Wirehouses need to quit tinkering with their payouts if they want to hang on to their talent.
You would think that the guys upstairs at the major broker-dealers would have learned that by now. But without fail, the wirehouses continue to tinker with the payout grids.
- Read more: Merrill Raises the Bar on Broker Pay
Every year, the changes prompt financial advisors to explore their options elsewhere. A recent J.D. Power advisor satisfaction survey reported that 66% of wirehouses advisors were unhappy with changes made to their compensation.
In my view, the dissatisfaction is not only about dollars and cents -- at least not strictly speaking. Rather the dissatisfaction has emotional underpinnings. Every time higher-ups decide to make what appears to be changes arbitrarily, advisors lose their sense of autonomy.
In his 2010 book Drive, Dan Pink, a career analyst and former speechwriter for Al Gore, underscores autonomy as one of three integral human motivations. These primary drivers do not require the promise of a reward to get us going. They are:
- Autonomy, or the desire to direct our own lives.
- Mastery, which drives us to continuously get better at tasks.
- Purpose, acting in service of a goal beyond ourselves.
Pink says organizations where employees capitalize on these intrinsic drives have happier, more productive people. As an example, compare Microsoft's defunct digital encyclopedia Encarta, and Wikipedia.
In the 1990s Microsoft hired and paid researchers to compile the online encyclopedia Encarta, which was discontinued in 2009 after it lost out to Wikipedia. By contrast, the free, online encyclopedia was more inspired, using voluntary posts from contributors to create its own database, and became a huge success. Wikipedia contributors, perceived as experts in their field, were driven by the common cause to provide a digital repository for anyone to use. In short, money is not always the best motivator.
At Google, software engineers are encouraged to spend 20% of their time on projects of their own choosing. Autonomy, in this case, yields results for the world's search engine. This is how Google comes up with new products, or reinvents them, like Gmail.
This is not to argue that advisors don't care about their monetary compensation, but in addition to being paid fairly, they need a firm culture that embraces these powerful motivators, especially autonomy.
Brokerage firms that want to retain advisors need to remember the old cliché that money can't buy happiness. One recent survey, The World Happiness Report, makes clear that the richest countries aren't necessarily the happiest. For example, while Iceland ranks 19th in GDP, it has a happiness index of more than 7, on a scale of 1 to 10, with 10 being the best.
But you don't have to scour the globe to find out that money isn't the only factor that keeps advisors satisfied. Just take a look at regional broker-dealers and independent firms. They offer a business model that features both simplicity and predictability when it comes to payout grids. Yearly modifications are rare. An advisor can join these firms with confidence that what they see is what they'll get in a firm compensation program. They can rely on senior management to keep the payout goal posts firmly planted in the same place every year.
It's no surprise that the J.D. Power survey finds advisors were most satisfied at Edward Jones and Raymond James, scoring those firms 200 to 300 points higher than their counterparts at the wirehouses.
In a side note: independents scored their firms 72 points higher in satisfaction than employee advisors.
My advice to wirehouses: Decide on a payout you can live with and stick with it.
It's fine to advocate a business model that you feel is in the interests of advisors and their clients. But if you're going to rejigger your payout every year, just remember that too much change has a price: advisors leaving for other firms and independence.
Leaving the payouts alone won't help keep advisors and address the recruitment shortage that persists in the industry. But it should help most firms keep the advisors they really want.