From the January 2009 issue of Wealth Manager Web • Subscribe!


As much energy and empathy as we are all spending on our clients, we may be overlooking another group of stakeholders whose portfolios have been damaged even more during this market crisis--our employees. Most wealth management firms rely on their employees to deliver the expertise, the knowledge, the service, the enthusiasm, the caring attitude--all of the special attributes that truly differentiate one firm from all others. The bigger the firm, the larger the group of non-owner employees and the greater their importance--collectively and individually. In return for their enthusiasm, skill and commitment they are promised a career--the notion that this is not merely a job, but a sequence of well-thought-out opportunities that will raise their status, their responsibility and their income. For many young people working in wealth management firms, that career is just about the only asset in their portfolio: It represents their future earnings capacity and the years of education and training they have invested in. The problem is that that asset--their prospective career--is in danger of underperforming over the next couple of years.

Once firms recovered from the initial shock of the market decline and had a chance to assess where they stand with clients, many realized that they are facing a sequence of immediate and difficult decisions: What to do with bonuses? What about salaries? Are we promoting people who were due for promotion? Are we sticking to our promise that we will make the best employees partners some day? The answers to these difficult questions are critical as they will define the relationship between owners and employees for the next five years. Now is the time when loyalty will either be created or lost, when commitments will either be solidified or broken, and when plans will either prove to be well considered or they will fail. In the movie "The Ghost and the Darkness," Michael Douglas has a line that has stuck with me for some reason. "Every boxer has a plan," he says, "... until they've been hit." We were just hit.

What Happens to 2009 Salaries?

The most immediate issues are 2008 bonuses and 2009 salaries, although by the time you read this, those decisions may be in the past. Salary decisions have a tremendous two-way impact: They are the single largest expense for advisory firms, and they are the single largest source of income for employees.

To be clear, I believe that the only difficult decisions arise when an employee is due a raise because they have been promoted, have significantly increased responsibilities or have achieved another degree or designation. In all other cases there would simply be no reason for raises, except of course, if they have become an expectation.

Again, this where a firm's philosophy about compensation and how that philosophy is communicated to employees is critical. If there is no understanding of why raises are given, but there is an expectation that there will be a raise each year, it will be very difficult not to disappoint employees. Still, it is better to disappoint and explain rather than prolong the lack of communication.

What about My 2009 Bonus?

Employees must understand that bonuses are not guaranteed, and owners should have consistently communicated this fact. Unfortunately, there is always the expectation that bonuses will be there. It was alarming during the last recession in 2002/2003 to see salaries actually rise in the Moss Adams compensation surveys. The explanation, we learned, was that since bonuses were no longer there, employers were pressured to increase the salary component of compensation. Unfortunately this defies the purpose behind a bonus.

If it's not too late, now is a good time to revisit the existing bonus program. If bonuses were discretionary, ironically this gives owners a lot of flexibility, and for once it is good news. Such bonuses are not very effective in motivating employees, but at least make it easier to explain why they are no longer available. The most difficult situation comes from top-line bonuses. There are many programs that pay based on top-line results and by definition, pay bonuses even in times when revenue is down by 20% or more.

Redrawing a bonus program is difficult, but if it is ever constructive, the end of the year is a good time. Relying on the logic that "employees are happy to have a job" is a slippery slope. Employees who are satisfied merely by having a job are usually not the high impact and highly recruited type. Ideally, if there is a sales-driven plan, at least it can be modified to exclude bonuses below a certain level of revenue.


Planned, pending promotions should probably go forward regardless of the market or the economy. If employees are facing a higher level of responsibility and are going to be fulfilling a new role in 2009, in my mind there is a little reason not to promote them. The more difficult aspect of that decision may be the compensation package that goes with the promotion. Also difficult is the issue of replacing the promoted employee at the level they are vacating.

As far as compensation increases are concerned, even a small amount can go a long way. Ultimately the symbolic value of the raise may be more important than the actual amount. Moreover, the increment concerned may not be of the magnitude that would make or break an income statement. That's why my inclination is to recommend some raise--even a small one--if someone is being promoted. It is ideal if the firm has established compensation ranges for all positions, and the raise meets at least the bottom of the range. The issue of hiring somebody for the lower level position is more difficult.

Who Wants To Hire?

While suspending new hiring for a while may be a no-brainer for most firms, it may not be practical for others. If a firm needs to add more capacity because of the workload, it is difficult to suspend hiring. What I fear is the quadruple hit of no bonuses and no salary increases coupled with more hours and more stress. That kind of pressure will not benefit client service levels and generally, will not create a good environment in the firm. The one advantage of tougher times may be that there are more people available for alternative work arrangements including part-time jobs and working from home. Perhaps these options can help meet the demands of the workload without compromising the financials.

