#FASuccess Ep 060: The Written Job Description As A Financial Plan For Employee Talent Development with Kelli Cruz

What You’ll Learn In This Podcast Episode

• The types of HR challenges that emerge as an advisory firm grows. [4:05]
• Why it’s important to view your employees as the ‘secret sauce’ when it comes to client retention. [4:05]
• Why it’s a good idea to hire a dedicated manager for your firm. [18:32]
• The importance of effective job descriptions and specific career paths within the company. [23:24]
• How to use industry benchmarking studies to evaluate your firm. [42:19]
• Why traditional compensation plans tend to not age well with a firm. [1:09:25]
• How to transition to compensation plans that allow your business to scale. [1:15:30]
• How to create the right culture and incentives that help motivate and empower employees. [1:17:04]

Resources Featured In This Episode:

• Kelli Cruz - Cruz Consulting Group
• Cruz Consulting Group's Career Path Framework
• FAS Podcast Ep. 008: David Grau On Maximizing The Valuation Of A Financial Advisor’s Book, Practice, Or Business
• Pershing Advisor Compensation Study
• Effective Succession Planning For Financial Advisors And The Problems With Advisor Compensation Based On Revenue Sharing

Full Transcript: The Written Job Description As A Financial Plan For Employee Talent Development with Kelli Cruz

Michael: Welcome, everyone. Welcome to the 60th Episode of the Financial Advisor Success podcast. My guest on today's podcast is Kelli Cruz. Kelli is the founder of Cruz Consulting Group, a human resources consulting practice that specializes in working with mid to large-size independent financial advisory firms.

In this episode, we talk in depth about the kind of human resources challenges that begin to emerge as an advisory firm grows, especially once that crosses the $100 million and then $200 million under management thresholds, where the firm grows beyond half a dozen employees and the founder's ability to directly manage them, and suddenly creating the right culture and designing effective compensation systems that properly incentivize employees, becomes crucial for business success, all of which begins with establishing effective job descriptions for every role of the firm, which Kelli says is like creating a financial plan for your employees' talent development, forming the basis of what goals the firm and the employee are collectively working towards together.

We also talk about the challenges of hiring dedicated management in an advisory firm, the importance of industry benchmarking studies, how to think about crafting a career track for your employees, especially when your firm isn't even large enough to have formal career tracks yet, and why the growth and evolution of an advisory firm is all about refining employees into increasingly specialized roles over time.

Be certain to listen to the end, where Kelli shares her thoughts on best practices in setting actual compensation plans, why Kelli believes that the traditional model of paying advisors a percentage of revenue for the clients they manage is a fundamentally unsustainable model for advisory firms that ever hope to scale, how even sales and business development incentives, in Kelli's view, should only last a couple of years, and how firms should balance out various combinations of base salary incentive plans and sales incentives for various advisory administrative and other staff positions.

So with that introduction, I hope you enjoy this episode of The Financial Advisor Success podcast with Kelli Cruz.

Welcome, Kelli Cruz, to The Financial Advisor Success podcast.

Kelli: Hi, thanks so much. I'm very excited to be here today.

Michael: I'm looking forward to today's episode, because you have, I think, a very unique consulting role and position in the industry. Because, you know, you talk to a lot of firms about structuring compensation for employees, how to actually structure the internal org chart of your firm. It's stuff that is so crucial to effectively running your firm, particularly once you get to a, you know, a size where it's more than just you and an employee or two, and all these kind of structure and incentive systems really matter.

I feel like we spend almost no time in the industry just actually talking about how all this stuff works, and what the best practices are, and how to do it. So I'm just, I'm really excited to have you on, and actually get to talk about like how do you structure a large firm, and how should you compensate advisers. So, welcome.

Kelli: Thank you. Yeah, well these are challenging questions, the things that you raise about running a firm. I think most firm owners that I work with didn't get into the business to manage, you know, their talent, their team. But as they've gotten more successful and have grown larger, they've hired more people and, "Oh boy, you know, this has gotten more complicated. I can't necessarily fake it anymore. I have to have certain processes in place to really manage all of this."

The Types Of HR Problems That Emerge As A Firm Grows [4:05]

Michael: Well, there really is a striking phenomenon to me out there. You know, I call it "The accidental business owner" phenomenon, that particularly as our industry has kind of shifted from the commission-based model to the fee-based model, like it's not just about commissions versus fees, and broker-dealers versus RAs and all that, but just the nature of the business that gets built.

You know, when you run on a commission-based model, you know, small amounts of trails notwithstanding, like basically, every January 1st when you wake up, you have zero revenue until you go find some people to do business with. And so, you know, there's always a pressure to go out there and find more business. If you are not personally out there getting more clients, and then you're not bringing any revenue in the door, and so you tend never really to hire a very sizable staff and infrastructure behind you, because it's kind of freaky to commit to salaries and paying a whole bunch of employees when your income starts at zero every year until you go and get some business.

But the rise of the AUM model, and just the fact that it's recurring revenue once clients are with you, you know, they tend to stay with you, we all have these like 90%-plus, 95%-plus retention rates, and if clients are staying with you, then as long as you can just stay in the business, you get enough income to survive and keep accumulating clients, you accumulate some clients that at some point you wake up on January 1st and there's a whole bunch of revenue that's going to come from all these existing clients as long as you just service them well. So you go and hire some service employees to service them well, right? Like you get client service administrators, and you get operations staff, and you start growing and building the firm. And then I find for most firms at some point, like if you do that for five or 10 or 15 years, you can make a multimillion dollar revenue business with a whole bunch of employees, having never actually set out to run a business and manage employees, and now you have to because you have a business with a whole lot of employees to manage. Suddenly, you have to figure all this stuff out.

I find it like a lot of advisory firm owners kind of hit a wall there when they realize that they just set out to be an advisor with their clients and kind of grew this thing around them, and now all of a sudden, the demands of running the business are consuming all their time and their attention. They don't get to be advisers anymore, and they're not sure how to figure out the rest of the stuff because it wasn't what they trained to do in the first place.

Kelli: Yeah. And it's not what they're passionate about. It's not what they're particularly very good at. I mean, to be honest, I've met very few that are actually good people managers, because it's not really what they've been trained to do, nor what they're really excited about doing. And you're right, they wake up and they're at this, you know, fairly good size in terms of the firm and their greatest asset is the talent on the team.

I like to say a lot, people have heard me, you know, speak or clients who have worked with me know I tend to say a lot that, you know, client retention, your business model, the secret sauce of your business model is dependent upon the people on your team and the relationship they have with your clients. And that's everybody, from the receptionists or, you know, concierge, client concierge person, to your very successful senior lead advisor.

