From the October 2008 issue of Investment Advisor • Subscribe!

October 1, 2008

Know Thyself

To get a fair offer, first accurately determine what you're worth

I get a lot of e-mails and chat room inquiries (the preferred mode of communication of my generation) from NexGen advisors asking how much they should get paid. Often they want me to point them toward some published data tables where they can simply look up the job they currently have and read off what their comp should be. I think they're often disappointed that my answer isn't quite as simple as that.

While compensation isn't brain surgery, it does involve a number of interrelated factors that can make each situation, if not unique, at least customized. Here are some guidelines to help you calculate how much you (or your employee) is worth, and how you can negotiate a compensation package that reflects your value.

As far as data sources go, the biennial Moss Adams Compensation and Staffing Study of Advisory Firms is by far the best (every other year, like 2008, Moss Adams's Study focuses on firms' financial performance). Moss Adams does a nice job of collecting data from nearly 1,000 advisory firms, and breaking it down by firm size, job descriptions, and various modes of compensation; eg., salary, bonus, incentive comp, and partnership interest. The Study presents the data so that practice owners can see what other firms are doing successfully, and not so successfully.

Yet young advisors attempting to apply these tables to their specific situations need to bear in mind that the Moss Adams' figures are only industry averages. While they may reflect firm size, they don't consider geographic location (a portfolio manager in New York will make more than his peers in Des Moines); the specific needs of a firm (a new lead advisor can be more valuable to a growing early ensemble practice with too many referrals than to an established firm just looking for another trainee for its pipeline); or what a practice can afford to pay (a solo practitioner who's reinvesting most of her profits to grow her firm isn't likely to pay top dollar for a support advisor no matter how desperately she needs one).Yet by considering a firm's location, needs, and financial situation, NexGen advisors can negotiate a compensation package that is fair, and more important, will enable them to reach their goals.

Fairness is the key. Proposing a "fair" compensation package--and being able to back it up--is probably the most powerful negotiating tool you can have (see "Playing Fair" sidebar).

Both Sides Must Play Fair

Of course, you don't want to just roll over, either--taking whatever low-ball offer an owner advisor offers. After all, bad faith works both ways: an employer who isn't trying to be fair with you is usually a red flag. To sort out what's "fair," you need to assess your value in each particular situation. The first step in doing so is to calculate how much advisors like you are worth in this specific city--kind of like getting comps from similar sales to determine the value of a house. Different neighborhoods have different values. So the question is: What do other advisors with the same education, training, experience, job skills, maturity, and drive as you get paid in this town--or the town in which you want to work?

It's not always an easy question to answer, but in this (as in many situations), knowledge really is power, and the more information you have, the better negotiating position you'll be in. So you might start with the Moss Adams data (bearing in mind that I suspect it's somewhat skewed to larger, more successful---and therefore, higher-paying---firms). Then ask around, use your networking skills to find out what other people make. Be creative; if you can't find enough young advisors in your town, use examples from other similar towns. Remember, the goal is for you to know how much you're worth, and to use that information to persuade your employer to more accurately value you, if need be. To avoid self-delusion and/or an unconvincing argument, just be sure your information is reasonable. No, your degree from the College of Financial Planning is not the same as an MBA from Wharton, and the two summers you spent selling popcorn at the local theater doesn't equate to your buddy's five years at Merrill Lynch. All kidding aside, it's important to take an objective look at what you're bringing to the table, and how people who are truly similar to yourself get compensated.

The next step in assessing your value is to determine what you are worth to this specific firm. Fairness works both ways: a firm's limitations, needs, and goals are just as important in creating that "win/win" as the skills you're offering. What's more, understanding where the owner is coming from can make you a lot more valuable. Certainly, the size of the practice is one factor, but there are others, which may be even more important:

What does this firm really need? If the owner's a quant who'd be fine convincing clients what they need to do, but can't make a pitch to save his life, then your rainmaking skills are going to command a premium, while your advisory skills won't have as big an impact on the firm, at least at first.

What's the firm's strategic plan, and how can you help? If you're very clear that you want to be a paraplanner and work 30 hours a week, you won't be a valuable to a practice that's growing fast and wants advisors who can grow along with it. Conversely, an aggressive entrepreneur will be just the ticket for an older advisor looking to hire her successor, and who wouldn't mind if they grew the firm along the way.

What can the practice afford? An advisory firm's cash flow depends on where it is on the growth curve. Ironically, practices that are reinvesting to break through to the next level often have less left over to pay the young advisors upon whom that growth often depends. True, if a firm can't afford you, they shouldn't be trying to hire you. Yet I've seen too many young advisors pass up what was really the job of their dreams, because they were too fixated on a salary number, rather than being flexible and creative in the short term in order to achieve long-term success. All I'm saying is that a job is rarely perfect in all aspects. It's important to determine what's really important to you, and then lighten up on most of the other stuff.

And yes, all things being equal, larger firms do tend to pay more. So if you go to work for a smaller firm, which most NexGen advisors will, be prepared to take less to start. But don't overlook that your willingness to make an "investment" in your new firm is your most valuable negotiating tool. Once you know what you're worth on the open market, and you're willing to take less, then it's more than fair to ask for some things in return.

Why Smaller Can Be Better

A better lifestyle, flexible hours, more vacation, your choice of computers/PDA/cellphone, etc., are all advantages that smaller firms typically offer compared to their more corporate counterparts. But you can also expect more tangible benefits in return for your commitment to the firm. You may have a lower salary, but there's no reason you can't share in firm's success: either through a generous profit sharing arrangement, or even better, more closely tied to things you can directly control, such as revenues you contribute to, additional AUM you attract from existing clients, good investment portfolio performance, or the new clients that the owner can bring in because you lightened her workload.

You can also negotiate for a formal training program, with the owner/advisor making the commitment to spend time working with you, and providing constructive feedback on your work. The opportunity to work with clients sooner than you would at another firm is also a perq that many young advisors want, and can get at a smaller firm. Finally, the Holy Grail for most NexGen advisors--ownership in the firm--at a more substantial level and earlier, should certainly be on the table (see my feature article on this very topic on page 70). Each of these perqs further demonstrates your level of commitment to the firm, and to your career as a financial advisor. Combined with your willingness to take less than what you're really "worth" should resonate loudly with any reasonable prospective employer. Finding an advisor who's willing to work with you to create that win/win may be the most important employment factor of all.


Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at angieherbers@cox.net.

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