Here is part one of a guest article by Allan Starkie, a partner at Knightsbridge Advisors, about compensation trends in the wealth management industry. His insights reflect the presentation he made earlier this month at the annual American Bankers Association, Wealth Management and Trust Conference.
Starkie specializes in executive recruiting in wealth management, and also provides management consulting and M&A support for clients. Prior to joining Knightsbridge Advisors, he was a partner at the executive search firm Riotto-Jones, where he led CEO and high net worth sales searches.
The views expressed below are those of the author’s, but Family Wealth Report is grateful for the right to publish them, and welcomes reader responses.
“Can a private bank or trust company construct a compensation plan for producers that delivers, and competes with the wirehouses?” That was the question that the American Bankers Association asked me to address at their annual Wealth Management and Trust Conference last month.
As I conducted the research necessary to address this, I was able to confirm some facts about how the wealth management industry has fundamentally changed, and why the wirehouse model has begun to morph into something quite different from its traditional roots.
In developing any compensation strategy, one should avoid concentrating on simply compensation; it is essential to regard compensation in light of the “three Ps”: platform, product and people.
For example, the ideal compensation plan for a business development officer selling a proprietary investment product, grossly out-performing its benchmark, would vary enormously from that of a professional garnering new AuM in a purely open-architecture platform, with strong referrals from commercial lenders and capital markets.
Product changes in the last decade have been moderate. The
industry has settled around the almost predominant use of outside
managers, and the effects of open-architecture have been
translated into most platforms and compensation plans.
Margins have been compressed, due to the cost of outside
managers, and the profile of client-facing professionals has
migrated from the once invaluable alpha-type sales professionals
to more empathetic, credentialed purveyors of holistic,
comprehensive wealth management services.
The greatest changes since the crash have been to the “platform”. Two trends have occurred simultaneously:
· The business climate in wealth management has undergone a structural change (source: Boston Consulting Group, Global Wealth, 2013).
· Private wealth has experienced explosive growth (Capgemini and RBC Wealth Management, World Wealth Report, 2014).
The major changes in the business climate have been directly or indirectly attributable to the crash itself:
- Enormous increase in back-office costs due to regulatory changes;
- Costs in facilitating the integration of corporate cultures and redundant personnel due to forced, post-crash consolidation; and
- Artificially compressed interest rates, forcing increased pressure on the growth of AuM to mitigate the loss of revenues on credit spreads.
It is interesting that the latest BCG report indicates: “because
of regulatory requirements and the subsequent rise in back-office
costs, cost-to-earnings ratios (CIR) have increased by 19 per
cent since 2007…players posted the highest CIR around 80 per
cent.” Naturally, this has had a very negative impact on
compensation in general, and the burden has fallen on the
front-office to subsidize the increased costs of the
Evidence of this was noted by BCG, and they point out that “CIR did not increase commensurately with revenues in 2012, indicating that wealth managers are placing an increased emphasis on cost containment.” And in further testament of the impact being borne by the front-office, BCG concluded:
“Pay and performance were not always fully aligned, but compensation ratios (measured by employee compensation as a percentage of revenues) appeared to be stabilizing at around 40 per cent...the trend is toward rising back-office costs and declining front-office costs…with many managers coping through striving for greater frontline efficiency…many RMs manage larger books…revenue per RM has increased.”
In other words, client-facing professionals are working harder, and when not formulaic, their compensation is not rising as fast as their increased workload. As a result, we must adamantly conclude that formulaic incentive compensation is critical in the current environment.