Wealth Management Firms: Different Compensation Structures for Your "Sales" Team

The following article is based on Amy Parvaneh’s presentation at the Barron’s Teams Summit called The Best Compensation Structures to Incentivize Growth (While Keeping Your Team's Culture).

How to Reward Your Team around New Business While Also Protecting the Business

In my nearly decade-long experience of management consulting some of the largest financial and wealth management firms in the nation, from United Capital (which was bought out by Goldman Sachs) to LPL to multi-billion dollar RIAs, one of the key challenges I have been brought in to solve has been the restructuring and ignition of “sales” teams.

I put “sales” in quotes, mainly because most times these folks I am now responsible for consulting around were not typically hired for a role of sales and business development. In fact, just like me, they are MORTIFIED by the word Sales!

They were originally hired for servicing, paraplanning or investment advising.

But throughout the years, as their company’s profits were more squeezed, and the main business developer (typically the CEO) ran out of steam, the responsibility changed from pure servicing, to servicing with a touch of sales.

I wrote about this in my article in RIABiz titled RIAs need to get over 'quotas' when it comes to sales and growth, or end up being owned by an RIA that knows how to impose them:

I started the article writing:

“RIAs who have left the wirehouses to set up shop often cite fiduciary reasons for doing so.  They escape sales pressure, but many times they stop making sales altogether.

Next thing they know, they have no organic growth (aside from their original clients’ referrals) and may reluctantly need to sell themselves back to a giant institution.

At the center of the advisor sales dilemma is a dreaded word --  quota. Professionals know it as an inflexible performance metric applied to a task where technically we have no control over the outcome.

The prospective client holds the signing power, the assets and the ability not to respond to voicemail messages.

What we know of quotas is that their rigid nature can force a broker's hand -- leading to deception, intimidation or even the opening fake accounts. Totally get that.  

But a fear and disgust of quotas is counterproductive. Just because athletes want to win so badly they take steroids, doesn't mean we toss athletic competition.

A quota is simply a measure of accountability.  

It is the key ingredient for sales and growth-- that “number” that you have to achieve in sales by a certain date.  

That quota is what keeps every sales person on target, focused on the prize and many times up at night.  As dreaded as it is, it works and it's unlikely that most firms can find an alternative.” 

Read the rest of the article I wrote here.

But let’s say you’ve set the quota in place and have provided great sales training to your advisory team [learn more about our sales training for financial advisors programs].

Now what? How do you pay your sales people so you are motivating them to bring in business, but not squeezing so far into your profits that it makes the rewards negligible?

Some key questions I’ve been asked by my clients are:

1) If I’m going to pay my advisor on the size of their book being managed, does that include accounts I’ve handed down to them from my own book so I can build more scale? What happens if the advisor brings in more wallet share that was already accounted for? Do I pay them the full Business Development bonus?

2) How do I pay my team on a trailing basis for business they’ve brought in?

3) What is the right balance between salary and bonus for someone hired purely for business development? How about someone hired purely around servicing but brings in business? What IS considered “bringing in”?

4) Do you give a “finders fee” versus a closing fee? How do you split the comp if the entire team was involved?

5) Does it count as new business if you get more wallet share from a client?

There are many many intricacies around these questions which we help answer in our Advisor Business Consulting Programs [click here to schedule a call with us about this topic]. We can help you calculate various scenarios for the optimal solution customized to your firm.

But on a high level, we wanted to share with you just a few compensation structures we’ve seen in the industry for your reference.

Successful companies often undergo “growing pains” as they figure out how to scale – adding headcount and increasing product output while at the same time not sacrificing product quality, all while remaining, or ideally, growing in profitability. For RIA firms, one of the most important questions that must be answered as the business grows is how to structure compensation. The right pay and bonus structure will allow you to retain current employees, attract new talent, foster positive company culture, and ensure that the business is insulated somewhat from conditions that adversely affect profitability. 

Let’s look at a couple of the most common compensation structures in the Registered Investment Advisor and Investment Management space: 

Percentage of new business 

In this structure, a new employee is paid a percentage of all new business that comes in after they are hired. It’s heavily weighted toward incentivizing employees to attract new business and harkens back to days that were more focused on hard-pitch salesmen, slinging their products to prospective clients. The base assumption here is that the percentage granted to the employee recognizes their individual contribution to the team effort.

Here’s an example of how that might work:
Firm: ABC
Fiscal: 2023
Net New AUM: $80 million
Net New Revenue: $120,000

Client Service Admin (Bonused at 10% of new business) = Base pay + $12,000
Paraplanner (Bonused at 30% of new business) = Base pay + $36,000 

These percentages, while arbitrary, show how different roles within the firm might be rewarded.

