Growing advisory firms need to employ the most effective incentives; team goals pay dividends.
Advisory firms looking to grow should be rewarding their employees as a team, according to practice management experts.
That doesn't mean paying all employees the same, but it's basically rewarding the whole company, for instance, when a large client signs on, instead of just giving the adviser who brought the client in a bonus. Team goals encourage cooperation and can lead some people to work harder than they otherwise would to ensure they don't fail and prevent the whole team from an award.
A recent Fidelity Advisor Insights study found that 40% of the high-performing advisory teams surveyed compensated individuals based on team success. In contrast, only 24% of other groups practiced this approach, according to the study released earlier this month.
“They do that because they want to reward and compensate everyone involved in the client relationships,” said Brian Nelson, vice president of practice management at National Financial, a division of Fidelity Investments. “It gives them all skin in the game.”
Brian Dombkowski, chief executive officer of Sand Hill Global Advisors, said growing firms that continue to pay employees based only on individual actions can create silos within the firm, where employees compete against each other, fail to share information and don't use common resources.
“To grow a firm from the lead adviser model to an ensemble, you need to institutionalize the business,” he said. “You need that to scale it.”
When an adviser wins a new client at Sand Hill, which manages $1.3 billion in assets, the reward is based on a 10-point scale, where the individual who closed the business gets the majority. So, for instance, the adviser may get 70% of the bonus, the team that helped him may share 20% and 10% may be allocated to “the firm,” which ultimately benefits the shareholder pool, Mr. Dombkowski said.
Of course, compensation based only on team performance could reduce activity levels and allow some people to “coast,” so a compensation mix is best, he said.
“Firms need to find a way that's a good blend, where it gets the team paid and the individual paid,” Mr. Dombkowski said.
Kelli Cruz, managing director of Cruz Consulting Group, which helps advisers create compensation and incentive plans, agrees. A successful compensation structure may include four or five incentive drivers for a particular individual and one of those should be based on a team-based goal, such as implementation of a new software tool or another key initiative the firm is trying to accomplish in the next year or two, she said.
“It's a great way to get people to work together and accomplish things, especially tasks that can be accomplished in a certain time frame,” she said.
Team goals shouldn't be the only incentive drivers at the firm, because some individuals can have larger impacts than others when it comes to a particular goal, Ms. Cruz said.
“Team-based bonuses probably work best for big firms with specialized departments or divisions,” she said. “At smaller firms, it may be more of a challenge, because there doesn't seem to be as much opportunity for setting goals that are team-based.”