So getting the talent piece becomes more and more important as the size of the firm grows. And you're right, for a lot of people, it is accidental. A lot of times when I get calls from potential clients, or bump into people at conferences, you know, what would I hear is, "You know, this is how we've been doing it and it sort of evolved along the way. It seemed to have worked out pretty well for a while, but, you know, I'm concerned at the way that I've got things organized and the way I'm comping my people is really setting the firm up for the best success."

And then usually, along with that comes the concern that how they sort of coupled together their compensation program, in particular, isn't sustainable as they continue to grow. So, you know, if they started off paying people a percentage of revenue regardless of what role they were in, whether they were in a producing role or not, that becomes harder to scale when you start adding technology and infrastructure, and start building a real business.

So you're right, I think a lot of them wake up one day and they say, "Okay, wait. I need to figure this piece out, because I can't keep growing the way I have up to this point."

Michael: You said a couple of things and they're, I think, are really powerful and certainly common problems and challenges that I see crop up in advisors that I talk to as well. You know, that whole sort of structure of paying percentages of revenue, I find just overwhelmingly is the thing that seems to make…that most advisors end out regretting in the long run. I think part of it is just, when you go out and start your business, like it's really easy to give your administrative assistant like 20% of your revenue because, you know, 20% of zero is zero, so you can get them cheaper for this like upside promise potential.

And then the business succeeds, and it starts to grow, and this becomes a problem. Like I knew one advisory firm that basically at the start, you know, they said, you know, the administrative assistant who went out with him from scratch in this like Jerry Maguire-style moment of quitting his wire house and going out on his own, and, you know, got her to come along for 20% of revenue. He got to a point 10 years later where the business was incredibly successful, they were doing well over a million dollars of revenue and he couldn't afford to hire anyone or do anything because he had a secretary making $250,000 a year.

Kelli: Yeah.

Michael: Because that was the promise he made way back when, and eventually got to a point where…I mean, there was no way to change it short of firing her, which she wasn't willing, and ready, and able to do. But short of that, the business was strangled and couldn't grow and couldn't do anything anymore.

Kelli: Yeah. Yeah. It's interesting. I, believe it or not, I have seen that. It is definitely more the minority of cases that I see, but more frequently, what I see is that longer term employee like you said, who started, you know, with the firm, and whose job has morphed over time, and it's a little bit of this, it's a little bit of that. It's a lot of what the person likes to do and not what the person likes to do. And, you know, that's great, I mean we all want jobs that we like.

But they then begin to have a death grip, I call it, on the roles and responsibilities that they deem are really important to the firm. Whether they're the best and most qualified to be doing them over time is another story, but they don't want to give them up because they feel like this is adding some much value, or it's really critical to the success of the firm.

And because of their relationship, these are families, and in a lot of cases, Michael, they are family. They are family members working here.

Michael: Yeah.

Kelli: Like if I had to say, a good percentage of my clients do have family members working with them.

Michael: Well, you know, family members are often very affordable when you need someone to work for low wages while you're starting a business. Works well early on, just sometimes it creates some problems later.

Kelli: Yeah. And the thing with this is that whether they're family members or not, you start to end up with people being the jack of all trades and master of none, and as you get larger, you actually create leveraging capacity by having roles become more specialized. So that can end up being...when I go in and sort of assess an organizational structure, and it's a firm that has long-tenured employees, especially those that, you know, started off in the early days, there's usually one or two that have these roles that have morphed over time that really start to become problematic as you try to scale the organization.

And sometimes along with that is what you mentioned. There is this comp level that just doesn't make any sense. I mean, I do a lot of benchmarking and I do a lot of blended role benchmarks, so, you know, I'll ask people percentage of time that they spend doing things, which by the way, is a question that every employee, for the most part hates, when you ask them, "How much time do you spend doing this?"

And it's not because I'm one of those evil consultants that's going to come in and get rid of your job, it's because I'm trying to make sure we're paying you fairly, and the only way to do that is, you know, on a percentage basis figure out how much time you're doing different functions, and then do a blended, you know, comp match.

That's when you really start to see, well, okay, if you've got three people that are doing, you know, 20% or 30% of a role, and then they're doing 25% of another role, and the balance of it as something else, it becomes…well, a couple of things. It becomes hard to figure out the right compensation. It becomes hard to replace that person if they're off work for any length of time, or they God forbid, quit. And it becomes difficult too, to figure out where they're really not adding value, and how do you hold people accountable.

So the blended job role or the wearing many hats can really create a huge organizational problem as firms get larger.

Michael: So can you give maybe an example or two of this, of maybe like firms you've seen, appropriately anonymized, of course? Like what was the firm's size? What was the employee doing originally, and then like what had they morphed into that was creating this problem?

Kelli: Yeah. So usually, when you've got a firm that has a couple, you know, they've started off with a couple of people, like you were mentioning before. You've got the advisor who starts his own firm and own practice. And usually there is an administrative person, you know, the paperwork person, the client service administration person. It morphs into ops and it's sort of that combination of doing admin work, you know, things that support the office versus the client paperwork type of stuff, or even, you know, trading and operational work.

You can have somebody, in the smaller firms, you can have somebody doing all of those functions. For a certain time period, that's going to work out just fine because you're not large enough where, you know, that's going to be too problematic. So I would say, you know, $100 million in AUM, you know, to $200 million in AUM, you know, you typically have to have people wearing more than one hat.

Michael: Okay.

Kelli: And the way to think of the organization, and I do this when I map out org structure for firms. You know, I look at the functions, not job titles. Because job titles, oh my Gosh, those are such a mess. If you try to figure out what people are doing based on job titles, good luck.

So you look at, you know, you have your new client acquisition and management, you have client service and retention, back office and administration if there's, you know, still doing in-house investment management, you could have that piece. Some of the firms I work with actually have, you know, retirement plan administration and investing, so they have a retirement section.

So you sort of map out functionally what are people doing so that you can see if you've got somebody who's, you know, in two, or three, or four of those boxes, how effective are they going to be at any one thing. So I would say to you that we do see overlap in roles. But as firms begin to get larger, and this is where usually, I start to get, you know, calls. I would say it's between that $200 million in AUM to $300 million in AUM. Or, I don't know, if you want to see around a million in revenue, is where it starts to get more complicated. Because now you're talking about staff size from maybe three or four people, to five, six, seven, eight and, you know, upwards.

And, you know, the one I love to pick on is, you know, the compliance. The Chief Compliance Officer, who is also like the lead advisor. Well, you know, okay, I guess for a while, that can work out well. But as you begin to get larger, you probably want to have someone manning your compliance, your risk management, mitigating your risk, who isn't actually involved in the actual client service day-to-day if you can. So that dedicated management role, which is the hardest I think, the biggest hurdle for a lot of firms to, you know, to get over meaning, okay, make the decision to hire the dedicated management role, we start to see with firms in about $500 million in AUM, you know, something like that where you start to see there needs to be somebody who's managing the day-to-day operations of the firm and the management of the people doing the work. That's usually a role that we'll see begin to identify as the CCO role. So you start to compartmentalize, and, you know, I think, minimize your risk too as you operate the firm in a much more professional manner than, you know, everybody doing a little bit of this and a little bit of that.

