When I’m sitting across the desk from an advisor, discussing their business and areas where our firm can serve them, one consistent problem arises: advisors don’t always understand their compensation structures.
Some have confidently told me what payout percentage they’re making. And together we’d unpack how hidden costs took basis points away from what they thought they were making, bringing that total payout to a much lower amount.
This misunderstanding was pervasive enough to lead me to found and launch AdvisorBOB in 2016. Its simple mission is in its name, Advisor Book of Business. Drawing on my IT and operations background, I co-developed the underlying software and product with the straightforward idea of making an advisor’s expenses and revenue easy to understand. Surprisingly, what I didn’t realize was that the platform was a unicorn among the available tech options for compensation.
Being an advisor, RIA founder and CEO, I could see where compensation structures would become needlessly complicated and confusing. I wanted advisors to have transparency into how their businesses are run. Many RIA “platforms” hide the ball to inflate their stated payouts. They don't want to share the “secret sauce” of the back office by being fully transparent in the compensation discussion process. But I believe that transparency actually benefits the RIA, the advisors, and the clients.
For the RIA, it levels the playing field.
In this competitive industry, we win when the clients win by building wealth over the long term. Of course, we believe that our firm has the best resources and advisors to serve our clients. However, this industry needs better and more transparent scorekeeping to determine what firm is the best fit for an advisor.
Complete transparency is one way to compare. Our industry should be a true meritocracy, rather than an opaque game of hide the ball. We want the best advisors to go to the best firms. If most of our industry’s advisors are in the dark about true value, how can they find their way to the best firms to serve their clients?
Transparency is also an absolute compliance imperative. It’s the underlying principle on which the SEC focuses during exams. The examiners spend hours determining whether fee disclosures and fee deductions are accurate. In fact, many enforcement actions have resulted in enforcement referrals because firms overcharged clients either intentionally or recklessly.
As advisors, transparency means freedom, and freedom means running the business on our terms. Having a clear compensation feature in a tech stack ecosystem helps us understand what’s working and what isn’t. That clarity equips us with the tools to make fully-informed changes and improvements to our businesses. The next question is: what is a competitive payout structure in our market environment?
It is important to look beyond the payout percentage and holistically factor in all costs (e.g. ancillary services, admin fees, ticket charges) that impact net income. If a firm is asking advisors to sacrifice more of their payout percentages for added services, then those services better be worthwhile. If a firm has a confusing structure that masks its services and pricing because the services aren’t truly valuable, advisors should take their business elsewhere.
As a firm owner, I don’t look at compensation models singularly. Instead, I see them as an opportunity to provide advisors with what they need on a case by case basis. Do they already have their own ancillary services and really only need to utilize our infrastructure? Or do they need more expanded services and back office support?
We support that flexibility. We want advisors to feel they are being compensated fairly while still achieving their growth goals. Our mindset is that we want to maximize both the payout and enterprise value that advisors achieve with us. Provide value when needed; don’t offer services that are not required. We offer each adviser a customized business model, rather than a black box.
So what’s next for advisor compensation models in the industry? Just this summer a large broker-dealer unveiled a $50M investment in their advisor compensation platform. I think our industry knows we’re playing catch-up when it comes to compensation models, and firms will need to find ways to bridge the knowledge gap if they want to remain competitive.
I want advisors to know that transparency shouldn’t be an aberration; it should be the norm. It should be a given that firms equip advisors with the tools to understand and grow the value of their businesses. When advisors are in the know and true competition rules, it raises the playing field for the entire industry. On that field, I’m excited to play ball.
James Spinelli is the founder of Great Valley Advisor Group, a nationally recognized firm supporting nearly 200 advisors and managing more than $10 billion in assets.
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