Firms Go Off-Grid to Drive Growth Long-Term: PriceMetrix’s Kennedy
Patrick Kennedy is cofounder of PriceMetrix, a consultant and provider of data and analytics software to North America’s wealth management industry that was acquired by McKinsey & Company in 2016. (This interview has been edited for length and clarity.)
What are some of the trends you’re seeing for next year in compensation plans?
Kennedy: I would say broadly, we’ll see more caution about changes. Nobody really knows what is going to happen with the economy, or where the markets are going to go.
But one of the things we saw in 2009 and 2010 after the financial crisis was an elevated level of money in motion from clients. More were choosing to switch advisors, so you may see firms try to encourage advisors to be playing that game by marketing to them.
You’ll see more “new client” bonuses and things like that to take advantage of what is likely to play out in the next few years.
The core [grid] model doesn’t scale that well.
How will advisors adapt?
Many advisors become very protective [about current clients]. They don’t want to lose them, and don’t feel like they can be out doing client development. But the reality is that in this environment, more clients are questioning the value of their individual advisor, and there may be more clients in play.
That being said, the more clients are happier the longer they stay and the more they refer.
More firms also are taking the opportunity to think longer-term about compensation, and that’s a conversation that allows thinking about the model a little more fundamentally.
What are they looking at longer-term?
If you think back through long arcs of time, the grid was central to comp for decades. It still represents the majority of compensation for most advisors but what’s happened over the last several years it’s less likely to drive an advisor to another firm than before. What we’re seeing now is firms incorporating more quality and behavioral components, supported by data science. Many firms are paying for the behaviors that are going to cause advisors to grow and succeed.
Advisors looking for a good match should pay attention to the way firms think about their business. I hope more and more firms can communicate a multi-year compensation strategy to the salesforce.
Do you see fundamental changes at brokerage firms in the use and primacy of grids?
That started to change, maybe 10 years ago or more, as firms added net-new-asset bonuses and growth bonuses and other teasers to encourage the behavior changes.
The grid incentivized advisors to be big. But if you just tell someone to do that, it’s a tricky proposition. Growth bonuses were a way to tell advisors what they need to achieve [to get] new clients and new money.
I coach Little League. If you yell at a kid to hit the ball, it’s not going to be very effective. But if you can break the swing down into five to 10 components that are going to increase their likelihood of hitting the ball, you’ll be more successful. That’s what a lot of the comp plan behavioral “riders” have done.
Is there a risk of too much complexity when designing behavioral incentives?
Comp plans have become very complex, and that makes it tougher to drive the very straightforward behaviors firms are trying to create. It’s a strange annual ritual where advisors get the comp plan and, like getting the government budget, they close their office door for four hours to compute what it means for them.
Over and over again, I’m hearing executives at firms asking how they can make it simpler. I’m not sure anyone has figured it out yet, but there is definitely a broad acknowledgement that comp plans have become very complex, in some cases needlessly.
More and more firms are thinking about how they can add choice for advisors along with more simplicity.
Firms seem to be using sticks, as well as carrots, to change advisor practices. We’re thinking, for example, about lower or zero payouts on small accounts.
Certainly, many firms have taken that approach.
It’s often misunderstood and doesn’t sound very client friendly. The better reframing of that [small household] challenge is that advisors who work with fewer clients can better serve the clients they work with. Most clients end up being better served and staying longer. And the advisors who have fewer small clients grow faster.
What other behaviors are firms incentivizing?
Relationship depth is one. If a firm is investing in a productivity tool that will allow advisors to spend more time with clients and less on account opening forms, they should reward advisors to use that tool. It’s not because they want the advisor to use the technology, it’s because they want the advisor to grow their practice first and foremost by keeping the clients they have.
Teaming is another big one. You’ll see more incentives for advisors who work through teams, as opposed to sole practitioners.
Not many firms are doing it yet, but there’s also a lot of discussion about how you can measure client engagement and satisfaction reliably [to help determine compensation].
We see some firms offering salary-and-bonus formulas in lieu of grids, primarily to trainees. Do you think firms will ever move completely to a private banking, grid-less model?
I haven’t seen anyone really push that thinking in the conversations we have had.
But thinking about client service and value, I could see a model closer to salary if billing [to clients] became more about time as opposed to assets. But I think those things are farther off on the horizon.
Do you see firms relying more on deferred compensation to lock advisors in?
Yes, and interestingly, that’s where a lot of the behavior-based components align. If I intend to be somewhere for a long time, then I’m going to be more driven by deferred comp.