Why It Is Important To Hire A Dedicated Manager [18:32]

Michael: Why do you think it is so challenging for advisory firms to adopt dedicated management?

Kelli: Well, I think it's a great question. I think it's a shift in thinking that has to happen. In most cases, when you look at who's been doing that dedicated management, it's that her firm principal and owner, maybe two of them. You know, maybe there's two principal and owners, and they've kind of split the function of managing the team up. But it's sort of that command and control. Well, if I can control everything and everybody sort of reports to me directly, you know, I know what's going on and I can keep tabs on everything.

So I think it's a mind shift of going towards what are you really good at. And I do this a lot with clients. I ask them, you know, so those of your folks listening, you know, just simply make a list. What do you really enjoy doing? What gets you excited when you get up in the morning thinking, "Oh, I can't wait to do this," or, "This is going to be challenging, I'm excited about it," versus dreading it. You know, make a list.

Most of the time when I work through that with clients, it's not the people management, or the management and the day-to-day running of the business that gets them excited. Every once in a while, I do trip across one of those types and they end up being, you know, the CCO and the COO of the firm. Usually, they've maybe come up through the ranks. Or they've, you know, been an adviser for a while and it's just not really exciting them anymore, and they have really gravitated towards the operations and the running of the firm. They like the technology piece, managing the financials.

But it's pretty rare that I see, you know, a founder/owner that's excited about running the firm. And so I think it's a mind shift. And then frankly, it's a dedicated management role. It could be the first role in the firm where it's going to cost him some money to bring someone in or promote someone into that role, and they don't really have any direct client facing responsibilities.

Michael: Right. It's the first time you have, you know, anyone above that's usually a relatively low level, sort of client service nature role that is, you know, very expensive, six-figure income and doesn't contribute to revenue at all.

Kelli: And also they don't, if there isn't somebody logical to promote from within, then where do they find this person? So that becomes challenging. And I will tell you right now, one of the challenges I see, and I work with firms across the United States, so even though I'm talking to you from my home office in the beautiful San Francisco, Bay Area, most of my clients are not in the Bay Area. I work with firms all over the country.

That Operations Manager, COO role, I'm kind of combining them together, which is a little dangerous, but that role is very difficult to recruit from the outside, because there's demand for it. Ideally, you want somebody who comes, at that ops manager role, you want someone who comes with some familiarity to the platform that you're running, the system software. COO, if you have a really good functioning ops manager and you're bringing a COO in for larger firms, then maybe you don't need as much industry experience. I've seen really good results with recruiting folks in that don't have the experience, and really bad results with people who don't have industry experience.

But I think that it's just this well, who would we find? How could we find such a person? And sometimes also, you know, this is why I love working with this industry. People that run advisory firms, for the most part, are so well intended. They care about people. We talked about the family culture. They really care about their people. They're concerned about bringing somebody in over someone who's been with them for a long time, and don't want to hurt anyone's feelings, so a lot of times will try to promote from within and give someone that opportunity to grow into that dedicated management role. And that seems to work fairly effectively if, you know, if you've got the right internal person who has that capability and desire to want to learn the management role.

The Importance Of Effective Job Descriptions [23:24]

Michael: So how do you break the news if you have to hire over someone? I would imagine this has come up for you in the past at some point.

Kelli: Yeah. What I always tell firms to do is be as transparent as possible. So in working through the organizational chart and we discover that there's, you know, this missing dedicated management role box, then being really honest with the team and, you know, creating a job description of what the role is, and what the experience level needed, the core competencies, and what I mean by core competencies, you might think of them as other skills and experience. But, you know, some of those things that you just can't teach someone. You know, necessarily, have to come in with, you know, a certain amount of management experience. People management experience, or PNL management experience.

Depending on the growth goals of the firm and the strategy for growth, maybe you need someone who has had some experience with mergers and acquisitions.

I mean, if you're clear and transparent about when you're looking for and what the job role is, then I think you put it out there to people and you explain, and if someone's interested in talking to you about the role internally and they're interested in it, then I think you have to have those conversations. I always advise people to do that.

Through the course of talking through what the role is and what's needed and required, and having that conversation, it doesn't necessarily have to be a huge negative. Now, you know, look, sometimes people hear what they want to hear. Maybe they feel like they've been passed over. But if you're clear about the role and what you expect from it, and what the accomplishments are of what, you know, the person that role is going to need to achieve, then most people aren't going to try to put themselves in a job they're going to fail at.

Michael: Right.

Kelli: The other thing that it does is it begins to create this career path that is so needed on the non-advisory facing part of your firm. So if you do go out and find someone from the outside and you bring them in, it creates a career path as you start to, you know, put more boxes on the org chart that hadn't existed before. So maybe that person that thought possibly they could do the job, now realize when they see the caliber of the person you bring in, that that role is a possibility for them down the road.

Michael: Down the road, and they can build to it.

Kelli: Yeah.

Michael: It is an interesting transition point that I find that, you know, you get somewhere up around, I mean, from most firms I see, it really is that path like from one to two million dollars of revenue when you start going down this path of like five, six, seven to eight employees, and it just starts getting to the point where if you're actually going to try to directly manage, you know, five, six, seven, eight direct reports, like you will not have any time to serve your clients, because you're just going to be managing all these people, and all the projects, and all the stuff that's happening in your firm.

Once you hit that wall, then you have to start making the decision and the transition of, "I can't literally manage everything in the firm. I have to hire people who are capable of doing these things for me," and actually being entrusted to run them. To me, like that's the transition point, when you really go from kind of a practice that's built around you to a business with enterprise value where the people that you've brought into the business are materially contributing to the value creation.

Not that employees don't do good things that help the firm, but you reach a different stage in the business when you're actually just going to go to someone and say, "Hey, you know, here's the thing we need to figure out this year. We need to develop a marketing plan to the business. So, you know, Chief Marketing Officer, that's your job. Figure it out, let me know what we're going to do."

Kelli: You're absolutely right, especially about the value that you're creating for this business going forward. If you are wearing so many hats, it's not going to create a lot of value until you begin to really have more role specification and put a really top talent in those roles. Because, you know, especially with technology changing, you know, I feel like technology, even though I'm probably, Michael, the least technical person you'll ever meet, I recognize that there's only a few levers you can pull in this business, right? One of them is technology, and it's so exciting.

Like, I go to industry conferences and I come back because I'm so excited about the technology, because what it says to me, not that it's going to replace the people. It says it's going to create a work environment where people are going to be able to really focus on the value that they can bring to the client directly. Not necessarily the work that just, it needs to get done, and it has to get done correctly. It's very important, obviously, that work gets done without any errors, but it doesn't have to being necessarily done by, you know, an advisor, or a principle, or the firm owner.

