RIAs: How to Fix Your Pay Structure
Financial advisors are buzzing these days with long-needed discussions about fee structures and the way clients pay advisors for their services. But setting a fee structure is only half of the equation. The other half is the distribution of compensation throughout the firm, from support staff to ownership.
Compensation is the single biggest investment most advisors make to ensure the ongoing success of their businesses. Many owner-advisors who spend considerable time and effort determining how to reward their employees neglect to devote the same attention to their own compensation. As a result, they become accustomed to discretionary compensation in good years and find themselves unprepared to adjust in difficult ones. And those who do take the time to develop a thoughtful owner compensation structure often outgrow their initial policies a few years down the road.
Consider the example of a firm that originally compensated its three owners with equal base salaries and equity percentages. As the business grew and the partners natural abilities and inclinations emerged, their roles evolved.
Each was making valuable contributions to the firm, but their equal-pay compensation model did not accurately reflect their increasingly varied responsibilities, or input. Two owners were working 60-hour weeks and taking only two weeks of vacation, while the third worked 40 hours and took a month off.
Although the partners had similar philosophies when they formed the firm, priorities shifted over time. The discrepancy created friction among the owners until they acknowledged that things were out of balance and adjusted their compensation structure accordingly.
COMP PLAN DESIGN
Whether you are tackling the challenge of creating an owner compensation plan for the first time or reassessing and updating your existing framework, the following steps will help guide your practice in establishing a plan that reflects your goals and supports your business:
1. Review the firms vision, goals and compensation philosophy.
A compensation philosophy establishes the intent, objectives and priorities of the firm's reward system. Owners must have a firm grasp on what the firm is trying to accomplish and the role they want each member to play, including themselves. A thoughtful compensation model aligns roles and responsibilities to the firms strategic objectives.
2. Establish base compensation ranges and criteria for advancement.
Base compensation should be based on the primary role each owner performs for the firm and should align with industry standards for that role. It is payment for services performed and unconnected to the owner's share of the firm's profits. The compensation should be consistent, but allow room for growth to accommodate additional responsibilities the owner assumes over the course of his or her career, just as it would for any salaried employee. Generally, owner compensation should represent 40% of a firm's total revenues.
3. Define performance and ownership criteria that drive incentives.
Each firms goals are different and will determine which elements of performance prompt incentive rewards. No matter the goal, performance criteria must be measurable and agreed upon among all owners and incentives should be paid according to the firms performance, not guaranteed.
4. Balance ownership incentive, profit distribution and retained earnings.
Reviewing and agreeing upon profit allocation in the ownership incentive pool is a critical component of business and financial planning. Carefully consider various models for balancing the financial risk for ownership, contributions and profits retained for a future safety net.
5. Calculate short- and long-term implications.
Just as advisors perform scenario tests on clients portfolios, it is imperative to test compensation plan models for viability before implementing them. The owner compensation plan must be attractive to the individuals and the firm both now and in the future.
6. Implement and review your plan.
Once a plan is developed, determine a schedule for implementing it and stick to it. Perform regular reviews of the plan and make adjustments as needed to make sure it continues to promote the vision, goals and long-term success of the firm.
Finally, in designing an ownership compensation plan, advisors should keep in mind the concept of simple, not simplistic. The clearer and simpler a plan is to understand, the more smoothly it can be implemented, followed and updated as the business grows and evolves.
Matt Matrisian is senior vice president of practice management and strategic initiatives at AssetMark, a provider of innovative investment and consulting solutions for independent advisors, based in Concord, Calif. He is the author of The Power of Practice Management: Best Practices for Building a Better Advisory Business.