Using incentive compensation to motivate advisers — and other staff members

Matt Cooper is so convinced that incentive-based compensation is the key to continued asset growth that nearly all private client advisers at his firm, Beacon Pointe Advisors, don't receive any base salary. Compensation is 100% dependent on how much business the adviser generates. Additionally, advisers earn twice as much on assets the first year the money comes into the firm, part of the company's focus on growth. "For the right people, incentive-based compensation is very motivating," said Mr. Cooper, managing director of Beacon Pointe. "We want young people who have big futures." Beacon Pointe, a registered investment adviser created in 2002, used to offer less incentive-based compensation, but the company found it wasn't getting the right kind of people on board and wasn't getting the growth its leaders expected. Since switching in 2009 to 100% incentive-based compensation for non-principal advisers who joined the firm, Beacon's assets have had grown to a record $5.6 billion. Nearly half of all U.S. financial advisers receive a portion of their compensation based on certain production-based parameters. About 47% of senior planners and 45% of junior planners earned incentive-based compensation last year, in addition to a salary and bonus, according to the Financial Planning Association's latest compensation study, which surveyed 1,000 advisers. The incentive-based portion of their compensation made up 38% of the total for senior planners and 24% of the total for junior planners, the survey found. Most commonly, advisers' incentive comp plans were based on new client acquisition, general firm performance, assets under management or client retention. For wirehouse advisers, the average pay out grid is typically 40% to 45% of total production and any incentive comp or deferred compensation would be additional, according to Michael Silver, a founder of Focus Partners, a practice management consultancy that work primarily with wirehouses. The two main incentives at most of the major firms are acquisition of new net households and positive assets coming into the firm, Mr. Silver said. Many firms are going beyond investment management and offering incentives to advisers for preparing financial plans, lending, and offering mortgages and annuities. “They want advisers to fill all different needs for clients and really own that financial relationship,” Mr. Silver said. For managers, firms often pay incentive comp based on retention and recruiting, he said. Incentives should be based on the most significant ways an individual contributes to the success of the firm, according to Kelli Cruz, managing director of Pepin Consulting, who spoke to advisers at an FPA Business Solutions meeting last month in Chicago. The amount of compensation that should be based on incentives depends on the role of the employee. A business development officer, for instance, should earn about 50% to 70% of their cash compensation from meeting certain performance goals, she said. For dedicated managers, such as a chief operating officer, about 15% to 30% of cash compensation should be incentive-based, she said. “Those who have the most impact get most of their compensation from incentives,” Ms. Cruz said. Incentives for employees whose functions lie further away from the sales process can be based on client retention, client satisfaction, skills development like attaining certifications, or performance evaluation ratings, she said. Firms also must decide what funding mechanism will be used for the incentive pool, how it will be paid out and what will trigger its use, she said. The InvestmentNews/Moss Adams 2011 compensation study recommended that incentive pools be paid for with firm profits and include a performance trigger for payout. “These two safety valves ensure that the firm is paying out incentives only when it can afford it, and only when appropriate,” the report stated. The study also found that 39% of advisory firms fund their incentive comp pool as either a straight percentage of profit or a percentage of profit above an operating profit margin. About 29% set it as a percentage of base salary and 32% base it on a percentage of revenue. But the report points out that a company with a revenue-based incentive pool that manages expenses poorly could run the risk of not having enough cash to support the incentive payments. Developing an incentive comp plan for an advisory firm can be a challenge, but it's worth doing, Ms. Cruz said. “Incentive plans help get employees on the same page with what you need them to be doing,” she said. In additional to individual incentive comp at Beacon Pointe, all its employees get a check every time the firm brings in a certain amount of assets, Mr. Cooper said. "It's the whole team helping to make it happen and we want the staff to be excited about growing, not resenting the added work," he said.