So technology is one of the few levers to pull. The other lever I like to call it is delegation, and being comfortable that you have the right people in the right roles that you can delegate effectively, and then just watch them grow and shine, and probably do even better work than you could do trying to do, you know, five or six different roles.

So the delegation piece comes along with, I think that's why I said it's a mind shift. It's, "Okay, we're going to do this. We're going to get the right people in the right roles, and I'm going to get out of the way and let this thing really grow and take off even further."

Michael: Yeah. Well, I think in kind of the truest, literal sense, like it is making the transition towards building a business that is bigger than just you.

Kelli: Absolutely.

Michael: And not to judge that, right? I think from the flip side, one of the biggest problems is often that firm owners, they see a lot of advisors. Like they feel like they're always compelled to grow. You have to always be bigger. You know, we have a tendency in our industry to compare each other by assets in UAM and the revenue that that implies. You know, if you just keep going down that road, eventually, it takes you to a firm size and an employee count where you will either have to build a business that's bigger than just you and goes beyond you, and start hiring people on these positions and, you know, literally entrusting them to be responsible for part of the equity value of your business that you may still own most or all of the shares on. Or you'll break your business in the process of not delegating and not letting go, and then eventually strangling the business or just becoming miserable in it, because you can't do the client work and you can't do advising anymore because there's just too many people to manage.

Frankly, I think there are some folks that probably would be better off just stepping back and saying, "You know what? This grew to a place I didn't want it to. You know, I'm going to sell part of it off and just downsize or right size my business back to the things that I enjoy, and, you know, someone else could do the rest of the building."

But, you know, just kind of recognizing that moment, I think somewhere between one and two million of revenue, or somewhere between $100 million to $200 million under management if you're charging 1%, seems to be where that transition moment comes. And you have to have some decision about what you're going to do.

Kelli: Absolutely. And that's where, you know, really pathing it out from an organizational structure…I'm a visual person, so when I first start working with clients and, you know, they're talking about Sue, and Tom, and Bob, and you know, like I know these people, right? We're best friends. And then, you know, "Well, Bob does this, and Bob does that," and there's a story behind every employee, which is great. But I'm like, "Do you have an org chart so I can writing all these little notes about Bob and Sue?"

A lot of times, no, there isn't one. So I really encourage people to think about it functionally first, because like you're saying, Michael, once you get more than four, five people on the team, you've got to start figuring out well, who's doing what, and how is work getting done? And then that helps inform you as to what's the next box that you need to fill, versus meeting somebody at a community event, or through church, or through a friend, or through a center of influence, or whatever, and sitting down and meeting this person and meeting with them a few times and you think, "This is great. This is talent. I'm going to bring him in and I'll figure out once we get him in here what they can do."

You know, there are stories where that's worked out great, but that to me, is not a recruiting plan. That is not a way to set a firm, or the person that you hire, up for success. So taking a more strategic approach, figuring out what the current landscape looks like with who's doing what and how work's getting done, and where there are potential gaps today or could potentially be, as you bring in that next tranche of new clients. You know, you hit the next revenue level, what are you going to need? Makes a much better recruiting process and hiring process.

Michael: Yeah. So maybe we should, you know, probably have talked about this a little bit more early on, but can you just give a little bit more context for just what you actually do? Like who is Kelli Cruz, and what is the business that you do in the industry. We kind of dived right into talking about some of these. You know, planning and execution is just around the business. We need to really talk about your actual business and working with advisors on these business issues.

Kelli: Sure. Sure. So my background, fundamentally, is in human resources management. So I'm probably the only consultant that works on talent management specific to our industry that has an HR background. I worked with Wells Fargo Bank for 15 years. My last role was a director of Human Resources for the Private Client Services Group, which at the time was the Personal Trusts Brokerage Private Banking. We had about 5,000 employees.

Michael: Okay.

Kelli: So a big chunk of my career is in HR management experience. Then I went over to Schwab, so I was a Bay Area girl. Our firm had headquartered in San Francisco, then went to Schwab. And, you know, for the last ten years, I've focused on the RA industry, and so, you know, think broader financial services, and then independent advisors, and really fell in love with this industry.

If I were going to reinvent myself again from a career standpoint, I would definitely be an advisor. I think it is an amazing career. The work that you all do, Michael, I put it right up there with doctors and medicine. You know, to live the kind of life that we all want to live takes two things. It takes health, good health, and financial resources. How much of the financial resources depends upon other factors, right?

Michael: Right.

Kelli: But still, the fact remains you have to plan well financially to be able to…well, I also think there's a correlation to having financial fitness and health as well. So those two things, to me, if you can work with people around either of those areas of their life, you're doing some really important stuff.

So I just think the career track and what advisors do, independent advisors, is financial planners, is so important. So I feel really blessed to be able to work with all of you and help you with the part of your business you don't know as well, which is the talent piece and how to manage that. So everything that I do with clients around talent management, it comes from very sound HR practices. So from a risk perspective, I'm going to helping manage your talent in terms of engaging and retaining, and, you know, compensating and all those programs, but also do it in a way that minimizes risk.

So I'm not making up stuff, this is coming from years of working in HR, as well as managing my own team of folks. So, for example, the compensation framework that I use for incentive plans is something that I've put together from my own experience of managing employees, designing incentive comp plans for advisors at Wells Fargo, as well as being an employee myself, and being, you know, motivated or not, in some cases.

Michael: Yeah.

Kelli: The former will remain nameless, but one major reason why I left a firm one point in my career is because they changed the incentive plan, and they couldn't tell us what the new one was going to be. We were halfway through the year, the calendar year. And I've always been the kind of performer where I'm fine if you want to leverage me more highly on variable comp versus face comp, but at least tell me how that pool is going to be funded, and then what I need to do to earn my share of it. And so the most important thing for me in a work environment, obviously, as I mentioned doing really meaningful work.

So I really am passionate about providing that expertise that most firms back to size, aren't really large enough to say, "I'm going to have a dedicated HR person on my team."

Michael: Right. I still don't see a lot of that in firms until they get much, much larger, if at all.

Kelli: Yeah. The multibillion dollar firms tend to have that, you know, at some point. But believe it or not, I still have those clients. Because a lot of those folks don't know the industry and haven't seen all the different pay structures that I've seen, so a lot of times, I will work with that chief talent officer, or COO who also is the head of HR on redesigning and looking at comp structure.

So, you know, this is work that I am passionate about. You know, writing job descriptions, putting performance goals together, designing incentive plans. You know, all of that is pretty fun stuff for me, so hopefully, you don't think I'm a major nerd here, but it's stuff I like to do.

