Building an effective compensation structure: It's one of the most common pain points in running a financial advisory practice.
Firm leaders who look to benchmarking studies and other popular means of determining pay frequently find that their team members are not quite satisfied with the results. And that means a great deal of ongoing management is required to grapple with employees' requests, concerns and questions.
Usually, the problem behind broken comp structures is a failure to look beyond money and review the structural elements of a business. Effective compensation structures don't exist in a vacuum. They grow from an organization's core values, service model, organization structure, growth goals and career paths.
Your firm's comp structures aren't only about money — just as your clients' financial plans aren't only about money. Let's look at each of these organizational elements and how having a firm grasp on them can point the way to the most appropriate and successful compensation structure for your firm.
1. Define Your Core Values
The importance of core values is that they establish boundaries around who belongs at your firm and who doesn't.
It's natural for employees to ask for more money over time. The problem arises when they're asking for more money based on accomplishments that don't fit within your culture.
For instance, let's say a firm's core value is "serve with impact." If an employee argues for a raise based on the number of clients they serve, then there's a disconnect.
If the employee shifted focus to quality rather than quantity — in other words, to serving clients exceptionally well — then the compensation would automatically come.
This is an example of how core values can guide compensation decisions. If the employee doesn't share your core values, of course, you'll likely need to move on from that person.
2. Consider Your Service Model
It's perilous for advisory firm leaders to rely solely on industrywide compensation benchmarks, because those benchmarks are generally not broken out by service model. Aggregate benchmarks for "wealth management firms" are of limited use, since wealth management firms often employ different client service models.
A firm that charges only hourly fees, for example, typically cannot pay its employees in the same way as a firm that charges only assets-under-management fees. Likewise, firms that combine AUM fees with flat fees can't pay their employees the same way as firms that charge by the hour or exclusively charge AUM fees.
The fees paid directly by clients affect the compensation an employee is paid. To create the most effective compensation structure, organizations must take into account specifically how clients pay for their services, how those revenues are generated and the risks a particular service model has on profits.
3. Review Your Organizational Structure
Organizational structure plays directly into compensation structure.
Team-based ensemble firms will pay their team members differently than firms in which advisors are siloed, working strictly with their own book of clients.
Also, team-based organizational structures tend to include paid salaries and team-based bonuses, while firms with siloed organizational structures generally pay their advisors a percentage of the revenue they produce.
There are countless ways to design an organizational structure, which means there are countless ways to design a compensation structure. But to find a compensation structure that pleases employees and facilitates the firm you want to build, it's essential to know your core values, your service model and how the organization is structured.
4. Clarify Your Growth Goals
It may seem counterintuitive, but advisory firms that are growing more slowly than their peers generally pay higher compensation than those peers.
