The grids are alright

The last few years have been rife with turmoil and uncertainty. Steve Galimi rhymes off all the headwinds, including the pandemic, unpredictable markets and concerns about a potential recession looming around the corner.

But the managing director and head of strategy with National Bank Financial – Wealth Management said the way advisors get paid has emerged unscathed. Or, to put it another way, the grids are alright.

“We’ve seen grids being relatively stable the last two to three years,” he said. “We haven’t seen major changes in the industry.”

Few advisors have succumbed to the Great Resignation, which has seen employee turnover skyrocket in other sectors, Galimi said. He has seen some churn as employees approach retirement age, but there has been no mass exodus. Which also means there hasn’t been pressure on compensation packages.

“They have longevity in their role, they’re solid in their job and they’re not resigning,” he said.

While the grid hasn’t been overhauled, that doesn’t mean firms are standing pat on compensation. John Cucchiella, president of Toronto-based SMEx Advisory, said he’s seeing variable pay baked into packages more frequently, especially with the bank-owned firms.

“Most of the firms have gotten crafty,” he said.

Some of the behaviours being rewarded include having a clean compliance record and providing holistic services to clients.

“Firms will incorporate a client experience or a client satisfaction component,” said Cucchiella. “Most of them will have a net new asset growth component to it.”

If the advisor hits the targets, there’s potential to earn another 5% to 7%, he said. Rather than paying that out in cash, it’s often given in the form of restricted stock units.

“It’ll be a three-year lockdown on those things,” Cucchiella said. “They’re deferring — you get to earn it, but you’ll defer it.”

The model is attractive to firms because it’s an incentive that can drive behaviour but also won’t break the bank: only about 10% to 20% of advisors will earn it, while everyone else sits on the regular grid, he said.

Galimi has also seen a significant evolution over the past five years with variable compensation.

“Standard straight payouts are going down a bit, being replaced with specific targets that are linked to each firm’s strategic objectives,” he said. “That’s kind of innovating in the sense that we haven’t seen these types of bonuses there for 20 years. It’s fairly recent.”

Cucchiella said advisors can often make more money if they’re willing to be entrepreneurs and take on an independent role.

“If you’ve got a great practice, and you’re willing to take on the headaches of all the other things that are involved in running a business — HR, payroll, tech, that kind of stuff — going to an independent model or on your own is a great option,” he said.

That’s because it puts you in control of managing expenses and investing where you think the biggest payoff will be, Cucchiella said.

“When you break down the math, if you do it right, you’re going to likely end up further ahead than where you were on a traditional grid,” he said.

While predicting the exact bump is difficult because it depends on how much the advisor controls overhead expenses, an increase could amount to around 15 percentage points. An advisor who was at 50%–55%, for example, could see that jump to 62%–68%, Cucchiella said.

And since that’s percentages, the more the advisor produces, the higher that difference will be in actual dollars.

“A 7%–8% lift on a $4 million–$5 million producer is quite significant,” he said.

Back in 2016, Cucchiella told Advisor’s Edge that payouts have nowhere to go but down. Looking back, he feels that was an accurate prediction.

When posed the same question today, he sees a lot of pressure on compensation because firms are investing heavily in technology. If revenue growth doesn’t keep pace, or the expenses aren’t offset as expected, there’s only one way to reduce costs.

“They’re going to have cut somewhere,” said Cucchiella. “Do they like to cut the grid? No, but as long as there’s continued massive investment in the platform itself, then grids are always vulnerable to being cut.”

Galimi said there’s a lot for advisors to consider when looking at compensation. When it comes to attracting advisors with high-net-worth clients, for example, the focus isn’t so much on the grid but on the support firms can offer to help these professionals thrive.

That’s because, 20 years ago, the conversations with clients would have focused almost exclusively on investments. Now their umbrella extends over financial, tax and estate planning plus insurance. Surrounding advisors with the support and expertise they need helps them perform better and differentiate themselves, Galimi said.

He’s also a big believer in the organization’s culture and the role it plays in an advisor’s success.

“People want to feel great at work, they want to feel appreciated, they want to feel like their work is important for the firm,” he said. “So it’s not the only reason, obviously, but it’s part of the decision-making process we see.”