Employee Retention Guide for Advisors – 2024 ed.

Strategies to Fortify Employee Retention and Minimize Advisor Turnover

In the fast-paced and competitive realm of financial services, the role of employee retention strategies has never been more critical for registered investment advisors. Independent advisors understand that retaining a skilled and dedicated team is as essential as acquiring new clients and expanding services. This article explores the multifaceted world of employee retention, providing insights into what the most effective advisory firms are doing today.

The Paramount Importance of Employee Retention

Retaining talent is a key element to scaling a business, sustaining growth, and maintaining a steadfast commitment to clients. The financial services sector faces not only industry-wide competition but also a scarcity of talent. Given the substantial investments in training financial advisors, employee retention emerges as a pivotal factor for the sustained success of financial services firms.

Establishing the Pillars of Success

A robust employee retention strategy begins with a foundation rooted in three foundational steps:

1. well-crafted employment agreements;
2. intentionally designed compensation plans; and
3. a career path to partnership.

This foundation should seamlessly align with the overarching business goals of your advisory firm, fostering team retention through clearly defined roles, comprehensive job descriptions, structured pay bands, and thoughtful equity/profit-sharing strategies (reserved for the most elite and impactful team members).

Defining Roles

Clearly delineating positions within the firm, from your operations and administrative team members to your C-suite and everything in between, lays the groundwork for an effective employee retention strategy. Outlining the various roles on your team, even if many of the roles are covered partially by the same person until the business grows and can justify narrowing people’s scope, is critical to make sure both you and your team understand the team’s needs in advance. Recruiting is something firms should never stop doing, and having a clear understanding of the next hire and roles needed can ensure strategic hires are accretive and done proactively.

Crafting Job Descriptions

Each position within your firm should come with detailed job descriptions that outline roles, responsibilities, expectations, and required skills. It is also important to ensure that the job descriptions are continually refined. As the firm grows, job requirements will gradually narrow, allowing team members to specialize and gain efficiencies. The narrower job requirements generally also make it progressively easier to find talent to fill such roles, as opposed to hiring a generalist that has skills across multiple disciplines.

Formulating an Equity/Profit-Sharing Strategy

There’s an old saying, “No one washes a rental car.” The point of the saying is that behaviors change when there is a sense of ownership. This is directly applicable to the professionals on a team. When they feel “invested,” they tend to approach the business differently. To foster a sense of ownership and create greater alignment with your employees, it is worth considering ways to give them a sense of ownership.

➡️ Free Download: Financial Advisor’s HR Toolkit

Compensation Plan Design – The B.B.P. Formula

Historically, advisory firms have paid their administrative/operations staff hourly or a salary. Team members responsible for client service or business development were paid a percentage of the gross revenue. While this legacy compensation model remains prominent in the industry, its usage is declining and being replaced by a more scalable compensation model that provides greater security to younger advisors joining the team, fosters greater enterprise value, and promotes teaming.

The first step in getting away from a legacy compensation model and creating something that will help foster teaming, is more narrowly defining job roles and tailoring the compensation to incent the needed behaviors/outcomes for such roles.

Most firms have struggled to find/recruit advisors to join their team that can find clients and service them. This is largely because providing excellent client service and doing business development require unique skill sets. Those that possess both skills are generally good at both, but not great at either. But with time and latitude, they will generally gravitate towards and excel in one area. Those who are mediocre at both service/operations and prospecting will have a place in early-stage growing teams, but the firm often outgrows these generalists as the firm achieves scale. And on the occasion the firm finds someone who is great at both – these team members that often make poor employees long-term, as most eventually leave to start their own practices.

To begin to narrow the skills and requirements for roles, an effective high-level way to group professional staff for the purposes of compensation plan design is identifying the “Farmers” and the “Hunters” on the team. Most growing firms will have their professionals in a hybrid capacity, but again, most of these professionals are only truly great at one of these two areas. The goal is to narrow the work for each professional to the thing they are best at in an effort to maximize their potential and drive efficiency/effectiveness.

Farmers

Farmers are the service professionals on the team, taking care of clients, managing the investments, handling operations, etc. Their primary function is to ensure the firm retains clients.

Farmers will have a base salary comprising roughly 80-90% of their total compensation. Farmers who service clients are often paid a salary that adjusts annually based on the number of clients and/or assets under management.

As the amount of clients/AUM increases, through the assignment of more clients to service, referrals from existing clients, additions to accounts, or appreciation of the assets, the salary will be adjusted according to a predetermined schedule that is calibrated for the location and qualifications of the individual.

They will often be eligible for bonuses based on new assets from existing clients or new referrals from existing clients. The final component is the “profit” element – which is designed to get them focused on the overall health and performance of the company.

There are a variety of ways to structure this, but most farmers are eligible for a profit-sharing plan that pays a bonus at the end of the year based on firm profitability (often then vested and paid out over a number of years). The highest achievers may also be invited to participate in a phantom equity plan that shares a stake in the appreciated value, or actual equity in the firm for those that meet some predefined criteria.

Hunters

Hunters are the team members that are focused on business development. This includes sourcing clients, nurturing centers of influence, and generally working to support the firm’s marketing efforts, converting leads into clients. While they may also possess skills to service clients once onboard, their highest and best use of time is client acquisition.

