The state of incentive plans
There’s currently a lot of buzz in the industry about incentive plans at bank programs. With firms grappling with the DoL, the long-term move to fee-based products, continuing economic pressures and changing adviser demographics, program managers are forced to reevaluate the structure and the real impact—both psychological and economic—of their adviser incentive plans.
Historically, the brokerage industry has relied on transaction-based compensation. Sell something, generate a commission, add up the commissions and apply that to a grid to calculate the adviser’s paycheck for the month. Lower producers might receive as little as 20% to 25%; larger producers 40% to 45%. The fundamental problem with this approach, of course, is the pressure it puts on FAs to “encourage” clients to buy or sell something, placing an inherent conflict of interest at the center of the relationship.
I believe the entire industry—not just the bank channel—has almost forgotten that incentive plans are not only the primary way to provide compensation, but must also be motivational. It was just easier to put in a grid and let FAs go to work. But using just monetary rewards as the sole means of motivation misses many other opportunities to spur FAs to greater levels of production, productivity and job satisfaction
These trends are heightened in light of the generational turnover now in full swing. Retiring boomer advisers are being replaced by younger GenX and GenY advisers. And research shows that, while monetary rewards are important to these newer FAs, they’re also looking for things like recognition, a feeling of accomplishment and giving back to their communities.
Indeed, I think we’re just at the beginning of new and unique ways to motivate and compensate FAs. Program managers I’ve spoken with are working on approaches, some for the first time, that would have been very radical just a year or two ago. Forward-thinking PMs will have new ways to prompt specific FA behaviors beyond just generating revenue and earning a paycheck.
Along with commission-based plans, the industry has used non-monetary and lower cost methods to reward and compensate advisers for many years. Perks ranged from titles like “senior” FA or VP Investments, to larger offices, subsidized sales assistants and limited expense accounts. But even as competition for large producers has increased across all channels, program managers have felt pressure to reduce expenses. Consequently, there’s a focus anew on non-monetary approaches to compensation and incentives.
Incentive plans, after all, are just systems to provide performance-based rewards of something of value to the participant.
Mistakenly, many PMs have used the basic compensation grid as their primary FA management tool. They’ve believed that simply telling FAs “produce this, get these dollars” was all the management these highly entrepreneurial sales people needed. While DoL may have been the primary reason to reevaluate incentive plans, it’s now time for them to develop new plans and programs that meet the challenges of the new landscape. Their FAs want incentives that spur competition, recognize them for the achievements and provide them with a feeling of accomplishment for achieving goals, and the satisfaction of just helping people. To a far greater degree than older advisers, these younger FAs are looking for work-life balance. Just using “more money” as the carrot won’t work for them.