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Building an Advisor Compensation Plan for the Future

Morgan Stanley’s encouragement of its financial advisors to use the wirehouse’s digital tools is just one of the many ways advisor compensation is changing.
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By Jeff Marsden

There has been a shift in the market in the past few years in how the industry is approaching financial advisor compensation. Wealth management firms are adjusting their approach and they’re getting more aggressive in how they do it. They are driven by a need to respond to evolving advisor demographics, shifting customer demands, an increasingly aggressive regulatory landscape and an absolute requirement to drive stronger operational performance on a long-run basis.

Firms—big and small—are putting more thought and care into the design of their programs. You can spot it in the industry news headlines; you can hear it discussed among advisors at industry conferences; and by looking back over 2 to 3 years of actual compensation programs, you can observe the evolution. The firms that are seeing the most success work hard to align their compensation investments with their business strategy and do it in a fashion that will work for the long run. And by doing this they shift incentive compensation from a blunt instrument to a critical business tool.

To accomplish the future-proofing and longevity of their successful incentive compensation plans, firms often employ these four attributes.

1. Reward Advisor Alpha and Its Building Blocks

Advisor Alpha—the value created by advisors for their clients—is fundamental to long-term success as a financial advisor. With the shifting customer perspective on advisor value and the emergence of digital tools that can provide leverage to advisors in lower value-added services, firms are keen to support and reinforce the refocus on high value-added, more holistic services by advisors. This can mean rewards for broader revenue streams, incentives for the provision of wealth planning, and the introduction of specialists to the customer. At the core of Advisor Alpha is advisor quality, and this is now getting attention. Consideration of expertise levels and skills development are now attracting discussion. A reward structure that encourages increasing the value of the advice asset just simply makes sense.

2. Ensure the Design Enables Encouraging and Supporting Change

We have recently seen firms align material financial rewards to the adoption of specific new technologies. Good example of this is the encouragement of its financial advisors by Morgan Stanley to utilize the digital wealth tools recently added to the Morgan Stanley platform. Success in the future requires establishing the right foundation today. Using the compensation program to make change in the current period to benefit the long run is a smart investment. Treating new technologies that support change as a line item often does nothing for its adoption rate inside of an organization, and, therefore, the companies that have the most lasting success with new tools are the ones that understand what to actually integrate and adopt change into the organization as a whole.

3. Incorporate a Focus on Customer Success

Creeping into more plans each year is a focus on specific customer segments. Originally driven by an increased focus on certain economically attractive segments and a desire to minimize channel conflict within large organizations, what was once brute force segmentation (account or household asset value), has become more sophisticated (needs and value dimensions), and will soon be able to incorporate preferences and behaviors. Coupled with the right customer focus will soon be new measurement techniques for customer satisfaction and engagement. The days of customer engagement metrics being common elements of compensation are not far off.

4. End Product-Based Compensation 

In every major global wealth market, regulators have been signaling a growing impatience for product-based compensation. It’s hard to support a product-based compensation regime in a customer-first business strategy. The compromise of objectivity is too costly a price to pay. Further, it has been repeatedly demonstrated that management of product profitability via advisor compensation is a fool’s game. As advice costs become more transparent, the need to strip away the noise of product-based compensation becomes more compelling. 

The key enabler of these changes is data. After years of promise, firms are finally seeing the fruits of investments in data aggregation strategies. With modern incentive compensation and sales performance management tools, wealth management businesses are increasingly able to unlock the value of their data to drive front office performance. Add in the ongoing march to digital transformation of the front and middle office, they can now use those technologies to align the performance management objectives to the advisor journey, driving value and performance at every turn. At the core of every successful, future-proof compensation plan is a heavy commitment to rich data assets to support strategically aligned plans.

We are only in the early phases of this strategic repositioning of advisor compensation. Forward-looking firms will increasingly invest in understanding what drives successful plans and act on it. 

Here are some trends to watch in 2019 and 2020 as firms further invest in advisor compensation programs in driving long-run performance and value.

  1. More support from major technology partners (custodians and CRM notably) to enable the data strategies necessary to power strategic compensation.
  2. Shift away from the captive versus independent core compensation styles to a more nuanced continuum.
  3. Incorporation of the omni-channel reality into the compensation regime.
  4. Closer alignment of elements of advisor compensation with the customer journey.
  5. Accelerated adoption of modern ICM and SPM systems.

The shift is on. No longer is incentive compensation just a means of managing to a gross margin objective, it is now—finally—living up to its promise as a strategic business driver with some smart choices that can be made future proof.

Jeff Marsden is head of Product, Technology and Strategy at Xtiva Financial Systems. xtiva.com.

TAGS: Technology
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