Incentive compensation: The new rules for advisers

For recruiting firms and advisers who are considering a transition, the topic of compensation is always paramount.

Oct 25, 2013 @ 7:59 am

By Tom Daley

It's clear the strongest firms are committed to recruiting top talent with top compensation. According to the 2013 InvestmentNews/Moss Adams Adviser Compensation and Staffing Study, adviser compensation has grown since 2011 and there is high demand for experienced advisers.

The study data shows a continued shift away from “payout-based” variable compensation toward an emphasis on “salary-based” compensation supplemented by incentive formulas. This confirms a trend our team has recognized in working with advisers who are comparing offers from new firms.

On average, 35% of all professionals had a payout-based compensation in 2011 while only 16% of advisers were compensated on a payout grid in 2013, according to the InvestmentNews/Moss Adams study.

This stat piqued my interest because it underscored a discussion I've had with many advisers comparing the pros and cons of a variety of opportunities. We always encourage advisers to not look only at the value of the transition package (or upfront money) but at the long-term compensation philosophy of the firm.

If the majority of today's advisers are compensated on base salary plus incentives (with base salaries generally making up 80%-85% of the total compensation), understanding the makeup of the remaining 15%-20% is critical to understanding the true value of a package.

To understand the value of the proposed incentives and benefits, advisers should ask the necessary questions:

• What is the incentive mix? It's likely a combination of commission perks and bonus pay. Understand the ratio and determine whether it is realistically achievable, given your preferred business style and likely client base.

• Do incentives include some form of equity — stock options, owner equity or even partnership?

• Are there incentives tied to more than revenue generation? For an adviser who enjoys and is talented at mentoring and/or management, are these roles monetarily recognized?

• Look into the quality and value of health benefits, life insurance and long- and short-term disability, as well as retirement benefits. Although they are not considered incentives per se, this non-cash compensation should not be overlooked.

This level of due diligence admittedly is time-consuming. However, looking at long-term projections is critical to finding the right to place to build your business, serve your clients and earn competitive compensation in return.

(How does your compensation and plan compare to other advisers or employees of an advisory firm? Use the new InvestmentNews adviser compensation calculator, based on data from the 2013 study.)

A few words of caution: This compensation exercise should never be the only consideration. Company culture and other intangibles must be evaluated, as well. When considered in totality, the chances for success grow exponentially.

Tom Daley is the founder and chief executive of The Advisor Center. For more blogs offering adviser intelligence on making a transition, visit The Advisor Center.


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