Michael: With the stuff that you enjoy doing I think it's awesome. I think it's awesome. So like firms that would hire you would be on a consulting contracting basis? Like they call you and say, "Hey, Kelli, you know, we've realized we need to update our compensation structure for our advisors, because we've got some problems and this doesn't seem to be working. But we're not really sure what to do, or how other people do it so, you know, we want to hire you to come in and just to help us figure out how to structure all this." Like is that kind of the nature of what an engagement would look like?

Kelli: Yeah, so I would say you're right. Usually, the number one reason why someone calls me has to do with compensation, you know, no surprise there. Number one expense for our firm is compensation. So getting the right is super important to the bottom line. Most of the time, it's folks who are concerned that they're not paying competitively enough. Nine times out of 10 when I do the comp benchmark analysis for them, they're definitely in paying, you know, at or above market.

So again, what I like about working with this industry is that people are finding talent, they're paying people competitively, and, you know, we have very low turnover. So, you know, news flash, if you've got a high turnover rate in your firm, you've got a problem, and you need to be addressing that. Because this is an industry that really does not experience very high turnover rates.

So I work with firms in two ways. With larger firms, I usually scope as a project, and we price the project and we do it on a project basis. For smaller firms, that would be firms say under $200 million in AUM, you know, under $1 million in revenue, right around $1 million in revenue, we can work as a retainer basis. So what I do there is we kind of scope the work that you need done, and then I'll deck a certain number of hours per month, and then I'll charge a retainer amount, and we do a minimum number of months to get the project work done. Because I enjoy working with small firms, I really do. Because I know, I feel your pain, and I want to see you be successful, and the talent piece, the people piece of your business is critical for you to be able to do that. So those are the two ways that I typically work with clients.

I also offer to our consulting, I stole this idea from you, Michael, if you don't mind.

Michael: No, not at all. I hope it works.

Kelli: You know, if people just want a, you know, pass some thoughts around and talk to me about what they're doing and the issues that they're having, and the problems, you know, it's not some big month-to-month thing they need help with, then I do. I mean, I enjoy that. I like to see people get what they need.

I've worked with a couple of folks who are moving into our industry, getting hired by an RA firm. They want to help them understand, you know, what compensation should look like and maybe what their comp package might look like. So I'm trying to help, you know, where I can, to make sure that people are getting some advice.

How To Use Benchmarking Studies To Evaluate Your Firm [42:19]

Michael: Interesting. So as you go through these engagements, can you talk a little bit more about like what are the most common issues and things that you're seeing these days? Like, where are the biggest problems and broken points cropping up for most advisory firms?

Kelli: Sure. I would say that we talked a little bit about this already, but it's definitely understanding where work is getting done, how it's getting done, and, you know, the organizational structure. So, usually, when I work with firms, I like to interview all the employees in the firm, for the most part. For the larger firms, then a representation of each of the roles that you have been in the firm. What that helps me do is really, we can take a look at it and say, "Okay, so where…" like I mentioned to you before, where is work getting done? Who is doing it? How are they doing it? That will help us sort of map out how things are getting done today, and where there are gaps and any overlaps in functionally how work is getting done.

That will help us identify, you know, as I mentioned to you before, the recruiting. You know, is there something that's missing that you need, and how are we going to plan for that? It also helps, the interviews help me be able to do the benchmarking analysis, which a lot of folks want me to do. Most of the time if I'm going to review a comp structure and make any recommendations, I want to know how people are currently being comped and how that compares to the industry benchmark studies.

Michael: Okay. So a firm might literally bring you in say, you know, "You look at all of our employees and how they're comped. You look at the industry benchmarking studies and just tell us what to do instead of having us try to read all those studies ourselves and figure out how everybody should be comped and structured"?

Kelli: Yeah. So let's talk about this for a moment, because the industry benchmark studies are a curse and a blessing all at the same time. So I spent, a few years after Schwab, I went to Investment News and I started up their research group they still have today, which was taking the Moss Adams, they had purchased the Moss Adams industry study. I ran those studies for them for about three years, and so I know how the data is collected. You know, it was always my hope, I would say, in that role, is that we could have a one industry report that a bunch of firms would participate in and we'd have a lot of really great data, and then we could slice it and dice it, and do all kinds of crazy fun things with it.

Michael: Yeah.

Kelli: The challenge with the studies is getting folks to participate. So the data is only as good as the data set, as you know. Now we, since I no longer do research, it's gotten even crazier because, you know, Schwab, when I was at Schwab, I was on the team that started the first benchmark study. I can't take any credit for it was it, that was Tim Forrest for us too, and Dave Welling, who put that study together, but great industry study.

But now you've got, you know, TB bought FAN side so TB has their own study. Pershing sponsors the Investment News study, Fidelity does their own study. DFA does their study. So the data sets get a little dicey, depending on the study, meaning, you know, not as much participation as you'd like to see, so it becomes hard to really slice and dice it.

So we look at the industry studies. And then I have a subscription that I purchase to a broader data set, and, you know, that and just anecdotally, I'm able to say, you know, "Here's what I see. Here's what I can tell you about this data." But it's really, as I tell my clients, it's more, the industry data is more of an art than a science when you do the benchmarking.

But at least it gives you a basis by which now you can start to make some very good decisions about where you're going with your comp. And so things like tenure, how long has the person been in the firm? How long have they been in the role? If they're in a non-advisor type of role, there aren't any real metrics we can look at. There's no revenue. There's not a number of clients they're servicing.

Now, if you've created a team approach, maybe you could say, "Well, they're part of an overall team that manages X amount," but you're really looking at performance, how well they're performing, if they're taking on any additional rules and responsibilities. Credentials, have they earned any credentials? Are they keeping their knowledge current? These are the things that you want to, you know, reward someone in terms of increasing their base salary and their total cash comp.

The studies give us some insights into that. But it's really important to do that, you know, know that you're paying competitively, but then create your own structure that, you know, you can adjust as you need and work with, so that you're very confident when you sit down and talk to employees, whether it's at the end of the year, or twice a year, about their compensation. You know, what's behind it?

You know, Michel, when I talk with employees and I talk to them about, you know, how the job's going and, you know, if they could change something about the firm, what would it be? It's more transparency. They want to understand better what's behind the compensation decisions. Most folks are thankful. They're not unhappy about their compensation, it's just they don't really understand what's driving it.

Again, the business model is pretty straightforward, right? It's a name most firms are still running off in AUM fee.

Michael: Yeah.

Kelli: So folks are smart. They know, they can figure out how much revenue you're generating and what that means, right? It's different. When you work in a large corporation, you know, you may not be able to figure that out so easily.

So having that transparency about what someone's compensation looks like, why they're earning what they're earning, how they can earn additional comp, what they need to do, how successful does the firm need to be in order for that to happen? Those are the kinds of things that people, you know, want me to help them solve. And it's important because it is a huge driver when we look at what millenials, who are, they comprise the majority of today's workforce, maybe not with our independent advisory firms.

