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Top 10 Considerations When Creating A Bonus Plan

Carla McCabe
Feb 28, 2017

The annual Financial Advisor Satisfaction Survey, conducted by noted market research firm J.D. Powers, has repeatedly found that compensation was at or near the top of key drivers of satisfaction. Financial advisors are consummate professionals, and they work hard to grow their base of knowledge, research the offerings of the firm, and serve their clients to the best of their abilities.

As a result, those financial advisors want to be compensated fairly, and they deserve to be paid for the hard work they do. One of the most common ways the owners of financial planning and wealth management firms compensate their advisors is through bonuses, but the structure of that bonus plan is at least as important as its implementation.

If your practice already has a bonus plan in place for its advisors, you owe it to yourself to analyze that current bonus structure and make sure it is still sufficient for your firm and your client base. There have been enormous changes in the industry over the years, and the bonus program that worked perfectly a decade ago may no longer be right for your firm or your base of financial advisors.

Having an outside consultant look at the structure of your current bonus program can help you build a program that will be more beneficial to your firm and your clients. Services like Truelytics specialize in this kind of analysis, helping the owners of financial planning and wealth management practices run their firms more efficiently and cost effectively.

If you are implementing a new bonus program for the financial advisors at your firm or revising the one you already have, it is important to look at the key considerations. Here are 10 essential things to think about when creating or revising a bonus plan for the financial advisors at your firm.

#1. Regulatory Compliance

Regulatory compliance is an essential consideration for any financial advisor bonus program. There have been some notable changes in this regard, and violating compensation policies and conflict of interest guidelines, even inadvertently, could result in severe administrative and financial penalties for your firm.

Before you implement any new bonus program for the financial advisors at your firm or make changes to an existing plan, it is important to review current financial industry regulations. Avoiding conflicts of interest and protecting the needs of clients is essential, and you need to make sure your advisor bonus program does not create competing interests.

#2. Competitiveness in the Marketplace

You want the bonus program you create for your advisors to be competitive with industry peers. Conducting a market survey of similar firms, or hiring an outside firm to do the research, is an essential first step when building a new bonus program or revising an existing one.

Competitiveness with your peers is an essential element of an effective bonus program. A bonus program that is too rich will attract advisors to your firm, but it could eat into your profitability. A bonus program that is less than others offer could result in a significant loss of talent and hurt your firm in the long term.

#3. The Nature of Your Offerings

Some financial products come with impressive bonus structures, while others are much less generous. That means the nature of your firm's offerings could directly impact the generosity and the design of your bonus program.

It pays to analyze your current offerings when designing a new advisor bonus program or redesigning an existing one. You may be able to make your bonus program better by changing the types of products your firm offers, but you will need to balance those considerations with performance and other factors that could impact your client base.

#4. Transparency

Your financial advisors will want to know where they stand, and how they can qualify for the bonus program you plan to implement. Transparency is an essential element of any bonus program, so make sure you communicate effectively with your advisors both before the implementation of the incentives and after.

It is also important to bring new advisors up to speed quickly, letting them know what is expected and how they can earn the bonuses you have outlined. Advisors who feel they are valued and included enjoy higher levels of job satisfaction, and that is good news for the practice owners who employ them.

#5. Ties to Client Satisfaction

At the end of the day, it is the satisfaction of your clients that matters most, and any advisor bonus program should directly address client satisfaction. It is the growth of AUM that will boost your profits over time, and without satisfied clients that AUM growth simply cannot happen.

Tying the bonus program for your advisors to the satisfaction of their clients is a great way to boost the performance of your firm and build the value of your firm over the long run. You want your advisors to be justly compensated, but their compensation should derive from the service they provide their clients, not just the number of financial products they can sell.

#6. Alignment with Firm Profitability

In a perfect world, there would be plenty of money for advisor bonuses, and you would not have to worry about things like budgets or competing priorities. In the real world, the bonuses your practice is able to offer should be tied to the overall profitability of the firm.

Once again, transparency and communication will be very important. If your firm is having a tough year, you need to share that information. You do not want your best advisors to be blindsided by a small bonus or no bonus at all.

#7. Set Realistic Goals

Connecting the awarding of advisor bonuses to the goals you set for each individual is a smart thing to do, but it is important to make those goals realistic. If your firm currently has 100 clients, asking each advisor to onboard 10 clients a year is probably not a realistic goal. If your firm is much larger, that 10 clients per year goal may be infinitely reasonable.

Setting realistic goals for each advisor in your firm is a great way to use the bonus program to your advantage. Think about what you want your advisor community to achieve in the common months and years, then tailor your bonus program to help you meet those goals.

#8. Consider Deferred Compensation

Current compensation is an important driver of advisor satisfaction, but so is deferred compensation like contributions to a pension or other retirement plan. Building those kinds of deferred compensation strategies into your bonus program can be good for you and your advisors, and it should be part of the overall structure.

Awarding part of your advisor bonuses in the form of deferred compensation could potentially lower the tax bills for your employers, further boosting the value of the bonuses they receive. If you need help designing this kind of bonus program, you should consult a tax expert or work with your CPA.

#9. Growth of Assets Under Management

It is the growth in AUM that will help your firm grow and thrive in the future, and that AUM growth should be part of any bonus program you create for your advisors. Everyone at the practice, from individual advisors to the sales team, should participate in the search for new clients, and those individuals should be rewarded when the AUM goals you set for the year have been met.

Again, setting realistic goals will be very important. Setting AUM growth goals that are too high could cause your advisors, and your support staff, to become discouraged, while goals that are too easy to reach could create complacency and limit future growth prospects for the firm.

#10. A Moving Target

There is no such thing as a perfect advisor bonus program, and even the best bonus programs can use some tweaking from time to time. Instead of thinking of your advisor bonus program as a finished product, consider it a moving target - and act accordingly.

Even if you think you have it all figured out, it is important to evaluate the performance of your advisor bonus program on at least a yearly basis. Is the bonus program helping your firm achieve its goals? Is your AUM increasing as it should be? Is the firm profitable? Taking all of these things into consideration is the best way to ensure your advisor bonus program is still the best fit for your financial planning or wealth management practice.

You May Also Be Interested In Reading: Determining Equity Compensation for Key Stakeholders

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