Radical Views on Advisor Compensation
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The advisory profession is set up to encourage selfishness and greed. For that to change, compensation must change. These thoughts are radical, so take a seat before you read.
These fee debates are so childish
I have four kids under seven years old. Sometimes you advisors remind me of children the way you taunt, mudsling, and “cancel” each other over this fee debate about who charges commission, who charges too much, who doesn’t disclose it like they should, who’s taking advantage of the client, etc.
Nanny nanny boo boo! You’re a commission-only advisor and I’m a fee-only advisor and I’m better than you!
Just like the mom I am, I’m going to put you all in the time-out chair.
- Fee-only advisors, stop shaming the fee-based and commission-only advisors.
- Fee-based and commission-only advisors, stop shaming the fee-only advisors.
- Flat-fee and hourly advisors, stop shaming everybody else.
I have people who haven’t liked any of my articles in years, and the minute I post something on LinkedIn about “the fiduciary halo” they chime in to the debate.
And the thing about it is that you’re all wrong.
All forms of compensation have conflict.
- Fee-only advisors are biased towards gathering assets.
- Commissions bias you towards selling products.
- Hourly fees prompt you to extend the project length.
- Flat fees motivate you to do the least work possible and still get paid.
It’s not about the fees. It’s about character.
The rules governing any type of compensation can never be far reaching enough to dictate how to act in every situation. That’s why it can’t be about the rules. It can’t be about reciting the fiduciary standard; that’s just rhetoric.
Behavior is guided by principle. There is a higher ethical basis that we, as a profession, are operating from. The advisor must take personal accountability for his or her actions on account of their character, who they are as people. That is the moral compass guiding us.
What’s stopping us?
Six things that need to change
All of this is going to sound naïve, idealistic, and radical. In my experience the more heavily shunned my ideas are, the more innovative and forward thinking they turn out to be.
- Better selection and compensation for new advisors
We must pay new advisors more if we want to change how they behave ethically. When people are living off $2,000 a month as adults, it’s just not possible to put the client’s best interests ahead of their own.
New advisors should be salaried, and it should be a living wage. Or, new advisors should be encouraged to have a part-time job or moonlight while building business, which may take years. We have to get better at knowing when a new advisor is putting ethics on pause to sell an insurance policy and meet this month’s quota. We have to get better at explaining to clients why it says on the ADV that their advisor waits tables at night.
The way it is now, we lose some of the best talent in the startup phase.
- Someone who has a life event during the ramp up period, for example, a woman who had a baby while starting her practice and couldn’t build up enough traction to meet the quota;
- Anyone with a high number of dependents;
- Intelligent, thoughtful people who take their time to find the right clients, market to them correctly, and do the right thing are penalized for taking their time; and
- Honest, hardworking people who came from humble means and don’t have the financial support.
That is who this system is designed to eliminate.
We can’t say that advisors are committed to the clients’ best interests with the disclaimer: unless they’re new advisors, in which case we encourage them to hustle for less than minimum wage, sell everything they can to anyone who trusts them enough to buy it, and hope that one day it all changes.
This is the equivalent of day trading their careers with 500x leverage. Treat new advisors this way – and then how do you expect them to treat their clients?
Management should create and follow a financial plan for their new advisors. We can’t be hypocritical, making new advisors feel like imposters while they go broke trying to become successful. If we are going to stand for financial wholeness, we can’t have it be a condition that comes about only when you’ve “made it.”
- Media commitment to looking beyond the numbers
If you look at any of the awards published by the advisor publications (other than Advisor Perspectives), such as the “top” lists, the advisors getting attention are the ones with the largest social media followings and/or the largest books by asset size.
- What about morality? Where is the list of the industry’s most ethical advisors?
- What about quality of client service?
- What about getting an award for growing smartly?
- What about who has had the most impact on society?
- Who offers the most specialized services?
- Top hourly or flat-fee planners – why isn’t there a list for that?
These accolades were created for advisors to use to brag to their clients and other advisors, and so it influences how we as an industry look at our leaders. Media has to present a different view of leadership and show us some people that are actually worth aspiring to be, not just people who tweet all day about their kids and weightlifting, ponies up the dough, or sells the most variable annuities.
- Redesign of schlocky entry-level programs at wirehouses and insurance companies
It’s a waste of the wirehouse’s time and money to train people who they then wind up firing after three months. It runs up the compliance costs and puts all types of strain on resources. The whole thing is just schlocky.
How can we say our industry is committed to the long term when the wirehouses are churning their own people left and right? Plus, it’s a joke how we all get that “touching base call” from the college buddy who just got a job at an insurance company. You know what comes next – they want to meet for coffee and “catch up.”
You don’t get to be a doctor without some type of screening. Let’s get some higher quality people in here by doing some in-depth testing and then see who gets the job. That means hiring fewer, more intelligent people, hiring more thoughtfully, and investing more in the chosen few.
- Expansion of compensation options
Financial services should adopt the model that so many other industries do, one of multiple revenue streams. Advisors should be encouraged to make money through paid webinars, seminars, speaking engagements, blogging, podcasting, and selling merchandise. This will take the pressure off making the big sale all the time. Less popular compensation models should be encouraged, such as hourly or flat pricing.
- Less fluffy designations
There are so many worthless designations nowadays. Clients can’t tell the difference between one set of letters after a name means versus another. Most of them are meaningless, expensive ornaments.
The CFP® designation should be harder to get and the exam pass rates should be lower. The CFA exam was designed to weed out the people who weren’t skilled enough to pass and as a result it actually means something. The CFP should be the same. The ethics section of the CFA exam was the hardest part, and it taught me what doing the right thing for the client really meant.
Get some real designations that you have to earn, not pay for, and you’ll see advisors adding real value to the client not just being low value, hand holding nannies that have little else to offer their clients other than an emotional pacifier.
- Higher quality discussion of compensation structures
Stay away from “those bad people.” Stay away from “them.”
If you tell your clients that advisors who charge a certain way are bad, it won’t work. Those advisors have their sales pitch against you! And then it just becomes a theoretical, vague debate without the client really understanding what type of fee model is best for them.
Instead of talking about “those other advisors,” talk about specific actions they take? That’s what’s real to the client! Instead talk about scenarios and what the drawbacks and advantages are of the specific recommendation being made?
Sara Grillo, CFA, is a marketing consultant who helps investment management, financial planning, and RIA firms fight the tendency to scatter meaningless clichés on their prospects and bore them as a result. Prior to launching her own firm, she was a financial advisor.