The research found that private equity ownership puts pressure on firms to drive growth while also avoiding increases in operating expenses. That increased pressure on advisors not only likely leads to more transgression, but it also likely curtails the firms’ ability to reinvest in talent, develop services and technology, and improve the client experience. Instead, the private equity oversight likely prioritizes and rewards higher client head counts, the pursuit of new assets and higher fees.
Those of us who have been around long enough might be feeling a little déjà vu. Growth combined with ineffective management and/or ill-conceived compensation models spells trouble for a firm’s clients, advisors, shareholders and culture. Our industry has experienced this before.
By now, the consequences of pursuing growth this way (and incentivizing advisors this way) should be obvious, right? It increases pressure to deliver growth and profit, which will burden leadership. And the tensions will compromise a firm’s culture, conduct and decision-making.
Firms have complex, unpredictable experiences in the ways they reward talent. Not everybody at a firm responds to incentives the same way. You certainly can’t get unmotivated team members to raise their game or drive growth with incentive compensation alone. These are just some of the reasons that effective incentive pay eludes many firms.
I recently spoke with owners at a successful RIA firm that had introduced generous advisor incentives. A significant share of revenue was paid to advisors for new clients generated, a reward that extended beyond year one, paid in perpetuity. In short order, advisors benefited from healthy levels of ongoing revenue from existing clients. But their focus promptly shifted; many advisors preferred to serve existing clients, avoiding the work required to find new ones and grow the firm. This response confounded the owners, who themselves would have enthusiastically chased such an incentive opportunity.
Another program that often doesn’t work is one in which firms offer their employees generous incentives for referring clients. Why? There’s a disconnect in the skills when someone from a non-revenue role, such as a client service associate, is asked to participate in revenue-generating activities. No amount of cajoling will persuade a client service associate to refer a prospect if they don’t feel equipped or confident in their ability to do so.
So there are two problems. On the one hand, firms acquired by private equity may risk reputational damage in pursuit of aggressive growth to meet expectations and generate rewards. On the other end of the spectrum are firms that cannot seem to offer large enough incentives even to inspire a focus on growth. Both incentive systems have failed, which shows the importance of achieving a more balanced compensation plan.
So where to go from here?
The “Growth by Design” research suggests that firms can avoid operational errors, inefficiencies, and stressed and dissatisfied staff by sharpening their focus during periods of growth. For example, firms might use incentive pay to reward non-revenue roles for contributing to process innovations, cost management initiatives, and employee value and retention programs that protect and aid growth.
The incentives for advisors, meanwhile, must align to their priority role functions, including their new and existing client accountabilities and the role they play more broadly at the firms. Their compensation can be combined with other essential ingredients: their ability to mentor and train others, for instance, or their adherence to a firm’s values.
A well-rounded, balanced compensation plan sends a very specific message about a firm’s values and priorities. The good news is you don’t have to get stuck in a frustrating compensation cycle that is not achieving the intended outcomes. And you don’t have to stick with a plan that’s not working. The most effective plans are reviewed at least annually to ensure talented team members are rewarded for their contributions, and in that way, a firm’s performance, values and culture are advanced.
Eliza De Pardo is founder and director of De Pardo Consulting.