It seems every year we begin helping firms with the upcoming year’s compensation plans earlier and earlier. This year, it started in January. One consistent theme we hear about is firms looking for ways to reduce compensation costs to help improve margins. When we analyze compensation structures, what often stands out is that firms are paying the same for commission revenue as they are for recurring (managed) revenue. This is the compensation mismatch.
From the client’s perspective – with managed business, the client is assured an ongoing relationship, with fiduciary responsibility from the advisor. This represents a higher level of commitment from the advisor than for commission business.
Outcome: Managed business carries a higher degree of care and responsibility from the advisor.
From the firm’s perspective – revenue from managed assets is typically three to four times more valuable when valuing books of business or entire firms. This makes a dollar of fee revenue materially more valuable than a dollar of commission revenue.
Outcome: Managed business is financially superior.
From the advisor’s perspective – generating managed assets requires a broader skill set and a longer-term time horizon to realize financial benefits. Meaning it is more difficult and requires greater patience to get paid compared to commission products.
Outcome: Advisors who build managed business are more valuable to the firm.
Across all perspectives – degree of difficulty, skill required, perceived value, and economic benefit – everything points toward a premium for managed assets over commission business. So how do most firms pay – the same for commission as for managed revenue. At the same time, those same firms are trying to reduce compensation costs. That is the compensation mismatch.
What to Do
In the past, many firms increased payouts for managed business above the standard grid, which helped accelerate the shift toward managed assets. That approach worked. Now it is time to take the next step. Firms should consider paying less for commission business than for managed business to better align compensation with the relative value, difficulty, and long-term economics of each. A practical approach is to maintain the current grid for managed assets while introducing a lower, fixed grid, for commission revenue.
The savings generated can be redeployed toward recruiting incentives, rewarding top-performing advisors, investing in advisor development, and strengthening sales support – particularly for those focused on managed business.
At wire-houses, where most revenue is already managed, this shift is happening naturally. However, until most financial institutions reach an 80/20 mix of recurring to commission revenue, a more deliberate adjustment is needed.
How We Can Help
This is an opportunity to correct the compensation mismatch by moving beyond legacy structures and aligning incentives with what is most valuable to the client, the firm, and the advisor.
The Bielan Group helps institutions:
- Assess competitiveness versus wire-houses and peers
- Redesign plans to support your strategic priorities
- Drive internal alignment and approval for necessary changes
- Use an objective external voice to accelerate adoption and execution
