As a profession that has evolved substantially out of the brokerage world, financial advisory firms have not always aligned their performance evaluation process with the behavior they seek. Money too often becomes a substitute for active management, and the method by which one achieves certain goals is often given short shrift.
Part of this is learned behavior: "I will get paid more money if I do X." Pay for performance is the theory behind the compensation grids within broker-dealers, and it is an idea carried over to many RIA firms that are trying to encourage their advisors to generate new business. But revenue generation is not the sole mission of advisors and their employees. Over time, the management of existing clients takes on more weight. That is why many RIA firms have shifted to a salary plus bonus compensation model versus a production grid. Nothing conveys the fundamental difference between a "producer" culture and an "advisor" culture more than this point.
Of course, sales is an important function. Other professionals including doctors, lawyers and accountants all recognize that business success depends on new client growth. As a firm matures, however, the dynamic shifts. Revenue generated from new clients diminishes to a very small percentage of total revenue, and ongoing client service gains more importance. Yet the practice of nurturing valuable relationships rarely finds recognition, let alone systematic reward.
Don't get me wrong. Incentive rewards have their place in business — but the behavior that creates success needs as much examination as the desired results. Just as child psychologists warn that using food as a reward can undermine healthy eating habits, advisors need more encouragement for ongoing work behavior. Think about the reward system within your firm: In focusing on advisor results, are you reinforcing undesirable or destructive practices?
Recently, I reviewed the syllabus for a personal economics course taught by Erika Fix at my former high school in Gladstone, Michigan. I was struck by the grading formula she had crafted. The purpose of this class is to introduce the concepts of money management and finance to students in order to educate them about the importance of financial planning and decision making in the real world. Fix identifies three components of the students' grades:
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10% – Citizenship: behavior and work ethic
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40% – Practice: homework, group work, in-class work, lecture and book notes
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50% – Evaluations: quizzes, tests and project assessments
When I attended that same school (a thousand years ago), my grades were determined by outcome: test grades, especially final exams. Today, half of a student's grade is tied to proper conduct and a consistent work ethic.
This makes me wonder about how to encourage an advisor's job performance beyond his or her measurable financial contribution to the firm.
First, think about goals within your firm. Are your employees recognized for demonstrating a passion for excellence, personal integrity, a commitment to learning, a sense of accountability and promoting a culture of respect?
Are your leaders valued for recruiting and developing talent, for implementing an achievable succession plan, for conceiving new ways to manage your business and serve your clients?
How do you want clients and employees to perceive your firm: as client advocates or product advocates? As consultants or producers? As transaction-oriented or advice-oriented?
These elements are subjective, making them challenging to assess. I suspect that is one reason why managers prefer to tie performance evaluations to simple, objective and quantifiable outcomes like revenue generation. In terms of helping an employee to grow, this sort of evaluation lacks impact. End results do not require a lot of discussion. What does require examination and coaching is the way they represent your firm and interact with your clients, employees and leaders.
