates serve a pooled set of clients.
"I am seeing momentum in the direction and the interest and willingness [to] move to more ensemble-type thinking, which then as a result forces the conversation around compensation," says Anand Sekhar, vice president of practice management and consulting for Fidelity Institutional. These days, he says, those conversations tend to place greater emphasis on succession planning and business continuity, issues that have taken on a fresh urgency amid an unprecedented public health crisis.
Sekhar explains that many first-generation RIAs were launched by founders who came from a wirehouse or a similar environment, and often kept that style of compensation structure in place. But when the senior advisors begin to consider the future of their firm and the next generation of leadership, many are reshaping their practice around with a more team-oriented focus.
"This model that's having us work in silos might not work in the long term," he says. "Those firms that are very siloed tend to have sustainability challenges."
So what does compensation look like in a team environment?
In some firms, it entails a greater reliance on base salary over variable compensation. Fidelity's most recent compensation benchmarking survey found that base salary accounts for three-quarters of compensation for individuals in advisor roles. Many successful firms still rely heavily on incentive compensation, but are getting creative with their approach.
Many firms that custody with Charles Schwab are moving away from individual incentives, and instead aligning bonus compensation with specific team or firm initiatives, according to Salvi.
"As firms grow and they move into a more ensemble, team-based approach, definitely you're not compensating just in individual rainmaker performance," Salvi says.
All those [benefits] can amount to tens of thousands of dollars, and most firms don't take credit for that. They're missing an opportunity.
"It doesn't mean that there's no incentive compensation, it's just that it's tied to different behaviors that you're trying to incentivize," she adds. "We still see a lot of incentive compensation happening, and I think firms are getting pretty sophisticated with how they tie compensation to key initiatives at the firm."
In some cases, an ensemble approach that tilts toward base compensation can make sense for bringing on green advisors or those who are new to the RIA space. Individuals who come from a large institutional bank, for instance, might have enjoyed tremendous success without having to spend much effort landing new client relationships.
"They may have been successful because they have been getting referrals from mortgage, banking, private banking," says Ken Hoffman, managing director and president of Optima Group, a financial consultancy. "They may be significantly less successful if you recruit them and then they have to go out and produce on their own."
Spotlight on benefits
Industry insiders agree that even amid the pandemic, the market for top advisor talent remains extremely competitive, with compensation packages playing a crucial role in the success of a firm's recruiting efforts.
"Even though we were in this unprecedented time, firms are still hiring," Salvi says.
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In its most recent RIA benchmarking study, Schwab found that for firms with $250 million or more in assets, compensation accounted for a median of 71% of their revenue.
"It's their biggest expenditure by far, and firms that really differentiate themselves have a compelling value proposition," Salvi says.
At Fidelity, Sekhar says that the custodian is encouraging its RIAs to expand their benefits programs and to position them as a prominent element of the compensation package, not just an addendum to it. That's become especially important in 2020 as workers in all industries have had to get creative in navigating paid time off and other policies during the pandemic.
"COVID is interesting from a compensation perspective, because I think what has happened there, is it has resulted in people rethinking elements of comp that have been 'softer,'" he says. "Firms are looking at their benefits structure."
Fidelity has actually worked up a model for its RIAs to give employees a compensation statement that includes the value of benefits alongside base and bonus compensation. So along with those traditional forms of compensation, advisors would see dollar amounts broken out for how much firms are paying for health insurance, retirement matching, Social Security, Medicare and even subsidies for perks such as parking or gym memberships. That can burnish the firm's value proposition, especially when recruiting younger advisors who might prize their benefits package more than older generations, according to Sekhar.
"All those things can amount to tens of thousands of dollars, and most firms don't take credit for that," he says. "They're missing an opportunity."