But as the firm grows, you can see how this model might not scale efficiently.

For example, after a year of growth where this firm brings in an additional $250,000 in new revenue, they’re suddenly giving an admin a $25,000 bonus, and the planner a $75,000 bonus – eating into the capital the firm needs to continue growing. Again – this is a simplified example, but you can see how this compensation structure could put the long-term scalability of the firm at risk. Especially when they start adding headcount to support the new business. 

Percentage of gross revenue

In this structure, bonuses are paid based on a small percentage of the overall firm’s profitability. These are typically smaller percentages, often as little as one or two percent. But for a very large firm with a lot of AUM, that two percent can translate into a substantial bonus.

Here’s an example showing the same two employees in a different compensation structure: 

Firm: ABC
Fiscal: 2023
Net New AUM: $15 million
Net new revenue: $100,000
Gross revenue: $580,000

Client Service Admin (Bonused at 2% of gross revenue) = Base pay + $11,600
Paraplanner (Bonused at 5% of gross revenue) = Base pay + $29,000

This compensation structure improves the scalability of the firm as bonuses will rise only as a percentage of growth versus the overall revenue of the firm.

If we put the following year in the same scenario as the first example, a growth year showing $250,000 in additional revenue, we see that the bonus for the admin rises to $16,200, and the paraplanner sees a bonus of $41,500. These increases reward employees for their hard work, but are less likely to balloon out of control as the business grows. This structure also recognizes the importance of retaining clients as well as attracting new ones. After all, if the firm is gaining a lot of new business, but also losing a lot of current business, everyone is working twice as hard to merely break even. 

All of that being said, there is still the risk that if the business continues to grow, with gross revenue climbing as new business gets added to ongoing revenue, bonus compensation could still get a bit lopsided. Which brings us to the third compensation structure.

Fixed bonus structure

In this compensation structure, employees are incentivized with fixed amounts for performance goals.

For example, this year employees may be rewarded with a $10,000 bonus every time the firm brings in at least $50,000 in new revenue.

In this example, the employee would in essence be getting 20% of the new business revenue, however, it’s structured in such a way that employees are not guaranteed that percentage every quarter.

Instead, the incentive can be reset the following year to better reflect the business environment. And employees feel they are being rewarded when the business hits its goals.

As the business grows, the amount of the bonus may remain the same, but the overall percentage of new business it represents would go down. This structure ultimately provides the most scalable model in terms of controlling compensation expenditure as the business grows.

Which compensation structure is right for my RIA?

The compensation at most firms tends to reflect the values and culture of the principal and the employees. However, there are a few things to consider that can set you on the right track when thinking or rethinking your compensation structure. 

What do your employees think? 

It may seem like common sense, but a great place to start is to solicit input from your existing employees. Do they feel well compensated? Is there a clear pathway to advancement? Do they feel like they are making a meaningful contribution and are rewarded for that work? This feedback is critical in developing a compensation structure that empowers your business to grow and succeed in the long term. 

Transparency is more than just a buzzword

Making sure your team understands the hows and whys of the compensation plan ensures they are set up to succeed, and by proxy, the firm will be set up to succeed. Clearly lay out goals and milestones that translate into tangibles for your employees.  If changes must be made, explain why and how the decision was made. Employee perception of the overall plan will be driven by how transparent you are in its creation and implementation. 

Firm strategy should inform the plan

The best compensation plans give employees confidence that if they stick to the firm strategy to accomplish the overall business goals, they will be rewarded for that work. That means structuring bonuses around real achievable goals that correlate directly with the success of the business. 

Don’t be afraid to make changes

Once you have your compensation plan in place, it’s time to regularly check in on it, along with your employees, to make sure the details still make sense for employees and for the business. For example, if the firm needs to focus on current business for a period of time to deploy new processes, teaming, or training, etc. It’s unfair for bonus compensation tied to new business to be affected by that change. Don’t be afraid to make adjustments as it makes sense for the business and employees as long as you’re transparent about it and communicate with your team. Another example might be that as the firm grows, bonus percentages may need to shift to more accurately reflect team contributions or changes in headcount, etc. 

There’s likely no right answer that applies to all firms in terms of how to structure compensation to best retain the most talented employees, attract new employees, and empower the business to grow and expand. At the end of the day, the best thing you can do is be flexible and ready to adapt if things are not working. 

Want to have our team help you develop a robust compensation structure that’s custom-fit to your needs and team?

We have an entire program and calculation to revolutionize your compensation, payout and bonus structure to help anyone on the team bring in more business and opportunities.

Please schedule a call with us to discuss this important topic.