New Horizons Sees 18% AUM Growth After Team Compensation Overhaul

New Horizons Sees 18% AUM Growth After Team Compensation Overhaul

Executive Summary

New Horizons Financial, a rapidly growing RIA, struggled to maintain a collaborative environment due to a compensation structure that prioritized individual performance over firm-wide goals. By implementing a revised compensation model that incorporated team-based bonuses tied to overall AUM growth and client retention, New Horizons fostered a stronger sense of collective responsibility. This strategic shift resulted in an impressive 18% AUM increase within one year and a significant boost in employee satisfaction, demonstrating the power of aligning incentives for firm success.

The Challenge

New Horizons Financial was experiencing growing pains. The firm, managing approximately $275 million in Assets Under Management (AUM), had built a strong reputation for personalized financial planning. However, their compensation structure, heavily weighted towards individual performance bonuses based on individual client acquisition and portfolio performance, was inadvertently creating internal competition and hindering collaborative efforts.

The original compensation model allocated 70% of an advisor’s bonus based on their individual book of business performance and new client acquisition, with the remaining 30% tied to overall firm profitability. While this structure initially drove individual productivity, it soon revealed several critical flaws:

• Siloed Client Relationships: Advisors were hesitant to share expertise or introduce clients to colleagues with specialized knowledge, fearing it would negatively impact their individual bonus. For example, a client with complex estate planning needs might not be referred to the in-house estate planning specialist if the primary advisor felt it would dilute their own AUM contribution.
• Missed Opportunities for Cross-Selling: The focus on individual performance discouraged advisors from cross-selling additional services, even when they were clearly beneficial for the client. A client with a substantial investment portfolio might not be introduced to New Horizons' tax planning services, potentially leaving money on the table for both the client and the firm. New Horizons estimated that they were missing out on approximately $1.5 million in potential revenue annually due to this lack of cross-selling.
• Disproportionate Workload: Some advisors were significantly busier than others, yet the compensation structure didn't adequately account for the time and effort spent supporting firm-wide initiatives or mentoring junior staff. This created resentment and a feeling of inequity among the team. Several advisors voiced concerns that their time was better spent pursuing individual clients than assisting with firm-wide client onboarding or participating in educational seminars, even though these activities benefited the entire firm.
• Client Retention Vulnerability: While new client acquisition was rewarded handsomely, client retention was not explicitly incentivized. This created a potential vulnerability, as advisors might prioritize acquiring new assets over diligently servicing existing clients, increasing the risk of client attrition. New Horizons saw a slight increase in client attrition (from 3% to 4.5% annually) that they attributed to this neglect of existing client relationships.

Rebecca Hayes, the firm's Managing Partner, recognized that this individualistic approach was unsustainable for long-term growth and a collaborative culture. She needed to create a compensation model that incentivized teamwork, rewarded client retention, and aligned individual goals with the overall success of New Horizons Financial.

The Approach

Rebecca initiated a comprehensive review of the firm's compensation structure, involving input from all advisors and support staff. She adopted a multi-pronged approach:

1. Data Analysis: Rebecca analyzed historical data on AUM growth, client retention rates, revenue generation by service line, and employee satisfaction surveys. This provided a clear picture of the existing performance landscape and identified areas for improvement. This analysis cost the firm $3,000 but produced invaluable insights.

2. Benchmarking: She researched compensation models used by other successful RIAs of similar size and scope. This benchmarking exercise revealed best practices for incentivizing teamwork and rewarding client retention.

3. Team Workshops: Rebecca facilitated a series of workshops with advisors and support staff to gather feedback on the existing compensation structure and solicit ideas for improvement. These workshops revealed widespread dissatisfaction with the individualistic approach and a strong desire for a more collaborative and equitable system.

4. Model Development: Based on the data analysis, benchmarking research, and team feedback, Rebecca developed a new compensation model that incorporated the following key elements:

   • Reduced Emphasis on Individual Performance: The percentage of the bonus tied to individual performance was reduced from 70% to 50%.
   • Introduction of Team-Based Bonuses: A new team-based bonus component was introduced, accounting for 30% of the total bonus. This bonus was tied to overall firm AUM growth and client retention rates.
   • Client Retention Incentive: 10% of the bonus would be based on the advisor's individual client retention rate. The benchmark was a 95% retention rate to earn the full 10%.
   • Firm Contribution Component: The remaining 10% of the bonus was allocated to recognizing contributions to firm-wide initiatives, such as mentoring junior staff, participating in marketing campaigns, or leading internal training sessions.

5. Communication and Training: Rebecca presented the new compensation model to the entire team, explaining the rationale behind the changes and addressing any concerns. She also provided training on how to effectively collaborate and cross-sell services.

