It is imperative that finance and sales leadership at investment programs understand the current research and trends in advisor compensation plans. The need to remain competitive is important for numerous reasons, but perhaps one of the most critical reasons is due to the growing talent shortage in the financial advisory industry. Older advisors are retiring at a rapid rate, by one estimate 35% of the current financial advisors will retire over the next ten years. According to Cerulli Associates, the retirement of these advisors will leave some $6 trillion in advisor-managed assets in need of new advisors to serve these clients. Cerulli research also shows only about 25% of today’s advisors are under 40, with only about 10% under age 30. This is a small pool from which to find the talented advisors of the future.
As a result of this talent shortage, finance and sales leadership at broker-dealers need to remain on top of the key trends in advisor compensation plans. Here are five key trends in advisor compensation plans.
1. Advisor compensation plans utilizing a “rolling grid”
Advisor compensation plans that calculate payout based on a rolling month production average continue to gain in popularity, specifically the rolling 12-month plan. According to the Kehrer Bielan 2018 Advisor Compensation Study, the rolling twelve-month lookback has experienced a marked increase in use, up from 19% in 2015. Although monthly plans are simpler to model and remain the most popular, multiple month plans are more stable and reduce suitability risk.
2. Implementing multiple advisor compensation plans
Broker-dealers who have implemented numerous and diverse advisor compensation plans tend to perform better compared to firms that employ a single compensation plan. Offering multiple compensation plans is particularly important for firms with tenured advisors. Typically, seasoned advisors have an established book of business and may focus more on managing the assets of their clients.
3. Completion of financial plans–quality over quantity
Recent research by Fidelity shows that only 18% of Americans have a written financial retirement plan in place. Incorporating the completion of financial plans as a special incentive is nothing new. Many firms have goals for their advisors to complete a specific number of financial plans. However, there is an increased focus on the quality of these financial plans rather than quantity. Additionally, seeing financial planning as a dynamic and ongoing process–rather than a static plan that is never revisited once completed.
4. Fee-based models continue to gain in popularity
Fee-based business in investment programs typically produces a recurring, predictable stream of income, rather than transactional revenue which can be uneven and unpredictable. Additionally, over time, advisory business will help grow the business and boost profitability. Moreover, it’s not just in the firm’s best interest to offer fee-based versus commissions. A recent Cerulli Associates study found that 62% of investor households prefer fee-based payment arrangements over commissions.
5. Advisor compensation and employee benefits
In order to attract and retain top talent, broker-dealers are expanding their offering of employee benefits. In addition to traditional benefits such as paid vacation/sick time, health insurance, and 401k plans, firms are offering nontraditional benefits including financial support of professional development and continuing education, flextime work schedules, and telecommuting. According to research by Financial Planning a trend that’s gaining traction is generous vacation time. Colony Group, the $10 billion Boston-based RIA, allows principals and key senior employees—about one-third of the workforce—to take unlimited vacation time (within reason) if they need it.