Far from simply being a recruiting and retention tool, financial advisor compensation plans are turning into important growth and valuation engines, according to succession planning experts.
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Registered investment advisory firms or other advisory practices must create career paths and pay plans that evolve quickly enough to keep up with industry competition, advisor career advancement, geographic factors and the company’s long-term goals, according to a webinar last month on compensation trends led by Julia Sexton, the director of strategic organizational planning at consulting firm Succession Resource Group, and Ryan Grau, the company’s director of valuations. They presented the first of what will become an annual compensation study based on data from the RIAs that use the firm’s services. And the central takeaway revolved around the divergent impact among firms that have taken proactive steps, and those that haven’t.
“Today isn’t just about benchmarking numbers,” Sexton said. “It’s about aligning compensation with role, clarity, behaviors, growth objectives and long-term enterprise value, because when compensation is designed intentionally, it becomes one of the most powerful strategic levers that you have in your firm and is so critical to so many transaction and business growth initiatives, succession planning, viability and just the overall cultural and financial health of your business.”
On the other hand, Grau jumped in to add, failing to build an effective compensation strategy is “one of the quickest ways to derail value.”
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What do you make?
Of course, any pay strategy begins with the basic amount that advisors will collect, and just as with any other profession, they will want to know how their pay compares to peers’.
Sexton and Grau’s presentation broke down advisor career paths into three general categories:
Support advisors (less than five years in the field): Responsibilities include planning and investment tasks and starting to identify possible new clients, and compensation includes base salary, bonus and profit sharing. Service advisors (five to 10 years, CFP mark): Responsibilities include oversight of planning and analysis, delegating tasks to junior members and much more identification of new potential business, and compensation includes a base salary (a fixed amount plus some pay tied to assets under management), a bonus, profit-sharing and so-called phantom equity (deferred compensation carrying some of the same benefits as actual company stock). Lead advisors (10+ years, several certifications): Responsibilities include acting as the primary manager of client accounts, business development and the team’s staffing; compensation includes base salary with AUM-tied pay, a bonus and an equity grant or purchase opportunity.
In terms of the dollar value of the compensation for those types of advisors, it varies significantly. Support advisors make total salary and bonus pay of between $50,000 and $85,000 per year with a median of $65,000; service advisors make total salary and bonus pay of between $66,964 and $120,000 per year with a median of $90,000; and lead advisors make total salary and bonus pay of between $108,000 and $235,750 per year with a median of $159,902.
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Succession Resource Group
Career paths and cost of living
RIAs have a vested interest in constructing career paths with distinct milestone markers along the way, Grau said.
“From my perspective, in doing valuation work, some of the more valuable firms that we see in this industry have defined organizational charts,” Grau said. “They have career paths in place. They focus not on trying to find an advisor that’s already successfully established and built their own book of business and had the taste of entrepreneurship, but rather, they’re hiring people that are fresh out of college, that are looking to get their feet wet. They have systems and processes in place to help educate them and teach them the ways of the industry. But more importantly, there is structure. There’s intention behind how you get from the starting place to being a lead advisor at some point in the future.”
However, those career guideposts may come up at different levels of experience or revenue with alternative duties and roles, depending on each advisor and the size of their firm. Their geographic location acts as another factor in the equation.
“We know your national averages, again, are not something that you should be anchoring to, but we have seen as a result of remote work environments and hybrid work environments that, in order to recruit some of the best talent, you have to look outside of your geographical region,” Grau said. “Now, there are certain areas such as the Northeast and the West Coast where compensation is expected to be higher, because there’s a pretty tight correlation to cost of living in those areas. So if you’re looking to hire in those areas, just understand that compensation, whether you’re at the service advisor level, executive or even operational support, that there’s going to be expectation of higher compensation, because cost of living in those areas is much higher.”
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Even more important than the significant expense
Regardless of their location, the largest expense line in the budget for any RIA is payroll. But firms should “start thinking about compensation as more than just a payroll expense,” and instead see it as “a design tool” for their firm’s future trajectory, Sexton said.
“Having your compensation model dialed in will determine more of your business’s future than you may be willing to believe right now,” she said. “Having that dialed in will help you determine whether or not an internal succession planning strategy is viable for you, whether or not your financials or your margins support your desired exit strategy or erode your firm’s value. It can even impact financing during transaction processes, when leverage shifts and options narrow.”
Ignoring the topic presents a lot of risk, and even firms that have created advisor career paths with compensation tied to them must continue to rethink them, Sexton added.
“The best way to fail your team and create frustration, disappointment and then turnover is to not clearly define a pathway to success,” she said. “If you don’t have a clear definition of success per role yourself, how the heck is your team going to know what it takes to succeed and grow? Once you have a clear path designed, the question becomes, how do you keep this up to date and evolving with the industry?”
