In the last few years, the wealth management industry’s approach to front office compensation has undergone a visible shift – from a narrow focus on financial performance to including qualitative aspects of what it means to be an exemplary adviser. The shift is driven by myriad factors – from the changing regulatory landscape to evolving adviser demographics and shifting customer demands.
McLagan recently surveyed 18 UK wealth firms on their short-term and long-term incentive plans to better understand this evolution. Given that the industry is yet to see any dramatic improvements in performance, how effective are these changes and what do firms need to do differently?
Formulaic commission-based schemes are popular with revenue-generating teams. They provide clarity in an otherwise complex world and are thus effective at aligning employee motivations and behaviour to achievement of specific financial targets. However, poorly calibrated and unrealistic goals only encourage advisers to cut corners in a bid to achieve performance targets and associated bonus pay. It is therefore critical for financial and outcome metrics to be based on accurate data.
Consequently, wealth managers are realising that incentive plans must reflect more than just shareholders’ needs to include clients, regulators and even colleagues. This has led to a shift to use a broader set of metrics, often in a balanced scorecard approach, especially for larger wealth firms.
Balanced scorecards include a combination of financial and qualitative metrics. These are assigned different weightings based on their value and importance to the firm. A balanced scorecard retains some formulaic elements – such as revenues, net new assets and other financial metrics – as well as linking non-financial metrics like compliance, company values and client experience (CX). Often the overall scheme is wrapped, which allows full discretion over the final amount paid.
In the US, for example, to make frontline staff efficient and deliver a higher level of advice to clients, Morgan Stanley is investing heavily in new technology. This includes tax optimisation software, a goals-based financial planning platform, an internal recommendation engine to guide advisers’ decisions, as well as BlackRock’s Aladdin, an investment risk analysis tool. To encourage faster adoption of these tools, it announced that from Spring 2019 it will be linking its adviser compensation strategy to each individual’s propensity to use these tools.
Unintended consequences
While technology platform usage is consistent with a focus on client outcomes – it too is not without its pitfalls. Using a financial planning platform, for example, can become a tick-box exercise for advisers wanting to hit their target and result in poorer planning for clients.
Introducing client satisfaction metrics into incentive plans is even more fraught with risks. While it is beneficial to signal to advisers the importance of balancing financial results with client outcomes, including a client satisfaction metric can similarly lead to unintended consequences.
For example, it can result in advisers spending too long on clients with smaller accounts, providing little opportunity to elevate satisfaction scores and pay, and reducing productivity. It can also encourage advisers to press clients for positive feedback scores, undermining the CX process.
Even getting robust enough adviser level data, to base pay decisions on, can be operationally challenging. A broad client satisfaction metric provides advisers with little actionable feedback unless it is supplemented with reliable data on how client satisfaction is correlated with share of wallet, and insight on which specific CX moments are most critical to get right so clients bring more assets to the firm.
McLagan analytics has found that certain components of client experience have a disproportionate impact on share of wallet and the critical client experience moments are where firms and advisers should focus. Understanding the relationship between these moments, adviser performance and remuneration can help firms improve growth and client satisfaction at the same time.
While designing a well-functioning incentive scheme remains an immensely challenging process, striking the right balance between multiple quantitative and qualitative metrics will ensure firms remain competitive, create desired outcomes and are in line with regulatory principles. As is often with such things, the balance is tricky to achieve and will depend on a host of business requirements, including the firm’s unique culture, operating model and specific organisational functions.
Elizabeth Beh is a consultant and Leigh Cotterill senior manager at financial benchmarking and compensation consultancy McLagan
