At Xtiva we have studied and opined on advisor compensation trends in wealth management for many years, not only on the scope of change but also on the pace. In this series, we discuss the major changes emerging in wealth management compensation as accelerated by seismic industry shifts and examine their green shoots. There are many change agents at work in wealth—technology and digitization changing value and enabling scale in new ways, new customer pricing models, new business models, activist regulatory bodies and new capital with new expectations. All, in one way or another, are contributing to changes in advisor compensation models.
Here we will explore the end of the revenue era. Yes, we are at the beginning of a slow walk back from revenue as the near exclusive driver of advisor compensation. This will disrupt virtually every firm and advisor practice in wealth management. To be clear, we do not expect revenue-linked compensation models to disappear entirely, but rather be materially lessened in importance.
The signs are there:
Non-Revenue Business Volumes
Increasingly the national and major regional wealth management firms have been shifting portions of their compensation to strategically aligned ‘bonuses.’ The first experiments with this were in the form of asset bonuses in the early 2000s. This now includes bonuses for net new assets, the breadth of the household relationship and penetration of financial planning, among other business objectives.
Takeaway: Firms are going beyond revenue-based business volumes because other business volumes may be more reflective of the long-term value of the customer relationship.
While hardly widespread, salary is no longer a foreign concept in wealth advisor compensation. In fact, it is becoming common in business units offering holistic services to ultra-high-net-worth customers, and recently, organizationally changes by some of the largest wealth management firms have seen salary begin to creep into the affluent and HNW advisor segments.
Takeaway: Firms are adding salary to the mix because it supports rules of engagement, underwrites service levels and helps alleviates some of the optics around conflicts of interest.
Despite the widespread emphasis on sales by practice management leaders, sustainable revenue is partially achieved by focusing on, among other things, the right customers and business processes. But until recently, there's been no strong way to track, analyze and incorporate these measures into compensation programs. Increasingly, investments in data management and better integration tools have broken down that barrier. Sales, customer service and business management activities can now be tracked, reported and made available for compensation models. A good example is the incorporation of financial planning metrics into compensation schemes.
Takeaway: Firms are embracing activity measures because they believe it enables better alignment of their investments in technology, practice management and training as well as providing more meat to their sales management efforts.
Some consider the ability to incorporate customer satisfaction (or better yet, engagement) to be the holy grail for influencing compensation. If the organization is effective at managing the profitability of the product and service offering, then customer engagement becomes the most effective indicator of success. Simple, yet powerful directional engagement indicators such as Net Promotor Score or a Forrester Index serves as an effective starting point.
Takeaway: Firms focused on incorporating client engagement typically approach it from "full stack" perspective, and emphasize it as part of the corporate culture as well.
Quality & Outcomes
Over the past two years we have found ourselves involved in an increasing number of forward-thinking compensation discussions about incorporating some measures of advisor quality. With quality ratings prevalent across the service industry (for instance, one-to-five star reviews), it is not surprising there is an aspiration to do something similar in wealth management. Firms still tend to think of quality as the input measures, as well as skills and credentials. Customers tend to think of quality in terms of service delivery and outcomes. Both are relevant and valuable. The great challenge here is the navigation of the technical and regulatory issues, coupled with advisor comfort around formalized feedback mechanisms.
Takeaway: Firms that will find success in measuring advisor quality and tie it to advisor compensation will appreciate the importance of making investments in data, but will not fear blending art and science to get to the destination.
As the revenue-based compensation era sunsets, the comprehensive compensation era emerges. Compensation has and will continue to represent the most important aspect of how the wealth management industry is organized and managed. Change is accelerating. The leaders know it.
Jeff Mardsen is the chief product officer for Xtiva Financial Systems