Compensation is a tricky subject in any service business, where the primary assets go in and out the front door every day. Devising a comprehensive compensation plan for advisory firms gets particularly complex, because it says a lot about where firms place their priorities.
But as consultant Philip Palaveev writes in this month’s cover story on page 32, the availability of talent also plays a key role in determining compensation. As he notes, quarterbacks are rarely the best players on football teams (with a few exceptions like the Kansas City Chiefs’ Patrick Mahomes), but they are usually the highest paid because their position is so important and their skills are hard to find.
As firms grow bigger and the need for specialization increases, firms often create new positions and embrace different metrics to evaluate different job functions. Rainmakers typically are viewed as the most important executives at an advisory firm, as they bring new clients in the door. But wealth advisors who provide ongoing advice and service to existing clients are largely responsible for client retention. When an outsider considers acquiring a firm today, two of the key yardsticks they use to determine its value are the organic growth and the client-retention rates.
But the profession’s dynamics are constantly changing, and firms’ priorities change with it. Over the next 15 years, one of the major challenges for this business will be managing the generational wealth transfer.
Advisors who are skilled in retaining intergenerational wealth are likely to become increasingly important. So are those who can bring in next-gen clients. Firms that excel in these two areas are likely to emerge as the big winners of the next decade.
Another challenge advisory firms face is how to structure their fee schedule as they add more services to compete in an intense market. Matt Matrisian examines this issue on page 28, observing that the increased fees some firms are charging are meant to help them keep pace with their services. Some of the big consolidators and integrators now offer tax preparation and have 50 estate planning attorneys on staff. Presumably, these giants are figuring out ways to make their services profitable.
These two articles and much more can be found in Financial Advisor’s November issue.
Evan Simonoff
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