Compensation is a hot topic in the wealth management world.

A week doesn’t go by without meeting an adviser who is amending a company's plan or thinking about it.

Sure, it is common to make changes. In practice, a company wants to match remuneration to incentives and long-term goals.

That, however, isn’t what is happening. Many times, compensation is reformulated when employees leave, threaten to leave or partners squabble.

Compensation shouldn’t be crisis management.

Instead, wealth management firms should develop broad talent and compensation strategies relevant to their goals. The next generation needs to know that it has a future, one with a clear path toward leadership and ownership.

Unfortunately, most firms haven’t had the time to develop broad strategies and have defaulted to secretive end-of-year subjective processes for assessing compensation.

In many firms, employees tell us that they don't know how compensation, bonus and equity decisions were made. In most instances, they view the partners’ decisions as subjective and divorced from employees’ contribution, responsibilities or work product.

A symptom of this is a lack of talent strategy discipline at wealth management firms.

Just 29% of advisers have a clear succession plan, according to one report.


So, what should a talent strategy look like? It depends on a firm’s size and structure, of course.

But firms can start by doing the following:

1. Develop a strategic plan with broad three-, five- and 10-year goals. Think about future assets under management, number of clients, demographics of client base, services offered and values.

2. Next: What is needed to achieve these goals? Consider how many employees the firm should have and with what qualifications. Do changes need to be made to existing employee positions? Don’t forget to incorporate their desired career paths. And be realistic. Is the firm in a market where most firms have family office service that targets clients with more than $10 million in assets? If so, clients will be used to advisers who have CFPs, are CFAs, and have earned MBAs and JD degrees from top schools. And this typically translates into higher costs.

3. How much will it cost to grow out the additional infrastructure, operational resources, space and technology?

4. Define how to retain star performers and attract new ones. Are employees who develop new services and business lines being compensated? Will they be compensated for taking risk and innovating, and if so, how?

5. Create compensation tracks that delineate distinct roles and define career paths. Nowadays, compensation for rainmaking should be different than for solely serving a client provided by the firm. Also, specialty builders may command additional compensation for their expertise.

6. Develop an assessment plan. Is the firm evaluating nonperformers and informal leaders? Are there repercussions for not performing? Is the firm realistic about the time it takes to develop new business lines? It is committed to providing the necessary patience, resources and support?

7. Create a clear path by which star performers in all functional areas can build wealth through a performance-based compensation and equity ownership. Variable compensation needs to be material and achievable.

8. Develop a clear view of the local market. If RIAs are going to compete for talent, they must figure out a way to make their talent un-poachable.

9. Finally, answer this question: Does this plan allow performers to build personal wealth through both compensation and ownership? Start over if the answer is “no” or “I don’t know.”

If they can’t build wealth, why should they stay?

There are a few caveats. These include:

  • Don’t solely rely on compensation studies. They are a good picture of the marketplace as it was at the time of the study, but the industry is still very fragmented. Job titles vary quite a lot by company. Also, try to understand the study’s objective, scope, recruiter feedback and compensation offers at other financial services companies.
  • Don’t punish employees through their compensation after a project cost too much money. Employees often say that the company spent money chasing the greatest new pet project of the founder. Typical pet projects include foreign offices and plans to become the new star hedge fund manager/real-estate investor/private-equity investor/technology investor.
  • Many times, employers set variable compensation targets that they know are unreachable, so much so that employees think it is a waste of time and effort to try. Variable compensation should include an individual goal and a company goal. Sometimes RIAs focus too much on the individual goal, which leads to silos and lack of institutionalization of the business. To prevent this, companies that want to build enterprise value, should, over time, make sure that a significant portion of compensation comes from equity distributions.
  • Equity means having stock that pays a dividend and has liquidity. Employees view equity that doesn’t have liquidity and doesn’t pay an attractive dividend as a broken promise. Also, in many firms, employees think that equity ownership equals management responsibility and control. It doesn’t. Equity needs to be structured as simply another aspect of compensation.

Ultimately, all the above defines one tectonic change that is transforming the industry: the sharing of risk and upside opportunity. Historically, founders/owners bore the downside risk and retained the preponderance of the upside. Today, employees have the opportunity to capture a much greater percentage of the upside, but if the compensation plans have been structured correctly, employees are also sharing the downside risk.

This story is part of a 30-30 series on smart strategies for RIAs. It was originally published on March 11.