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RIAs Using Incentive Pay Saw Stronger Long-Term Results

Managing a Practice

In the intensifying war for talent, motivating staff with performance-based incentive compensation can engage employees and impact the quality of talent, as well as a firm’s bottom line, according to Charles Schwab’s 2021 RIA Compensation Report. 

With nearly three-quarters (74%) of firms compensating staff with performance-based incentive pay in 2020, a firm’s compensation strategy, especially incentives, can help drive overall firm goals when aligned with the firm’s strategic plan. In fact, the percentage change in the median five-year compound annual growth rates (CAGR) for all firms that reported using performance-based incentive pay, as compared with firms that reported not using such pay, shows that: 

  • AUM was 25% greater;
  • revenue was 54% greater;
  • clients were 134% greater; and 
  • net asset flows were 52% greater. 

Across the study, 26% of firms tied compensation to revenue generation in 2020. And at the median firm, one in three roles tied compensation to revenue generation in 2020. 

Equity ownership also is an important part of compensation, as it helps to retain talent and support firms’ succession strategies. According to Schwab, at the median firm, roughly one in three staff are equity owners and overall equity ownership is diversified generationally, with staff under 50 holding about a third of larger equity positions.

“As RIAs continue to grow and deliver an exceptional experience to more clients, firms recognize talent is the differentiator of the future. In this tight labor market, firms can ensure they have a compelling compensation strategy and a well-defined employee value proposition to help attract and retain top talent, drive business performance, increase diversity, and support their staff as the workplace evolves,” says Lisa Salvi, Managing Director of Business Consulting & Education with Schwab Advisor Services. 

This year’s report, which is an addendum to Schwab’s 2021 RIA Benchmarking study, focuses on three key themes: hiring to meet firm growth and client needs; leveraging rewards beyond base salary to drive performance; and offering more than compensation to attract and retain top talent.

The compensation portion of the RIA study included 1,036 advisory firms, representing over three-quarters of those who participated overall (1,340 firms), with data collected from January to March 2021 on nearly 13,000 employees across 27 roles typically found at RIAs.

Talent and Compensation

As the largest investment for firms, total compensation has ticked up each year across the RIA industry, with compensation costs comprising 71% of a firm’s expenses in 2020.  

Schwab found that total cash compensation has increased 14.5% (median) since 2016 for the 27 roles in the compensation portion of the study (total cash compensation includes owner profit distributions). 

Below are some of the changes in median total cash compensation from 2016 to 2020 among client service teams:

  • Senior Client Account/Relationship Manager is up 20% to $238,000;
  • Client Account/Relationship Manager is up 15% to $107,000;
  • Client Service Associate is up 13% to $65,000;
  • Investment/Portfolio Manager is up 7% to $177,000; 
  • Research Analyst is up 12% to $95,000; and 
  • Operations Director/Manager is up 18% to $110,000. 

In addition, nearly 80% of firms reported that they planned to hire in 2021. Schwab notes that if current growth rates continue, the median firm will need to hire six new roles over the next five years, without accounting for employee attrition/turnover. 

Generally, advisors add a new role for every $325,000 in revenue. As firms grow, they typically add dedicated client service teams, specialized roles and executive management positions, the report notes.  

Beyond Compensation 

Beyond offering a compelling compensation strategy, having an employee value proposition is essential to attract and retain talent, along with providing a variety of benefits. According to the study, traditional benefits like health and dental insurance are typically considered “table stakes,” while nontraditional benefits can be used to directly impact employee satisfaction, support development and incentivize staff with long-term opportunities.  

Nontraditional benefits include: 

  • workplace flexibility to support work-life balance, which in today’s environment both prospective and current employees are seeking; and 
  • career path opportunities to support staff development, improve engagement and build bench strength. 

Internal promotion and investing in staff also help employees feel connected and appreciated. According to the study, the median firm with $250 million or more in AUM spent over $1,700 per professional on training, education, and professional dues.

Fostering inclusive and equitable employee experiences can also optimize a firm’s talent pipeline, Schwab further emphasizes. Of the survey responses received, 47% of the roles were filled by women and 53% were filled by men.