Michael: We'll get there. Just a little bit lagged.

Kelli: Yeah. I mean, a lot lagged for most firms. Although looking at who was at the TD conference last week, definitely it looks like a younger crowd, which I think overall is a really good thing. But millenials range competitive base pay very high on the list of things that are important to them.

Michael: Yeah.

Kelli: So, you know, if you don't think compensation is that important, you're wrong. It really is. Very few people are working just for the fun of it. Most of us work because we do have bills to pay and we need to be working. So getting that right, and making sure it's motivating people, is super important.

Interestingly enough, something else that's very high on millennials' list, and I think it's pretty high on a lot of people's lists, what are the career opportunities? Where is this going? So people want to know that from the rules and responsibilities, you know, what knowledge do I need to, you know, made sure I'm keeping up on? What credentials? You know, those types of things. But also, how is my comp going to grow? Where's this career taking me? Are we in line with each other with where I'm thinking I need and want to be, and have to be, maybe, and what the firm is able to offer?

Michael: Oh, I want to touch on that theme for a moment, of, you know, painting the path about what someone's, you know, income and career track and opportunities are. Because I, you know, I get it, the conceptual level, like I've lived that side of it as an employee for a long time. But, I mean, I feel like the challenge for a lot of advisory firms, I understand how Wells Fargo has career tracks, and Schwab has career tracks, and such. You know, they're massive firms. There's lots of roles and positions. There's lots of departments. You know, you can climb the ladder. We can explain to someone how to climb the ladder. I get it.

You know, what I mean, like, you know, I'm hitting the wall what you're talking about. I'm $200 million or $300 million under management, I'm hitting $2 million of revenue, and I got like seven or eight employees. And someone saying like, "What's my career track over the next five years?" Like, I don't know. Five years ago we only had two employees here. Like I don't know how to answer what's the career track and the opportunities years from now, because I've never run a firm that size. Today is the biggest I've ever run a firm, and I've no idea how quickly it's actually going to grow in the future. Am I nuts to feel like that's a challenge, or a pressure point, of how are we supposed to explain these career paths when the truth is I have no idea because we haven't grown that size, and I don't have the depth and infrastructure of a mega firm to say like, "Oh yeah, here's the seven-step ladder we've got because 14 other people have already climbed it and we know how this works." I'm just not big enough and I don't know if I'm going to be big enough, so how do I make these promises and explain this to someone?

Kelli: That's a great question, and you're being very honest. I do hear that, maybe not with that kind of clarity and honesty, but I do hear a frustration when I'm working with firms around, you know, creating a career path, or career progression. Because so many founder/owners are just like, "Nobody painted a path for me. I don't know, I just figured it out. You know, I rolled up my sleeves, I started to develop new business. I figured it out."

Well, you know, here's the reality. Employees working for you, if they were entrepreneurs, they wouldn't be working for you, for the most part. So you are at a place and point in the evolution or the life cycle of the firm where you do have to figure it out. It doesn't have to be, like you say, like Wells Fargo, Schwab. Obviously, in my career, they have those career paths. Although I will tell you I never followed and was a little bit of a maverick. I tended to always create my own job roles.

So for anyone who's listening to this might, you know, apply to, it's really interesting to think about this. Because, you know, charting your own path within some boundaries and structure is really exciting. And not everybody is going to be a entrepreneur and want to start their own firm, but they may want to be entrepreneurial in nature in how they approach their careers.

So laying out a framework, I think, is important. And sitting down with someone, and this is what I encourage, you know, let's start with the framework. And I actually have something I'm happy to give this to you, and we can make it available, where, you know, things like time and role, additional credentials in education, training target that you can set up with the employee. It isn't like this all has to be figured out. It can be flexible enough that you work with your employees to sort of carve the path for them.

I think performance rating, somebody should know that they're doing a good job before they move to the next…I don't know "Level" is the right way to think of it. I like progression, the next stage, or step. What type of leadership, other skills and experience, maturing into the roles do you want to see? And this gets to your firm's values. The core values of the firm, and someone making sure that, you know, that's how they do their…they come in every day and do their job in the spirit of that culture.

You know, these are the things that I think that the value or contribution that that role is making to the firm, it can't always be measured in terms of revenue, but it can be the number of client touches, or other ways that people are contributing to the value. Saving money, ideas that reduce expenses, helping people learn new technologies so people are doing their jobs more efficiently.

All of these things can sort of be put into a framework that then path with…You know, we do traditionally have some roles in these firms that we know these are roles that have to get done, and there is a progression of knowledge and experience you need before you can move from one to the next.

Now, I work with some firms that use the client service administrator, so let's talk specifics for a moment, as sort of that entry level. You know, combination administrative assistant type of work with the firm, helping the firm run, as well as doing client service work. That's sort of their entry level. That can be that someone then takes the path to stay more behind the scenes. Some call it the back office, some call it, you know, ops and admin, whatever, you know, works for your culture. Some use it as a way to introduce folks to the advisor facing as well. But that's sort of the entry, and someone can, once they've, you know, become very proficient and they've been in that job for a few years, they can then try to figure out, "Where do I want to go? Do I really want to do this exciting advisor work in front of the client, or do I like being more behind the scenes?"

And what I like is why not let people try it out and see? Maybe they decide, they try the advisory work, and it's not really their bag and they want to go back and contribute in a different way to the workings of the firm.

Michael: So how do you set that...like that's an interesting angle, how do I set that up so that, you know, if I have to go back to them and give them the bad news, it's not working out, I don't lose an employee? I feel like here so much of what we do in work with clients basically comes down to expectations management, that, you know, maybe I'm just hypersensitive to it having gone through this over the years, but like I always feel really wary about trying to make these commitments, whether it's, "Hey, you can go down advisory path in our firm," or, "Here's the career track and where you're going to go with that."

I don't want to make some implied or literal promise to someone and then have the role not work out, and now I've just got an unhappy employee who's leaving because it didn't work out the way that I said. Like, how do I, you know, how do you put somebody into advisory role and take that back?

Kelli: Yeah, that's tricky. There's no doubt about it. But the best way to set, you know, yourself as a manager as well as the employee, is to create what the expectations are for the role. Be very clear about that and then create a feedback mechanism to make sure that you're giving feedback on a regular basis. And I don't mean once a year, or at what I like to call "The Dreaded Annual Ritual." I mean, you know, on a regular basis. So meeting one-on-one for 15 minutes to 30 minutes, you know, every other week. Or, you know, not waiting to build this long list of frustration…you know, build a list of frustrations to sit down and basically dump on someone, because that doesn't work well.

