From the September 2004 issue of Investment Advisor • Subscribe!

Show Them The Money

Many of the problems we face today come from the gap between our vision of reality and what the world really looks like. One area where I'm constantly confronted with this illusion-versus-reality problem is the way financial advisors think about their practices. As far as I can tell, most advisors view themselves as lone rangers whose clients' well-being depends on their judgment alone.

Yet if you're a good financial advisor, the growth of your practice is almost inevitable. Most advisors find that to adequately service their existing clients and attract new ones, they need help--at a minimum, an administrative assistant, a receptionist, or clerical staff. In many cases, advisors recognize that they could also benefit from paraprofessional support, and sooner or later, the help of other advisors. And there's the rub: As soon as you add just one person, you're at least a part-time manager, diverting some of your time and attention and diluting your control.

Having consulted with the owners of hundreds of small practices and larger ensemble firms, I've come to realize how unprepared most are to handle growth. Whether they have a staff of five or 50, they invariably feel that they've lost control of the enterprise. It was never their vision to be surrounded by so many people, but somehow it happened. While they try to keep their hands wrapped tightly around this sack of cats, they are losing their grip because of all the squirming and squealing inside.

Unfortunately, in addition to feeling out of control, advisors' discomfort with their staffs also inhibits their ability to use that staff to leverage themselves and other staff members, greatly limiting their success.

The solution, of course, is for advisors to take a more realistic view of their practices and their role in those practices. No one can do it all today: there's too much to do and the benefits of having help are too great. For advisors to break through the glass ceiling of their own professional and business limitations, they need to add technology, people, and processes to become more productive and efficient--in a word, more successful.

In my experience, the most problematic of these steps toward progress is adding people. In many cases, advisors need to add talent that complements their abilities. Yet while adding the right people is essential to a practice's growth, it also requires an advisor to have a set of skills for which they usually aren't trained: management, leadership, counseling, and dispute resolution. But the most difficult people issue that advisors face, and ironically the most important factor in the success of a firm, is compensation.

Compensation may be such a tough issue because it appears to be, and at least in the short term is, a direct conflict of interest: The more you pay your staff, the less you take home yourself. Most advisors' internal discussion of the matter seems to begin with how hard they worked to built their business, the risks they took, and the difficulties they overcame. Now that the practice is a success, the notion of sharing some of the rewards is difficult to embrace. Starting with this kind of thinking, it's all too easy to slip into a mindset where the staff comprises lazy, greedy, self-centered kids,who want it all now, and think they can have it without paying their dues, etcetera. Conversely, it's a rare advisor indeed who intuitively understands that if structured right, he can receive a lot more in the long run from a narrower slice of a much bigger pie--that he can increase his revenues and profits because he has others to help him develop business or respond to the needs of existing clients.

To help more advisors get their minds around the concept of sharing their prosperity, last year Schwab Institutional asked us to collaborate on one of its MKT Reports on how the best-managed practices were building their compensation plans. We harvested data from our annual study for the Financial Planning Association and compared the upper quartile firms (in terms of operating performance) to the total database. Here are the lessons learned from the best-managed firms about how they pay people:

1. Formalized compensation processes are more effective than ad hoc arrangements. Many practice owners fear that by introducing more consistency and structure into their firm's compensation plan, everybody will eventually be paid the same regardless of effort or success, and that they'll lose control without the ability to pay discretionary bonuses. The reality is quite the opposite. A consistent compensation platform means that you have a clearly defined framework for rewarding staff for doing the right things, and for how they can enhance their income by helping to propel the business forward. You can still build in as much discretion as you deem appropriate, but the important point is that everybody understands the basis on which their compensation will be decided. The performance of your staff will improve exponentially once they understand exactly what they are getting paid for and for what they will be paid extra.

2. Strategy-driven compensation drives the firm's strategy onward. Everything begins with a vision for the business. Whom do you want as clients, and what will you need to provide in services or products to meet those clients' needs? By answering these questions, it becomes easier to envision the type of organization you need to build, the type of individuals you need to fill the right slots in your organization, and what type of behavior you want from those individuals so you know how to pay them. For example, our studies indicate that more advisory practices are moving away from 100% variable or commission payment to a reward structure that combines base salaries with incentives. When doing this, it is important that you recognize how such a program might affect your business. If your firm is primarily a sales organization, it's important to emphasize short-term incentives like commissions. But if you are building a culture of teamwork and client service with the goal of total practice growth--including adding assets from existing clients--you may need to reexamine whether your current pay program encourages behavior that's focused on those goals.

3. Well-defined roles and responsibilities make performance evaluations easier and make promotion more manageable. Most entrepreneurs resist job descriptions out of a fear that employees will see them as an excuse to limit their efforts (as in the now ubiquitous: "That's not in my job description"). But if structured properly, job descriptions can enhance motivation and creativity. There's usually nothing more motivating than giving someone the responsibility to solve a problem or help someone in need. So rather than use descriptions that limit what your staff does (Employee No. 1 answers the phones, Employee No. 2 generates reports, and so forth) try to think in terms of which client needs each employee is responsible for addressing: "Each of our clients needs an accurate report every 90 days and it's your job to see that they get it."

4. Employee development benefits the firm even more than the individual. Limited opportunities for individuals to rise in responsibility and compensation tend to sow the seeds of distrust and resentment. One of the biggest challenges in the financial planning profession is creating a career path for both junior planners and other staff. To create such a path, advisors have to realize that the career path and development of their staff may be a different path than their own. To build the right career path, practitioners need to build the same proposition for employees as they do for clients: "Why do they come here, and why do they stay?"

5. Formal review processes tied to compensation are powerful propellants of firm success and individual career growth. This is exactly the kind of structure that most advisors resist, but if you don't make a process out of employee feedback and compensation reviews, it won't get done.

6. Linked goals for the firm and individual place everyone on the same page. Most elite firms today create an incentive for employees to excel individually and to help the firm reach its goals. That means the firm needs to have goals that are clearly spelled out. Compensating people for the success of the business, at least in part, creates a sense of ownership and will unlock creativity and initiative among the staff that will more often than not exceed your expectations.

7. Rewarding the right behavior is paramount to the long-term success of the compensation plan and your firm. People tend to do what you pay them to do. You can talk all you want, but how folks are compensated sends a clear message about what you want them to do. So be sure you spend time thinking about exactly how each employee can provide maximum benefit to the clients, to the firm, or to you, and how you can provide incentives for them to do so.

8. Premium pay for premium talent is a fair procedure and helps retain staff that would be more expensive to lose. It never fails to amaze me how many otherwise intelligent people think they are clever for underpaying their staff. If they only realized how much they lose in low performance, apathy, and turnover they'd kick themselves. Data we compiled for the 2001 FPA Compensation & Staffing Study showed that elite ensemble practices (the top 25%) "pay higher compensation for every position typically found in an advisory firm." In elite firms, the total compensation for a typical professional is 33% higher, support employees have 44% higher compensation, and office managers and administrative employees have compensation that is higher by 20% and 3%, respectively, than all other firms. The easiest way to have a great financial planning practice is to hire great people and pay them enough so that they feel that they owe you, and not the other way around.

It's always interesting to apply these concepts to advisory firms where there is a lot of perceived unhappiness by staff. The turnaround is usually nothing short of remarkable. By thinking sequentially about how to address human resources in your practice, it becomes easier for you to build an economic model that makes sense, rewards you, and keeps your people focused on what they are supposed to do. Part of your job as an advisor is managing others to help you serve your clients better. And the most successful firms find a formula that is a win/win/win for everybody.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at

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