A compensation plan for your firm is critical.

But it is. And not just because compensation is probably your firm's biggest expense. Simply put, making sure your firm's compensation strategy is aligned with your overall long-term vision can have a dramatic impact on overall profits. Just ask the 28 firms that made it onto Schwab Institutional's first-ever list of the most profitable, best-managed investment advisory shops in the country.

The principals at these top 28 firms earn on average $412,000 in annual pre-tax compensation, compared with $241,000 for principals at other firms. That's a 71% income advantage, according to Moss Adams, which finessed the data it collected for the 2003 Financial Planning Association's Compensation and Staffing Study for the new Schwab report to identify the advisory firms reaping the greatest financial rewards. The future looks equally bright for these firms, which are growing at annual rates of 15% to 22% per year.

The disparity between these top firms and the rest of the industry is nothing short of dramatic. "What's clear is getting compensation right is crucial to success," says Mark Tibergien, partner in charge of business consulting at Seattle-based Moss Adams. "The biggest mistake advisors make is failing to align their compensation strategy with their business strategy. Instead, they'll use compensation as a substitute for active management. They'll throw money at people and problems. It might work for a little while, but it can't take the place of long-term, meaningful planning," says the architect of the new study "Best Management Practices: Creating an Effective Compensation Plan."

The purpose of the study, says Schwab Institutional's director of marketing Tim Welsh, is to give firms a clear sense of how they can optimize compensation planning to benefit clients, employees and themselves. "This industry is relatively young, and many folks are realizing that to get to the next level of success they need a system," Welsh says. "I think this study is a tool for assessing how the best firms institutionalize compensation and human resource practices to achieve that next level."

The critical first step in this process, according to the study's finding? These firms clearly link strategy and compensation. They design their staffing and compensation plans by first developing a business strategy that targets long-term financial goals, types of desired clients and new business initiatives.

The effort can really pay off. Nancy Abrams, president of Nancy Abrams & Associates, one of Schwab's "Best Managed Firms," pays four employees premium pay and leverages them across job lines in order to sustain her firm's significant asset growth-20% in 2003 to $100 million under management at the by the end of the year. She expects to share ownership with a partner in the coming year and believes that the strategic compensation planning she does will make the transition easier and more beneficial for the firm and its clients. "I think it's important to set the tone at the top and communicate down the line that clients really do come first," Abrams says.

Two years ago, Chatham, N.J.-based RegentAtlantic Capital, which also made it onto Schwab's "Best Managed Firms" list, decided to get serious about where they wanted to go. "At that point, we didn't have the link between strategy and compensation very well defined," says Christopher Cordaro, one of the firm's five principals. "It wasn't defined at the staff or partner level. As a result, almost every year we'd come up with a different compensation formula."

The problem with this lack of focus, experts say, is that it prevents advisors from harnessing the human resources they need (and are paying for anyway) to drive their goals. The Schwab study found that what these "best managed firms" have in common is a compensation system that defines roles and responsibilities for all staff, starting with the firm's owners, in a way that links specific responsibilities and rewards to the firm's strategic goals. The best firms also use incentive pay to link goals and employee behavior.

Today, RegentAtlantic, which manages more than $600 million in assets with a 19-person office, has put in place a multi-faceted compensation plan that rewards the firm's staff and principals for achieving clearly identified goals. Instead of paying flat salaries across the board, everyone at the firm now receives a base salary and incentives based on factors that include client revenue, overall firm revenue, firm profitability and client retention. To earn incentives, the firm principals and financial advisors are also charged with business development. "When it comes to the folks whose performance can really drive the firm's profitability, we've built more variable compensation into the mix," Cordaro says.

By clearly defining job descriptions and goals for the overall firm and working as a team, "the firm has taken on a life of its own," he adds. "If you really want to create value and a firm that lives beyond any partner, it's critical that all clients have the same experience."

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