But being clear about what the expectations are and how someone is performing in that role, and giving someone the opportunity. You know, what comes to mind is, that sounded kind of, you know, top down. Giving someone the opportunity to give you feedback on how they think they're doing, versus it all coming from the manager and it being all the manager's responsibility. The employee has a responsibility in their career path. If this is something they're asking for and they want, then they have to participate too by performing and letting you know when they need clarification. Letting you know when they're not getting something they need in the form of resources or knowledge they're lacking, or skills they think they don't have and they need additional training on, where things are working well for them and where they're not, and what they need from you as a manager to help them with it.

Keeping that dialogue open, I'm pretty optimistic, and I know from managing a team of people myself, you can course correct when things start to not move in the direction they need to. Or you can have a discussion about where things don't seem to be going well and why, and is this really the right path.

Now, in micromanaging people, I had several situations where, you know, I came in and inherited a team and it was too far down the track to kind of salvage the person in the role. You know, when that happens, and if you have that situation where you as a manager haven't dealt with it and it's too far gone, then we need to get creative within the context of the law, to figure out what the right solution is, right? Because having the wrong person in the wrong role, and having someone not performing, isn't good for the person.

Michael: Right.

Kelli: Because I like to say everybody has noble intent coming in to work every day to do a great job. You know, let's be honest. Nobody comes to work, or if they're working remotely, you know, logs in to their computer and says, "My intent today is to do a really lousy job. I'm going to feel fulfilled at the end of the day if I don't get any of my tasks done, you know, cleared off of the CRM system." Like, that's just not how people operate.

And people know when they're doing a good job, and when they're not. I mean, I think most people understand at some level. So creating an opportunity to provide that feedback on a regular, ongoing basis, and, you know, just checking in with people to see how it went. You know, if you had some kind of a meeting that they were involved in, whether, you know, they had an actual part in it, or they were observing. You know, checking in, "How did it go? How did you feel?" you know. When somebody doesn't perform at the level you expect them to, then being open about giving them that feedback, and just in time. Again, not waiting till it's too far down the road.

But being clear and upfront with people what the expectations are, and also just being clear…that's why it might have sounded funny, you know, some of the things on this framework: time and role. Well, if your expectation is that somebody has to be in a role for a certain period of time to gain the knowledge, the experience, to advance to the next level, then you better set the expectations so you're on the same page and there's not, you know, a mismatch there.

Michael: Yeah. Well we'd love to include that, you know, kind of setting career expectations framework document as well, if you're willing to share that. So this is Episode 60 of the podcast, so for folks who are listening, if you go to kitces.com/60, we'll make sure that Kelli's going to, I don't even know what you call it Kelli, like a career track framework, or promotions framework?

Kelli: Yes.

Michael: We'll have it there so people can, you know, take a look at and maybe experiment or explore, or think through, like how might we apply this in our practice as well.

Kelli: Yeah. You know, one of the things on the framework is compensation, because again, I want you to be thinking that, you know, the expectations should be as someone takes on additional responsibilities and is progressing in their career, that it's going to cost you more money. So you need to plan for that and budget for it. This is all part of that building an HR, you know, a human capital roadmap, if you will, that is sustainable for the firm.

Michael: So when you talk about these like regular check-ins, I mean, what really are we talking about? How often would you tell firms they should be doing employee reviews if "The Dreaded Annual Review" as you put it, is not the right cadence?

Kelli: Yeah. There's not a lot written about, you know, throwing out an annual review. I know a lot of larger firms, and when I say "Larger Firms," you know, the Virgin Atlantic I think has thrown those out. But larger firms have decided, you know, we're not going to do the annual review.

I'm completely married to an annual review. What I am married to is that on a regular basis, like I said, you're going to be having a conversation. So I'd like to see you minimally, do it on a quarterly basis.

Michael: So on a quarterly basis, like some kind of sit down check in with the employee, "How are we doing? Are you still on track?" I mean, this isn't a compensation review. We're not giving people quarterly raises.

Kelli: No, it's a quarterly…and you can use, if you've got a job description, or you've actually created some goals, I'd like to see that you have both of those things. But if you had to pick between one or the other, I mean for me, a job description is the most important document that you can have from an HR perspective, because it's going to create…it's almost like your financial plan in a way. It's going to be what you're able to address other aspects of your employees' experience with you.

So if you don't have job descriptions, I would suggest working on those. And if you don't even know where to begin, you know, ask employees to write down for you what they're doing, and how they get work done.

Michael: "Can you please write your job description and what you do?" "What do you do here?"

Kelli: Most people actually are like, "Yay, somebody is actually asking me, and I want to do that."

Michael: Like, I'm having visions of office space in my head of these meetings where we're sitting across from the consultant and says, "What exactly do you do here?"

Kelli: Well, you know, I actually had that idea for office face before that came out, and I didn't pitch it to anybody, darn it.

Michael: You didn't run with it? Oh.

Kelli: Oh yes, a different career for Kelli if she had.

Michael: Yeah, no kidding.

Kelli: But it's interesting, when I work with firms that don't have job descriptions and I sit down with employees and I ask them, most are more than willing. I mean, they like to talk about what they're doing. They're excited that somebody is interested and wants to help put it together in a more organized manner.

Michael: Right.

Kelli: From there, you can create goals for folks regarding what you expect them. Two, three goals. You don't have to make it, you know, so overwhelming for people that nobody wants to deal with it. That's what you want to check in with folks on. You want to ask them things like what's kind…this is going to sound crazy, what's gone really well? What hasn't been going so well for you? Where do you feel you need additional resources, training? What do you need from me, your manager, that, you know, I'm not providing today? What can I be doing to help you? What can the firm?

You know, just have a conversation like you and I are doing right now. Have a conversation. And ask them to come prepared to the meeting with, you know, a couple of ideas of things that either have gone really well, that they're particularly proud of that they've been able to accomplish over the course of the last few months, what's, you know, high on their list to focus on for the next few months, to make sure that you're on the same page, verses again, waiting to only have that conversation, you know, once or twice a year.

Michael: Right.

Kelli: And what I like to do is have these conversations document. Like write notes. You take notes when you meet with your clients. Take notes. Have the employee take notes. You take notes. Then that can be your, if you want to do the end of review, that can really be the basis. So you don't have to start from scratch to do a performance review, you've got notes from these quarterly check-ins.

I've got a whole guide that, you know, I use with firms, but for some firms that, might be too much. It might be overkill. So, really getting some feedback. What I would suggest you do is ask employees to think about it. Have them answer some of your questions in writing and send it to you on an email before you meet.

Michael: Okay.

Kelli: Because some people are better communicating in writing than they are verbally.

Michael: Right.

Kelli: Some people don't really like being put on the spot in a one-to-one meet, but if you've got, you know, an email exchange, something that you can refer to in the course of the meeting, some folks just are better if you prepare them in advance and given the opportunity to respond in writing.