Are We There Yet?

As soon as October was over, and firms started preparing budgets for 2009, some discovered that they had to let people go. Unfortunately, there is still a lurking suspicion that this may not be the last round of layoffs. Sometimes the dangers we imagine are worse than the real thing, so it is important for wealth management firms to restore confidence in their employees that their jobs (and careers) are secure. With that said, if further cuts are necessary, then the sooner the firm faces that reality, the better.

It is impossible to determine where a firm stands without a budget for 2009. As obvious as that is, the number of wealth management firms that do not prepare a detailed budget amazes me; I'm guessing it is over 30%. Many firms only set a top-line goal without ever projecting all the expenses associated with that goal. The other necessary component is setting expectations for owner income.

For wealth management firms, owner income in the form of profits (normally 20% to 35% depending on the firm's size) and owner base compensation (typically 5% to 20%, also depending size) and the tolerance of owners to go without income for a period of time largely defines what the firm can withstand financially. My recommendation tends to be that as long as owners have defined a normal level of compensation for themselves, they continue paying that compensation and not use that amount to fund other expenses--unless it becomes critical for survival. However, what is normal compensation is debatable. As a simple rule of thumb--with some exceptions--I would propose that anything below $200,000 is too low and anything above $500,000 is too high. Owners should discuss "how low they can go" upfront because that's the number that will answer the question: Is it over yet?

If the budget is showing significant discrepancies after the end of the first quarter of 2009, it may be time to revise it and make new decisions. April will be an important month to revisit the budgets once all first quarter information is in.

Partnership Track

Perhaps the greatest appeal of privately owned wealth management firms is their ability to offer equity to their best people, giving them control over their practice and the opportunity to create wealth through equity. Losing that potential will be a major blow to the majority of wealth managers and will eliminate the most prominent advantage they have over larger firms. Most firms are not thinking of drastically changing their partnership admission programs (if one was defined), but there are two types of difficult possible situations: One is a pending candidate who--if times were better--would have become an owner within the next couple of years, and the second is partners who were just introduced and are going through buy-outs.

Many firms have a candidate who was going to be proposed this year and probably would have become an owner at the end of this or next year. Unfortunately, with revenues and profits down, this means that the other partners are selling their shares at the lowest valuation in the last five years and, thus, are diluting their income. At the same time, the candidate may be meeting or even exceeding expectations and may be as valuable as they have ever been to the firm.

In this situation it is important to remember why the firm is adding this person as a partner. It is to encourage growth and to motivate and tie in a valuable person. It is NOT to cash in a significant amount of equity (rarely possible financially without third party participation). Thus valuation should not be a problem. The lack of growth in income is. Without growth in income the existing owners will be facing a dilution in their income from the new owner, in addition to the decline due to the market. If candidates are encouraged to "think like an owner" perhaps now is a good time to ask for their patience and delay introduction. At the same time, if they have waited patiently for a while, this may make them vulnerable to leaving.

Good people are tough to find even in the hardest of times. Young, talented wealth managers will continue to be recruited, and therefore disappointed candidates will be at risk. A year's delay is perhaps still a reasonable compromise between ambition and financial reality. Another possible compromise is using options or profits interest as opposed to real equity, although there are some drawbacks to this solution.

Ultimately, the worst solution is to do nothing. Facing the harsh reality in an open discussion with the candidate is always a constructive step. In such an open discussion both parties can demonstrate their owner mentality and ability to think of the long term future of the firm.

New partners who are just starting their buy-in are in a difficult situation since the buy-in assumes that they will have access to profit distributions to make the payments. With profits severely lower, there may not be enough income to cover the payments. This is true for all buy-ins that use a loan from the firm or from the owners. In a different way this also affects the profits interest partners by wiping out their equity and share of income. In dealing with the situation, firms need to balance the motivation and retention of an individual talented enough to make partner) with the fact that partners DO bear financial risk as part of the job. The risk that a highly aggravated junior partner, struggling to make ends meet, will not be as productive or constructive as he needs to be will not be good for the firm. On the other hand a "bail-out" may create a dangerous precedent. In most cases, extending the loan period for another two to three years or letting the partner skip one payment may not be an unreasonable compromise.

None of these are easy decisions, but then if it were easy, everyone would be doing it. A wealth management firm simply cannot grow without people. Motivating employees and giving them opportunities is even more important during a recession than it is in good times. Everyone can get children to behave by giving them candy; it's just not a good idea long term. Not to compare employees to children, they do need care and motivation. What can really go a long way is a sign from owners that they are concerned and involved in their employees' careers. Just as it is with clients, relationships with employees come down to trust. If there is trust between the two parties, the relationship will endure; if not this stress may create cracks that will be there for years.

Philip Palaveev is President of Fusion Advisor Network. He can be reached at

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