#20: Advisor Compensation and Career Path

Listen & Subscribe On Your Favorite Podcast App

There Is A Better Way To Pay Advisors, Find Out How 

A compensation philosophy is a major aspect of any organization. The way that you pay your staff exemplifies the values you believe in, the behaviors you want to incentivize, and the mission that guides you.

Last time, we discussed our general compensation philosophy and how we have come to structure our compensation packages. To re-cap, we pay salaries at market averages with a built-in bonus structure to incentivize exceptional performance and results. 

Our compensation model doesn’t just dictate how our staff gets paid, it also lays the groundwork for an advisor’s career path and future at the firm. Today, we are going to focus on the unique way that we pay our advisors. We will touch on everything from what didn’t work to how we came to the process we have in place now. 

Let’s get started. 

Compensation Plans That Just Don’t Work

Hindsight is 20/20 and experience is your best teacher. So while we have made several mistakes in developing our compensation plan, we know that it led us to the process that works for us today. The top two plans that we found don’t work at all are:

  • Commission-based compensation or “eat what you kill,” as we like to call it.
  • Salary-only compensation

Why do these two models not work for us?

The eat what you kill philosophy is the oldest in the book and frankly one of the worst ways to pay advisors. First, it doesn’t support the mission of our firm or our ensemble approach to serving clients. We want to guide clients through life’s most important financial moments and a commission-based compensation plan doesn’t mesh well with that mission. Instead, it provides incentives for advisors to sell products or services that might not be in the best interest of the client, not to guide them. 

This type of model encourages advisors to sell particular products. An example of this is someone who finds any reason to sell a variable universal life insurance policy and makes a hefty sum from the commission of that product. 

This type of thing is common for those in the wrong compensation system. One of the fundamental rules of economics is that people respond to incentives, and eat what you kill commissions incentivize the sale of products. But this model doesn’t just hurt commission-based firms, fee-based practices can also fall into the eat what you kill trap.

If an advisor’s compensation is based entirely on the amount of revenue he or she manages, that can create its strange incentives. 

For example, you can imagine a client who wanted to build a new house. An advisor whose pay is based only on the number of fees collected might be tempted to recommend that client takes on a mortgage instead of using their savings. Now, of course, the mortgage might be the right course of action, but there may be a built-in conflict of interest if the advisor’s compensation will go down based on a withdrawal.

Now that we know that eat what you kill doesn’t work, what’s wrong with a salary-only model?

The challenge with salary only is that it doesn’t promote growth or propagate the mission to more households. 

Do Compensation Models Impact Your Career Path?

The short answer: yes.

Let’s take a look at how the eat what you kill compensation model can negatively impact an advisor’s career path. 

First of all, for advisors newer in their careers, eat what you kill means that they are probably starving for the first few months or even years. Many people could be great financial professionals who will never give the career a chance if they don’t have a base income.

Next, you want to think about midcareer advisors. As their skills and competencies start to improve, they begin to acquire and serve more complex households. At some point, they reach capacity and can no longer effectively serve any more families, so it makes sense for them to introduce some of their less complex relationships to a younger or a newer advisor or a team, so they can focus on business development. 

But in a pure eat what you kill system, their income will go down, so they hold on to all those clients. That advisor’s growth stalls, the firm’s growth flattens, and the new advisors are deprived of the client base. The clients are stuck with an advisor who may slightly resent them and whose service may be somewhat diminished.

Finally, the veteran advisor. They have years of experience and knowledge to share, but if their compensation is based entirely on revenue management, what incentive do they have to spend time mentoring and training? Since compensation is the primary driver of behavior at work, why would that veteran dedicate any time to the firm instead of clients?

Our system works differently. We know that compensation impacts behavior which in turn affects future career paths. Now we will take a closer look at our process for paying advisors.

Our 5 Step Compensation Model

There isn’t one way to pay advisors. For us, taking our mission, values, and culture into account helped us create the unique payment model we have today. Let’s take a look at our process.

  • Salary
  • Team Bonus
  • Individual Bonus

Last two elements are for those who have equity in the firm:

  • Quarterly profit distribution (dividends)
  • Equity in a leveraged-ensemble 

The first part of our plan is the salary. We find that paying a salary is the best way to pay a fair and competitive wage. Everyone at the firm is an employee, which means we have group benefits like health insurance, life insurance, disability, a 401(k) with an awesome match, plenty of paid time off, and other corporate benefits.

There are many elements that go into the salary determination, including the number of assets managed, number of client households, the complexity revenue managed, and other functional roles fulfilled within the firm. 

We have a very clear career path with different salary levels, ranging from brand new advisors to veterans. About two-thirds of the way through the career path, there’s an opportunity for advisors to have equity. In other words, our path includes not only progressively higher salaries but also a path to ownership, and so our salaries are not based on seniority but a contribution to clients into the firm.

The next phase is team bonuses. Our team bonus is available to everyone in the firm and it is paid quarterly. It is also location-based, so our various offices generate their own bonus pool, which is then allocated amongst all the members of the wealth management team in that area.

We also offer individual bonuses for advisors based on the new net revenue the advisor sources to the firm. This can be from new households to additional revenue from existing clients. 

We do work as a team but ultimately our advisors are responsible for revenue management, so we have all the tools and processes to track that and reward the right behavior. Remember, the bonus is paid for net revenue sourced not net revenue served. This is a key differentiator from the eat what you kill philosophy. 

Let’s look at an example. A seasoned advisor like Mary has a personal minimum of a million, and she gets introduced to the Smiths who have $400,000 in investible assets. Mary can bring those clients into the firm and introduce them to the appropriate advisor for their level of complexity and still get the bonus for sourcing the new AUM. It’s perfectly aligned with our compensation philosophy and career path. 

Both the fourth and fifth elements of the compensation scale are for advisors who have equity in the firm and are on track for partnership. The fourth way we pay is through quarterly dividends 

to partners based on their ownership allocation. If you own 5% of the firm, you get 5% of the dividend.

Lastly, and perhaps the most lucrative aspect of our payment system is the growing value of equity in an ensemble firm. Firm equity is often our partners’ most valuable asset.

The Right Compensation Model Matters

How your team gets paid is an important part of your business model. Compensation is a driving force for behavior in the workplace and the right plan can help propagate the right type of work ethic. 

We believe that the 5 ways we pay advisors inside of an ensemble are aligned with client needs, the firm’s mission, and a strong career path for individual advisors for generations to come.

Our free download today is called Five Ways To Pay Ensemble Advisors and breaks down our payment system even more. 

Further reading