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Financial Planning firms are built on values like:
- Client first
- Caring
- Best advice
- Fiduciary
- etc.
Basically, do whatever is best for the client.
And delivering that best advice is a whole-of-team effort.
To then put an incentive scheme in place that rewards individuals for generating sales, runs the risk of creating self-interested behaviour which is in direct conflict with the company’s values. It makes no sense.
In last week’s blog, I looked at being different and aligning your remuneration strategy with your culture and values so that your pay system reinforces the right behaviours. This week (and next) I’m diving into one of the key components of effective remuneration – incentives.
Key Components Of Remuneration
While there are a lot of possible components to remuneration (see last week’s blog for a comprehensive list), There are two biggies:
a.) Base pay
b.) Incentives
Base Pay
Base pay needs to be competitive to attract the right talent and importantly, you need to have wide salary ranges to recognise the differences in performance among people doing a similar or the same job.
Think fairness, not sameness.
Verne Harnish and Sebastian Ross, co-authors of Scaling Up Compensation: 5 Design Principles for Turning Your Largest Expense Into a Strategic Advantage, promote the idea that 1 equals 3. One great person is better than 3 average people.
The thinking goes that if you pay great people great money you can have fewer people. Your total employment costs will therefore be lower than your competitors’.
Incentives
Properly designed incentive programmes can impact employee motivation and performance. However, poorly designed ones (which are the ones I see most often) can impact motivation and performance too, but in all the wrong ways.
Last week I used the example of Aussie removalist firm, Mini-Movers, who avoid the expensive cost of insurance for breakages, by sharing that saving with their employees.
The result?
A very careful, totally aligned removal team who get paid better than the industry average and a company with a great reputation for not breaking your stuff. It’s a win/win/win and came out of thinking strategically and aligning pay with the company’s values.
What I see in the adviser space
Take another look at the list of values I outlined at the start of this article for Financial Planning firms.
Most adviser remuneration pays a small base salary and then rewards advisers for a percentage of the revenue that they generate or manage.
E.g.
- Base salary: £40,000
- Variable Component: 35% of all revenue above £120,000 (3x qualifying level)
Effectively, it rewards them for generating more fees, which doesn’t always align nicely with a ’client-first’ approach.
What if the best advice is no action?
I realise some people can navigate that conflict of interest, but I also know there’s plenty who can’t and I wouldn’t want to take that chance if it was my business. This type of remuneration is certainly under the spotlight in the FCA’s Consumer Duty.
Additionally, an adviser focused on hitting their bonus target or generating more business might also put pressure on the back office staff to get things done ‘out-of-process’ so that individually they can hit their end-of-quarter earnings target. This then creates further potential for tension and division within the company. I hate it.
In a client-focused Financial Planning firm, why not hire people who score highly for customer care genes and put them as servicing advisers on a salary? They can be paid well for just loving the shit out of their clients. There’s only one rule – “do your absolute best for the client every time.”
But what about advisers whose job it is to bring in and convert new clients to the business?
I think you have two options here:
- You could just recognise their high skill levels and pay them a much higher salary.
Clearly, you’ll measure the results of what they bring in and make sure that pay is properly aligned with performance. However, in a lot of larger established firms, the leads just flow. They are not generated by the individual salesperson.
So again, the brief to these well-paid people could be as simple as “do your absolute best for the client every time and don’t bring any dickheads into the firm”.
And because they are not rewarded piecemeal by clients or funds under advice they can say ‘no’ to unsuitable clients easily.
In a firm with multiple advisers, this ‘converting-new-clients’ skillset is in the shortest supply, so they can see all of the new leads, convert a high proportion (of the right clients) and be very well paid. They are like the front-end ambassadors or concierges for your business.
In a smaller firm, this is probably you, the owner-founder. So feel free to pay yourself well.
- When you bring on a new client they are in all likelihood a client for life. Very few clients leave their advisers. So you could value each new client and the ongoing fees they generate as an annuity for the business.
To be conservative maybe you value each new client as 5x, 10x, or 15x annual fees (not forever) depending on their age. If you then also collect an up-front planning fee and some form of implementation fee you are generating enough revenue to be paying the converting adviser well for highly skilled work. (I’m still thinking of paying them a salary rather than a portion of the fees generated).
If you want to get a better understanding of how you might separate advisers into ‘servicing’ and ‘selling’ versions and pay them differently, go to my white paper, How To Solve The Scale Problem (in Financial Planning businesses).
Some advisers are demanding incentive based-pay
What I’m hearing from the coalface is that some advisers are asking for (demanding) incentive-based pay. They want to get paid a percentage of the revenue they bring in or manage.
Of course, they do!
But you don’t have to respond to those demands – at least not in the way you’re thinking (by acquiescing).
Be creative and get the incentives right.
As I mentioned in my blog Be Different (When It Comes To Remuneration), your approach to remuneration needs to be a Total Rewards Strategy. One important component of that is:
Relational Rewards
- Recognition and status
- Employment security
- Meaningful and challenging work
- Informal learning opportunities
It’s not only about the salary.
Most people are more motivated by the things on the list above than money.
And remember, we want to hire patriots, not mercenaries.
Up-and-coming advisers need to do the work and learn the skills to be able to move into a new-client-conversion role. You shouldn’t simply let them loose on your new leads to practice. ‘Servicing adviser’ could be a first step in their career journey as an adviser, not an endpoint.
If they are prepared to learn the skills (and that requires study, training, observation, role play and eventually some practice on real clients) then they can move up. But they have to show a willingness to learn and grow first.
Your job is to support their training and development and ensure they can progress as quickly as possible. Most firms lose good young team members over lack of progression, not lack of money (although it often presents as a request for more money).
If you’ve upheld your part of the bargain by providing training and development and it’s still not enough for your up-and-coming adviser, then unfortunately you probably need to part company.
You are 100% responsible for your 50% of the relationship and they are 100% responsible for their 50% too. I’m ok with people asking for what they want, but I also want to see them putting in 100% effort on their side of the fence.
And I’ll leave the last word to Verne Harnish.
“Easy on the carrots.”
Related: Stand Out With Unique Approaches to Employee Compensation