Firms paying salaries alone, however, often struggle to properly compensate their stars. Salaries are instinctively set in a narrower range that doesn’t differentiate nearly enough between the stars and those in the bottom of the distribution. For example, partner-level lead advisor salaries in the bottom 25% are $150,000, the median salary is $200,000 (33% higher) and salaries in the top 25% are $300,000 (twice as much as those in the bottom). On the other hand, those in the bottom quartile account for $650,000 in revenue, while those in the median tier account for $1.2 million (which is 95% higher) and those in the top quartile account for $1.8 million—nearly three times as much as those in the bottom, even though they are paid only twice as much. I would argue that those in the median and top quartiles should be paid much more.
Bonuses don’t help here as much as you would think. When they’re added in, those in the bottom 25% receive $176,000 in total compensation (salary plus bonus), while those in the median receive $250,000 in total (roughly 42% higher), and those in the top quartile receive $334,000—about 90% more. The bonuses merely help us revert to the mean rather than widen the distribution. This scheme is designed less to reward stars than to avoid upsetting people.
Then there’s variable compensation (when advisors are paid a percentage of revenue, such as 30%). Unfortunately, that approach ends up creating silos within a firm and that’s when you start hearing words like “my client” and “my revenue.” What’s more, the percentages turn into a recruiting race—if one firm pays 30%, the next pays 35% and then someone always offers 95% or 100%. Economists call this “the winner’s curse”—when competitive bidding leads to overpayment.
So the only solution seems to be equity, and it is certainly a very good one. Those employees who create the most value should benefit the most from what they have created. That was the original power of the independence movement. That’s how the original stars (the founders) earned their reward.
Unfortunately, equity has become very expensive, and much of it is in the hands of institutional investors, who have yet to come up with compensation plans that have scope and impact. Most firms otherwise have no good mechanisms for transferring ownership. The future stars get to purchase 2% to 3% of a firm, but the process stops there, and there is often no secondary market for those who want to buy more shares.
Balancing Stars And Management
Stars, we should point out, are not easy to manage. That’s been true since the days of Achilles. (He was a prima donna. So is Kevin Durant.) LeBron James seems to handpick his coaches. Quite a few players have been caught screaming at theirs. Still, without the stars, even legendary San Antonio Spurs coach Gregg Popovich can’t win many games.
That’s led to the league recruiting coaches who can better work with stars, and the same thing is likely going to happen to executive management in our industry. Some of the best executives I have worked with or observed—people like Stuart Silverman, Michael Nathanson, Dale Yahnke, James Poer, Bob Oros, Fielding Miller, Eric Kittner, George Stapleton and many others—know how to recruit, identify, collaborate and inspire their stars rather than control them, diminish them or appease them.
The former CEO of Moss Adams, Bob Bunting, told me that in the last year of his tenure he asked his 250 partners to give him the names of professionals from other firms who they wished were on “our team.” Then he made 100 phone calls to those star players asking them to join his firm. That’s the approach I believe wealth management firms should take.
Stars have a huge impact on the outcome. They don’t need to destroy the team. Quite the contrary. They will make the team better. You could say that being the CEO of a wealth management firm means identifying and developing your future stars. If you don’t have enough—go recruit them!
Philip Palaveev is the CEO of the Ensemble Practice LLC. He’s an industry consultant, author of the books G2: Building the Next Generation and The Ensemble Practice and the lead faculty member for the G2 Leadership Institute.