Ask Brad: The Absurdity of Annual Compensation Plan Changes
This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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Imagine you’re a standout college athlete. You’re projected to be chosen high in the draft.
You get picked by a team, and they give you a big signing bonus.
The cash hits your bank account. You’re pumped. You feel good.
Then the contract terms hit you.
You must stay with the team at least 10 years.
Throughout those 10 years, the team can change the coaching staff as often as they want.
They can change the team facilities.
They can change what equipment you can use.
They can change what position you play.
And the real kicker… while you might have a general idea of your annual compensation, they can (and likely will) adjust how you’re paid every year.
Well, maybe the coaches will decide your annual comp changes. They know you best, how hard you work and your value to the team. They will surely treat you fairly when they decide your comp each year.
The coaches have no say in the matter.
Ownership has ordained a group of team executives, many of whom have never played the sport themselves, to decide how to adjust your comp each year. Their marching orders are simple: Increase profitability of the team.
These executives are no dummies, though.
If they squeeze you too much, you might flee the team (even if that requires that you pay back some of the signing bonus.)
So, they don’t hit you too hard in any one year. Their mandate is to boil the frog – not to prompt you to flee, but to save you from death by a thousand cuts.
They tighten the screws slowly. Each year they tweak your comp formula more to their liking. It’s not about what’s best for you; it’s what’s best for the team owner’s bottom line.
Our savvy pencil pushers even know to every couple of years triumphantly announce they are not making any comp changes that year. While it pains them to sit out a year of applying their beloved squeeze, they know it will cause you to believe they are on your side (briefly).
“We’re here for our players,” they proclaim!
The following year, the charade begins anew after they’ve sufficiently walked you back from the ledge.
By the end of your 10-year contract, your annual compensation plan is nearly unrecognizable from how it looked when you first signed.
If you were this athlete, would you sign on to this arrangement?
Whether or not you received a signing bonus, would you tolerate near-annual changes to your compensation? Would you accept the annual moving of the goalposts?
Yet here we are in our profession.
Near the end of the year, the annual season for brokerage firm compensation changes is upon us.
Except for the heroic, self-congratulatory firms temporarily sitting this year out, the annual squeeze is here.
How did we get to this point? How did it become acceptable to constantly jigger how advisors are paid?
More surprisingly, advisors will accept being locked into 10+ year arrangements with no guarantee of how their compensation will change over that period!
This is not an industry-wide phenomenon, though.
This nonsense is non-existent in the RIA model.
If you have your own RIA, you control your profit & loss (P&L). You decide what strategic changes, if any, to make to the firm each year. You are in control of what ultimately falls to your bottom line.
For advisors joining RIA firms, compensation changes are unheard of. RIAs rarely express advisor compensation as a “payout.” They consider the client fees you generate to be 100% yours. They provide you with the needed solutions for you to service your clients. They charge you a fee for that, essentially the inverse of a payout. This fee is rarely adjusted.
If you’re a standout athlete and one team constantly adjusts their player’s compensation, and another team rarely, if ever, does, who would you want to play for?
Athletes would never tolerate such shenanigans. Why do advisors?
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.