As a profession that has evolved substantially out of the brokerage world, financial advisory firms have not always aligned their performance evaluation process with the behavior they seek. Money too often becomes a substitute for active management, and the method by which one achieves certain goals is often given short shrift.
Part of this is learned behavior: “I will get paid more money if I do X.” Pay for performance is the theory behind the compensation grids within broker-dealers, and it is an idea carried over to many RIA firms that are trying to encourage their advisors to generate new business. But revenue generation is not the sole mission of advisors and their employees. Over time, the management of existing clients takes on more weight. That is why many RIA firms have shifted to a salary plus bonus compensation model versus a production grid. Nothing conveys the fundamental difference between a “producer” culture and an “advisor” culture more than this point.
Of course, sales is an important function. Other professionals including doctors, lawyers and accountants all recognize that business success depends on new client growth. As a firm matures, however, the dynamic shifts. Revenue generated from new clients diminishes to a very small percentage of total revenue, and ongoing client service gains more importance. Yet the practice of nurturing valuable relationships rarely finds recognition, let alone systematic reward.
Don’t get me wrong. Incentive rewards have their place in business — but the behavior that creates success needs as much examination as the desired results. Just as child psychologists warn that using food as a reward can undermine healthy eating habits, advisors need more encouragement for ongoing work behavior. Think about the reward system within your firm: In focusing on advisor results, are you reinforcing undesirable or destructive practices?
Recently, I reviewed the syllabus for a personal economics course taught by Erika Fix at my former high school in Gladstone, Michigan. I was struck by the grading formula she had crafted. The purpose of this class is to introduce the concepts of money management and finance to students in order to educate them about the importance of financial planning and decision making in the real world. Fix identifies three components of the students’ grades:
10% – Citizenship: behavior and work ethic
40% – Practice: homework, group work, in-class work, lecture and book notes
50% – Evaluations: quizzes, tests and project assessments
When I attended that same school (a thousand years ago), my grades were determined by outcome: test grades, especially final exams. Today, half of a student’s grade is tied to proper conduct and a consistent work ethic.
This makes me wonder about how to encourage an advisor’s job performance beyond his or her measurable financial contribution to the firm.
First, think about goals within your firm. Are your employees recognized for demonstrating a passion for excellence, personal integrity, a commitment to learning, a sense of accountability and promoting a culture of respect?
Are your leaders valued for recruiting and developing talent, for implementing an achievable succession plan, for conceiving new ways to manage your business and serve your clients?
How do you want clients and employees to perceive your firm: as client advocates or product advocates? As consultants or producers? As transaction-oriented or advice-oriented?
These elements are subjective, making them challenging to assess. I suspect that is one reason why managers prefer to tie performance evaluations to simple, objective and quantifiable outcomes like revenue generation. In terms of helping an employee to grow, this sort of evaluation lacks impact. End results do not require a lot of discussion. What does require examination and coaching is the way they represent your firm and interact with your clients, employees and leaders.
Consider these performance markers:
Lifelong Learning. Do employees work on their craft as much as they work on business development? Are they becoming more educated and informed in certain disciplines like estate planning, tax planning and philanthropy? Are they developing management skills that will help the business advance?
Safety. How careful are employees about client acceptance and retention? Do they adequately document their work? Do they skate around the edges of compliance or ethics? Do they expose your firm to undue reputational risk?
People Development. Are leaders effectively matching the right people to the right jobs? Do they invest the time required to help co-workers improve their skills or visibility within the firm? Do they give others legitimate opportunities to grow and mature? Do they create the appropriate environment so that motivated employees can flourish?
Succession. Are leaders making sincere efforts to reduce dependency on themselves? If they have taken on a new role, is it obvious who their replacement is? Are they addressing the gaps in their successor’s development so the transition is orderly and their successor is prepared?
Financial Contribution. Beyond generating new business, are leaders pricing services properly and are they managing relationships profitably? Are they managing their expenses and spending time on the areas that make the greatest impact? Do they recognize when certain tasks can be done by a lower-cost employee so that they can focus on higher-impact activities?
Peer Evaluation: How do their colleagues view them? Do you perform 360-degree evaluations so that managers, peers and subordinates can assess them on criteria you deem important? Do colleagues view them as collaborative or competitive? Are they viewed as supportive or destructive?
This final point is especially critical in producer cultures where the top revenue generator is regarded as royalty and the others as serfs. Many great revenue generators are viewed positively by their peers and subordinates, but some rainmakers disregard firm culture, believing they are above it all. Employees see everything. What they do based on what they see is both your risk and your opportunity.
The market has room for all types, including pure salespeople. Clients may choose how they want to conduct business and how they want to be served. Studies continue to show that people at all levels of the economic spectrum may have relationships with a variety of financial providers ranging from banks to brokerage firms to robo-platforms to DIY discount brokers. It is important to provide clarity around your business model so that the people within your enterprise know what you value most.
The business of financial advice continues to evolve, driven by changes in how employees want to work, how clients want to be served and how regulators want us to behave. Good leaders skillfully operate the levers that contribute to a great outcome, and recognize that proper maintenance of these mechanisms will ensure the optimal performance and longevity of the enterprise.
— Read “FINRA’s Ketchum Warns on Dangers of Poor Firm Culture” on ThinkAdvisor.