The strategic thinking behind this approach was to shift the focus from individual achievement to collective success. By tying a significant portion of the bonus to overall AUM growth and client retention, Rebecca aimed to create a shared sense of ownership and responsibility for the firm's performance.

Technical Implementation

The implementation of the new compensation model required careful attention to detail and the development of a robust tracking and reporting system. Rebecca leveraged Google Sheets to create a custom compensation spreadsheet.

1. Data Integration: The spreadsheet was linked to the firm's CRM system and portfolio management software to automatically pull data on AUM, client retention rates, and revenue generation.

2. Formula Development: Rebecca developed complex formulas within Google Sheets to automatically calculate bonuses based on the defined parameters. These formulas incorporated the following factors:

   • Overall AUM Growth: The team-based bonus was calculated based on a tiered system. For example, if the firm's AUM grew by 10-15%, the team bonus pool would be equivalent to 5% of the AUM growth amount above 10%. If AUM grew by 15-20%, the bonus pool would be equivalent to 7.5% of the AUM growth amount above 15%, and so on.
   • Client Retention Rate: The client retention bonus was calculated based on a target retention rate of 95%. Advisors exceeding this target would receive the full 10% allocation, while those falling below would receive a pro-rated bonus. The formula used was: (Advisor's Retention Rate / 0.95) * 0.10 * Total Bonus Allocation.
   • Firm Contribution Score: Advisors were evaluated on their contributions to firm-wide initiatives based on a qualitative assessment by the management team. This assessment considered factors such as mentoring hours, participation in marketing activities, and leadership of internal training programs. The score was then translated into a bonus amount using a pre-defined scale.

3. Transparency and Accessibility: The compensation spreadsheet was made accessible to all advisors, allowing them to track their performance and understand how their bonus was being calculated.

4. Regular Reporting: Rebecca generated monthly reports on AUM growth, client retention rates, and revenue generation to monitor the effectiveness of the new compensation model and identify any areas for further improvement.

5. Scenario Planning: The Google Sheet was designed to facilitate scenario planning. Rebecca could simulate the impact of different AUM growth scenarios or client retention rates on the bonus pool, allowing her to adjust the model as needed to ensure its effectiveness.

The spreadsheet utilized financial terms and methodologies such as:

• AUM Growth Rate Calculation: ((Ending AUM - Beginning AUM) / Beginning AUM) * 100
• Client Retention Rate Calculation: (Number of Clients at Year-End / Number of Clients at Beginning of Year) * 100

The system provided a transparent and data-driven approach to compensation, fostering trust and accountability within the team.

Results & ROI

The implementation of the new compensation model yielded significant positive results:

• AUM Growth: New Horizons Financial experienced an 18% increase in AUM within the first year, growing from $275 million to $324.5 million. This surpassed the firm's initial goal of 12% growth.
• Employee Satisfaction: Employee satisfaction scores, as measured by an anonymous internal survey, increased by 20%. This indicates a significant improvement in employee morale and a stronger sense of team cohesion.
• Client Retention: The client retention rate improved from 95.5% to 97%, demonstrating the effectiveness of the client retention incentive. This resulted in a reduction in client attrition and increased long-term revenue stability.
• Increased Cross-Selling: The cross-selling of additional services increased by 30%, leading to a significant boost in revenue. Clients were now more frequently leveraging the firm's tax planning, estate planning, and insurance services, generating additional revenue streams. Estimated additional revenue generated from cross-selling was $450,000.
• Reduced Internal Competition: Anecdotal evidence suggests a significant reduction in internal competition, with advisors more willing to collaborate and share expertise. The firm observed a noticeable increase in team-based problem-solving and knowledge sharing.

The ROI of the new compensation model was substantial. The 18% AUM growth translated into approximately $49.5 million in new assets under management, generating additional management fees for the firm. The increased client retention rate and cross-selling activity further contributed to revenue growth and profitability.

Key Takeaways

Here are several actionable insights for other RIAs considering a compensation overhaul:

1. Align Incentives with Firm Goals: Ensure that your compensation structure incentivizes behaviors that directly contribute to the overall success of the firm. Don't unintentionally reward individual achievement at the expense of teamwork and collaboration.
2. Involve Your Team in the Process: Solicit feedback from advisors and support staff when designing a new compensation model. Their insights and perspectives are invaluable in creating a system that is both fair and effective.
3. Track Key Metrics and Monitor Performance: Implement a robust tracking and reporting system to monitor the effectiveness of your compensation model and identify any areas for improvement. Regularly review the data and make adjustments as needed.
4. Prioritize Transparency and Communication: Clearly communicate the details of your compensation structure to all employees, ensuring they understand how their performance is being measured and rewarded. Transparency fosters trust and accountability.
5. Consider a Hybrid Approach: A blend of individual and team-based incentives can be highly effective in driving both individual productivity and collective success. Find the right balance that works for your firm.

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