Hunters will have a reasonable base salary that will comprise roughly 60% of their total compensation, assuming they hit their client acquisition goals. Hunters will then receive a percentage of first-year revenue generated by the firm from new clients sourced. The final component is the “profit” element – which is designed to get them focused on the overall health and performance of the company.

There are a variety of ways to structure this, including a profit-sharing plan that pays a bonus at the end of the year based on firm profitability (often then vested and paid out over a number of years), a phantom equity plan that shares a stake in the appreciated value, or actual equity in the firm for those that meet some predefined criteria.

Using the Farmer and Hunter lens, the B.B.P. formula can be used to tailor a compensation plan that consists of a base salary, bonus, and profits for each role, weighted accordingly based on the desired behaviors and outcomes sought. Table 1 shows how the B.B.P. model is generally applied to each role.

Also worth considering is that financial compensation may not be the sole motivator for every employee. While money is undoubtedly crucial, current trends suggest that a holistic approach, including things like a hybrid work environment or the ability to work remotely, is vital for employee retention or sourcing the best talent.

Evaluate factors such as work schedule flexibility, flexible PTO policies such as unlimited PTO, incentives for professional growth, and special occasion days off (birthdays, work anniversaries). Even little things, such as providing recognition or awards for major milestones such as 5/10/20 year work anniversaries, go a long way towards fostering a healthy and happy workforce that feels appreciated. If any of these elements are lacking, it is worth committing the time to reassess why an employee would choose to stay with your company in the long term.

Beyond the foundational elements and onboarding best practices, SRG’s proprietary Base, Bonus, Profits (B.B.P.) formula presents an innovative approach to retaining financial advisors. This formula transcends traditional revenue-based compensation models that drive silo’d behaviors and instead supports a true teaming model for growing enterprises.

➡️ Extended Reading: Five Best Practices to Create An Effective Compensation Plan

Write it Down

As the firm grows, it becomes increasingly important to create a standard set of employment agreements, independent contractor agreements, and offer letter templates that can be consistently leveraged once perfected. The offer letter and employment agreement are critical to ensuring that firms document the expectations for everyone as well as including appropriate protections for the firm. The agreement should detail the parties, role definition and duties, compensation, ownership of clients, confidentiality/trade secrets, and other firm protections and details.

One of the key elements to include and get right is the restrictive covenants. These covenants can include clauses such as a non-compete, non-solicit, no-service, non-disparagement, and/or buy-out. The key is to create terms in the agreement that will be enforceable and that won’t unnecessarily deter future hires. It is also important for FINRA registered persons to be conscious of Rule 2140, and to structure the agreements accordingly. Done correctly, it is possible to create an agreement that will be enforceable, that a new hire or existing team member will happily sign, and that will provide the necessary protections for the firm.

Leveraging Equity for Long-Term Retention

To fortify retention strategies, it is important to ensure there is a path to becoming a partner and predetermined criteria that will be used to evaluate team members relative to the firm’s needs. Equity has emerged as a key differentiator for attracting and retaining talent. Equity as a tool can be used in a variety of ways, to drive a multitude of outcomes from simply retaining key staff to helping Gen1 founder with their exit planning.

Over the last decade, it has become increasingly common for firms of all sizes to look at expanding the pool of owners. Equity sharing can involve real equity or phantom equity. Equity in the firm may be granted to acknowledge someone’s sweat equity, or it may be sold. It may have voting rights or just financial rights. The path to equity will differ for each firm, but the goal in sharing equity is to create greater alignment and avoid spending years training and mentoring what ultimately turns into a capable competitor. For now, creating career paths and roles that could lead to ownership, and defining the qualifications to be considered for ownership is a unique competitive advantage that can help firms win in the war for talent.

➡️ Extended Reading: How Does Equity Compensation Work?

Next Steps to Implement Change

Moving forward in the journey to enhance employee satisfaction, promote professional growth, and reduce turnover involves three crucial steps:

1. Valuation

The first step is to begin regularly tracking the value of the firm. This will support eventual equity sharing, regardless of the format. It will also assist the current owner(s) in understanding the key drivers and detractors of value so that value can be optimized.

2. Entity Structure

Forming an entity has a variety of benefits that support equity sharing and protecting the owners of the firm. Done correctly, an entity will reduce the liability of the owners, allow for easy sharing of equity in something that is divisible (as opposed to being a sole practitioner), and potentially reduce the owners’ tax liability.

3. Formalizing Your Employment Resources

Invest in your HR resources – work with SRG to create a contemporary compensation plan that aligns with the firm’s long-term goals and prepare employment agreements designed for your firm and the industry.

4. Equity Sharing

Foster a sense of ownership among employees through equity sharing. When employees feel a genuine sense of ownership, they are more likely to be engaged, committed, and willing to invest their efforts in the company’s long-term growth.

When implemented effectively, these strategic steps can significantly contribute to your firm’s success and longevity and allow you to thrive even with the increased competition, pressure on fees, talent shortage, and turbulent markets. Should you encounter challenges or require further assistance, SRG stands ready to support you. Specializing in helping independent advisors go beyond traditional Human Resources (HR), SRG ensures smooth operations and enhanced employee retention through effective contract implementation.

As the financial services landscape evolves, staying ahead in employee retention strategies becomes a continuous journey. By embracing the principles outlined in this guide, financial advisors can navigate the complexities of talent retention and ensure a robust and resilient foundation.