CEOs and CIOs earn the highest overall median direct compensation ($630K), with nearly 37% of that total driven by incentives, while CFOs have a significantly lower portion of their compensation ($272K) based on incentives (12%), according to a comprehensive report on large RIA and MFO compensation practices.
To help firms benchmark their compensation practices and plan for compensation in 2018, Fidelity’s report, “Insights on 2017 Advisor and Staff Compensation at Large RIAs and MFOs,” provides data and insights on 20 positions at both the executive and staff levels based on a survey of 48 participating firms.
Bonuses
Nearly all firms (96%) awarded bonuses for 2016 performance, representing an increase of four percentage points from 2015. Firms with less than $2 billion in AUM were less likely to pay bonuses than their larger counterparts, coming in at 92% for 2016 and 84% for 2015. Fidelity notes that nearly 6 out of 10 large RIA and MFO firms use a formalized plan or a mix of discretionary decision-making and a formalized plan to award annual bonuses (which is considered a best practice) as opposed to a discretionary-only approach.
Salary Increases
The vast majority of firms (92%) awarded salary increases in 2017. The report shows that 35% of participating firms awarded salary increases from 2% to 3.9% for 2017, consistent with the U.S. average increase of 3.1%. However, half of all firms reported salary increases from 4% to 10% or more, outpacing the national average. Fidelity suggests that in a competitive and shrinking labor market, firms will need to keep pace with the industry to attract and retain top talent.
Employment Agreements
The use of employment agreements is a growing trend and generally considered a best practice, according to the study. Yet only about half of all organizations report having employment agreements in place for top positions. The data also shows that the levels for employment agreements are considerably higher across all executive positions for firms with AUM of $2 billion-$5 billion, compared to all other firms.
Employment agreement provisions most prevalent in large RIAs and MFOs include employment arrangements, compensation arrangements and executive benefits, as well as termination and severance provisions, non-compete clauses and confidentiality restrictions.
Other Findings
Other key findings of the survey include:
- The use of long-term incentive plans is prevalent, with nearly 65% of large RIAs and MFOs reporting the use of one more LTI vehicles.
- Operating company equity and phantom equity are the most prominent vehicles used for LTI plans across firms of all sizes, but firms with AUM below $2 billion are more likely to use other incentives.
- Some firms reportedly are not using vesting requirements, which may lessen the effectiveness of LTI plans as a retention tool.
- Nearly one-quarter of firms offering a 401(k) plan do not match contributions, putting them at a disadvantage for attracting talent.
- 52% of firms offer a profit sharing program, with a 3% contribution being the most common among firms.
Practice Makes Perfect
To place the insights from this report into practice, Fidelity suggests that large RIA and MFO firms may want to consider:
- Thoroughly reviewing all positions to assess competitiveness of overall and individual-level compensation and benefit practices.
- Incorporating the use of employment agreements, especially with executive-level positions, to define both employment and termination provisions to mitigate dispute resolution.
- Ensuring that annual salary increases are competitive compared to the U.S. market and other large firms that are outpacing the national average.
- Implementing 401(k) plans with company matching and profit-sharing plans to help with recruitment and retention.
- Incorporating vesting provisions into LTI plans to better serve as a retention tool and protect the firm from payouts related to performance gains occurring after separation from service.
With 48 firms participating in the survey by invitation only, Fidelity notes that the findings represent approximately 9% of the large RIA/MFO market segment and provide individual employee data on 910 individuals. The online survey was conducted from Feb. 28 through Apr. 25, 2017, with compensation data reflecting 2017 base salaries and bonuses paid for 2015 and 2016 performance.
