Two years ago, I remember meeting a founder of an RIA firm in the Midwest who we'll call Mark. Mark had struggled with growth over his career and it was apparent why: he lacked a solid group of talent surrounding him. As a result, Mark worked very hard over the next couple of years to recruit a group of younger advisors who had a demonstrated track record of success. When I recently met with Mark again, I was initially surprised to find out that his firm’s asset levels were barely above what they were in our original meeting! Even worse, the vast majority of the new assets that had come in over the past two years were still being brought in by Mark. After spending a few minutes on his model, we quickly deciphered what their core issue was: even though Mark had the right talent in place, his advisors were simply not incentivized and motivated to grow with their base-salary-only model.
Mark’s issue is not unique as I consistently see this problem in our industry whenever I meet with new firms. Many RIA firms in our industry originated from an accounting practice where it is commonplace to have just a base salary model. Even where RIAs have performance-based incentive models in place, I often find that the incentives do not align to the behaviors the firm is actually trying to encourage. While every firm is unique and requires a customized approach to designing the incentive model that is best for them, I recommend incorporating four important themes in your compensation model:
- A Simplified Incentive Model that is Consistently Reinforced
A strong compensation model should be straightforward, very simple to understand and have few, or ideally no caveats. As a general rule, if it takes more than five minutes for you to explain an incentive model to your team, then it is probably too complicated. Simplified compensation models make it very easy for advisors to understand what they need to accomplish and what their reward will be. To reinforce your incentive model, I recommend referring back to it when appropriate; for example, a quarterly or bi-annual full team meeting is an excellent opportunity to reinforce your model while also simultaneously recognizing significant achievements by high- performing advisors.
- Realistic and Achievable Ongoing Incentives
For an incentive model to actually work, the goals must be actually be attainable. While trying to whet the appetites of your advisors, you might consider setting different tiers or hurdles (as long as you remember the first rule--don't overcomplicate!). Having a tiered model allows you to motivate all advisors, regardless of the stage in their careers. It also creates an immediate new goal for an advisor to aspire to once they meet a certain hurdle. Many firms seem to use Net New Client Assets (new assets less client withdrawals) as a model when setting tiers. While I find this to be a good measure, I recommend using client revenue, as it better aligns the advisor with the interests of the firm (for example, your advisors will be less likely to discount fees).
- Aligning Incentives with the Firm in Mind
Ultimately, you want to surround yourself with talent who will think like you and put the firm’s interests first. To do so, you need to inspire behavior that is tied to your firm’s success. In growth-oriented firms with successful compensation models, this is usually accomplished with a year end discretionary bonus broken up into two parts:
- A quantitative piece that is based on the firm’s year end profit figure (bottom line profit better aligns the advisor with the firm than revenue or assets)
- A qualitative piece that is subjectively determined based on how the individual contributed to the broader team or firm outside of their day-to-day activities.
Occasionally I run into firms that compensate their advisors purely on a payout model like those at the wirehouse. While a payout model can be motivating, I often find that these advisors tend to focus only on their own books and very little on their firms. This can create very dangerous “silos” within your organization, especially as most RIAs pride themselves on a team-based model. If you choose to use a payout model, I always recommend making it one component of the advisor’s compensation; it can be a nice supplement to a base salary and a discretionary bonus.
- A Clear Path to Partnership / Equity Ownership
The most motivating factor I have found is the presence of a clear and attainable path to partnership and/or equity ownership. However, I have discovered that the vast majority of firms do not have a documented path. Most haven't even discussed such a path within their organization. Granting partnership to deserving individuals is beneficial to founders for many reasons, but ultimately there is no better way to have your advisors think as owners than to be owners. A clear path to ownership will also allow your firm a competitive advantage in recruiting talent. Similar to my earlier advice on referring to your incentive model whenever appropriate, you will want to similarly reinforce your partner path in the minds of your advisors. At a minimum, you should always discuss it when you sit down with your advisors for their year-end reviews so that they know where they are on their career tracks and what exactly they need to do to ascend to the next level.
Question for Readers: What motivates you? What do you find exciting/motivating about your firm’s compensation model and what do you find non-motivating?
