Are you struggling to attract the right financial advisors to your practice? Have you run the numbers on what you can offer to exploit the old W2 firms and win more scalable, sustainable business for your own company?
The financial practices that are successfully attracting high-producing financial advisors are offering compensation plans that include payout rates of 50%, 60%, and sometimes 70%+. While this may seem extreme at first, let’s take a look at how some of these practices are enjoying positive contribution margins, with the upside to capture more business through becoming an advisor’s built-in succession plan.The smart practices are shifting the focus from payout rate to contribution margin. Contribution margin is calculated as follows:
Contribution Margin
revenue - payout rate - overhead cost the practice incurs = contribution margin
More on this in a minute. Let’s quickly look at how W2 advisors are currently compensated...
We hear it every year from W2 financial advisors - they wait and wait to hear the company’s compensation plan for the following year, knowing that it will likely decline or be less attractive. But they often don’t think about transitioning practices because the risk and extra work of moving a book of business feels more burdensome than the reward. It’s not worth jumping ship to get a similar payout rate to where they are today.
We’ve heard from these advisors, “Every year it would come down to us having to do more work, to earn the same amount of money.” These advisors want to see bigger percentages to motivate them to make a move.
Based on a 2019 compensation report published by On Wall Street, most reputable W2 firms across the industry have payout rates for $600,000 producers anywhere from the high 30s to high 40s, including deferred comp and other incentive-based opportunities. That’s a pretty big range when it comes down to taking home a paycheck.
However, advisors can earn significantly higher net compensation at places not published on this list...
When thinking about the future landscape of how advisors do business, does it make more or less sense for these advisors to stay put in a W2 position? In a post COVID-19 world, if all the overhead that was once needed to run a practice is no longer necessary, and technology allows practices to run a leaner business, why would an advisor continue giving their firm ~60% of what they earn?
If advisors remain at these big firms, they’re letting the company spend the money for them with a one-size-fits-all approach to deploying this capital, whereas team practices have the ability to design compensation packages to exceed the needs of an advisor currently in a W2 model.
Related Article: 7 Critical Steps When Recruiting Financial Advisors to Your Firm
This simply comes down to advisors wanting more based on what they’re worth, and rightfully so. Many advisors grow out of the firm they start with and look for new opportunities to offer better service and earn more in the process. It shouldn’t come as a surprise that after a few years of doing business at a firm, many advisors realize the level of work they’re doing exceeds the net amount the firm pays them for their effort.
One appealing offer aspect we’re seeing is that team practices offer payout rate locks that eliminate the unpredictability of next year’s compensation plan changes. The former W2 financial advisor now has the stability they desire when it comes to level comp - they know what they’re going to get paid and it doesn't change every year. Their support team is now pooled and they can bring home more to their families. This is immensely valuable to them, not having to anxiously wait for the next year’s comp plan to be announced.
Let’s take a look at a simple example comparing payout rates for a $500k financial advisor joining a team practice:
| Revenue | $500,000 | $500,000 | $500,000 |
| Payout Rate | 35% | 50% | 60% |
| Advisor Comp | $175,000 | $250,000 | $300,000 |
| Expenses (staff support, benefits, tech/software, office space, misc) | $75,000 | $75,000 | $75,000 |
| Advisor Costs | $250,000 | $325,000 | $375,000 |
| Contribution % | 50% | 35% | 25% |
| Profit/Loss | $250,000 | $175,000 | $125,000 |
The idea here is to look beyond Payout Rate, to Contribution Percentage. We want to drive up the contribution percentage by sharing resources and decreasing the business expenses. As you acquire practices or bring on more advisors, you should be able to drive down those costs without having to make cuts to your compensation package for attracting new advisors.
If you’re able to achieve a positive contribution margin, even if it’s in the single digits, you’re making money. On the contrary, if you take too much money in the beginning, you’ll have to spend more money and time recruiting a high producing advisor. You’re also at a higher risk of losing them in the future.
The team practices that concentrate on contribution margin are also focused on the future - and what will happen to a book of business once an advisor is ready to retire.
These practices are covering a higher payout now, to assume control over the book of business in the future when the advisor moves on. At that point, the practice will hire another advisor to take on the book, and continue to grow primarily through acquisition.
We’ve seen hundreds of practices struggle to attract advisors from other firms, and when we talk with them, we notice they lack two simple strategies that would drastically change their recruiting outcomes:
Balancing revenue, payout rate, expenses and contribution margin isn’t easy. But in simplifying your compensation plan and putting an emphasis on whether adding a new financial advisor would result in a positive contribution margin, you’ll set your practice up for sustainable growth through acquisition, and long-term success.
Schedule a no obligation consultation with our “MacGyver of Transitions and Acquisitions” to learn more about what other successful practices have put in place to attract W2 advisors, and to talk through what this may look like for your firm.