Why Traditional Compensation Models Do Not Age Well [1:09:25]

Michael: So one of the other areas I know you do a lot of work in is specifically around things like bonus compensation and incentive plans. Which I think, historically, has been...we kind of talked about earlier. Like, it's all been revenue sharing, I think historically, for the industry. You know, people, advisors are incentivized because they get a percentage of their book. Maybe you give them an additional bonus for business development that's a percentage of the revenue they brought in. But like everything at the end of the day is tied to percentages of revenue.

So I'm just curious, like from your perspective as you look at the evolution, the industry, and your history with this, like is that still sound practice? And is that still something you typically recommend and do, or do you see advisory firms now shifting in other directions about how you do incentive compensation? I guess, even for…could you maybe talk about this for advisors and also just for the rest of the team that still needs usually some kind of bonus and incentive structure as well?

Kelli: Right. Yeah, exactly. Usually, we do separate, in talking about this, separate our advisors versus non-advisors. However, the framework that I use for the incentive plan/bonus, same difference, is the same. So for firms that I work with, we end up with an incentive plan that can be used for any role in the firm.

Now, the advisory roles are going to be more highly leveraged. They're going to have more opportunity to earn, because they are more influence on your end client than say, your non-advisory team.

Michael: Okay.

Kelli: So that's first and foremost. For the advisory category, I guess we'll say, I do still see a percentage of revenue as part of, you know, somewhere in the mix of their compensation. And I'm not opposed to that, but it has a place and a purpose, and it should not be the only factor in determining how your advisors get comped. So that, eat-what-you-kill model, it's a terrible name. Or sales incentive model, maybe I'll just call it that. I do still see there are firms using that.

Most of the time when I get a call from someone about that model, it's not sustainable. And it's not really working towards building a team approach, so they're trying to figure out a way to get off the eat-what-you-kill, if you will. Or at least for the new advisors they bring into the firm, they have a different comp structure for them.

Michael: So why is it not sustainable? What doesn't work?

Kelli: Well, it ends up becoming too expensive over time once a firm starts adding to the infrastructure and hiring more people. You know, all of a sudden, that percentage of revenue that seemed like it was very sustainable in, let's just call it the early years, now is causing a problem in terms of being able to have the firm be profitable and continue to build the firm, to put more money into the firm because it got this percentage that, you know, when they hired this person three or four years ago seemed like it was going to be profitable for them, and now over time as they've hired more people, and the firm's expenses have changed, they don't want to continue that type of model going forward.

Michael: Okay. So I mean, just literally, it's a point like, "Hey, we've accumulated so many advisers now that this percentage of revenue is just an ungodly large number and it's breaking the firm." Like, is that basically what it's coming down to?

Kelli: Yeah, it does. It also is a problem because there's other sort of consequences of that model where it doesn't really incent people to be team players, it doesn't always incent people to bring in the right type of clients, because someone's really focused just on bringing in as much revenue as they can.

And, you know, I guess on the one hand it's like, well, it shifts, really, all the compensation risk, which is why people do this model early on in the beginning of starting up a firm. Because it shifts the compensation risk, or the compensation risk, I should say, is really on the individual, not the firm. You don't pay them, you know, anymore if they don't bring it in.

Michael: Right.

Kelli: But it isn't necessarily focused on clients of the firm and a team approach. So from a profitability standpoint, if you're growing and you're continuing to want to bring in advisors, that percentage of revenue, over time, what I've see happen is it has become less and less, because the firm's cost structure has increased.

Michael: Right. So just, you know, literally, the revenue base when they're taking a percentage of revenue gets so large that they're just getting paid a number that's so large, you can't do the rest of what you need to grow the business anymore. That's basically what it comes down to?

Kelli: Right. And the one thing you don't want to be doing is changing someone's payout percentage all the time. That's not a good recipe.

Michael: Well, I feel like for a lot of firms, they would be concerned about changing the, well frankly, changing the payout rate ever. Like, you know, for like, you know, how to blow up your firm, have an advisor responsible for a key portion of the revenue, and then mess with their compensation to piss them off and have them leave and take the clients.

Kelli: Right.

How To Transition To A Sustainable Compensation Model [1:15:30]

Michael: So like for firms that are in this situation, because I think there are a lot, how do you get off of a percentage of revenue compensation system if you've decided it's not sustainable, but it is what you use, it's what everybody is already being compensated at, and you don't want to blow up your firm and have everybody vanish because they're so upset about having you take away their percentage of comp, because that's why they joined the firm in the first place? Once you're there, how do you get off this roller coaster?

Kelli: Right. It's difficult. It's a challenge. Usually, what the firms that I have worked with, we've focused on the next group of advisors that we're bringing in.

Michael: Let the old advisors that got the good deal keep the good deal, but the next ones we hire, we're going to "do it right."

Kelli: Correct. Right. So I call those transitional comp plans because you've got, for good reasons, and I am assuming that, you know, these are people who are, you know, really great business developers and they're bringing in the right kind of clients, and they're retaining them, and servicing them and doing great work. You're right. You don't want to mess with that part of its working. But if what you do know from a profitability standpoint, you can't continue to recruit additional advisors under this model, then you want to think about changing that comp structure for the new advisors you bring in.

How To Create The Right Culture And Incentives [1:17:04]

Michael: So you change the structure for new advisors, and then in essence, you just kind of grow your way through this over time? "Hey, as we add more clients and grow the business, more of our advisors will be on the new comp plan, fewer of our advisors will be on the old comp plan. This will get less painful over time. And eventually all willing, one of those experienced advisors will retire and then we can replace them with a new person that's on the new plan that's much less expensive."

Kelli: Exactly. Or it might be that the comp structure, or may be the overall total cash comp isn't substantially less but you're able to use those comp dollars and drive a different set of behaviors and outcomes that are more in keeping with the firm that you now have become. So things like, you know, rewarding for team work, and rewarding for bringing in the right clients, you know, that meet firm minimums and the right fee structure, etc. So developing the next generation of advisors or, you know, team leaders.

Because that's the other thing with the "eat what you kill" model. You then have to build on incentives on top of that to potentially say well, you know, "I'm going to pay you to do these other things that I need you to do, because I'm taking time away from you being able to go out and, you know, find more revenue and get paid off of that stream."

So there are some different approaches you can take if you're trying to get off it. Just for the sake of this conversation, it would be easiest to transition the next group that you bring on into more of that base plus performance incentive, and if you want, a sales incentive as well. So thinking that almost as three buckets. You have a competitive base pay, and competitive is all relative to where you're operating and how tight is talent in your regional area, and how hungry do you want someone to be. Because if you pay, you know, the 75th percentile of base, is that really someone going to be hungry enough to do some of the other things you want to incent them? Probably not.

Michael: Right.

Kelli: So then you have a performance-based bonus which can be things that you're not potentially paying for on the base, or you feel are important enough that you want to emphasize through the incentive plan. So maybe client retention is one of those. A lot of times, that's one where I see firms may be double up for advisors, as I call it, where, you know, part of retaining clients is why you're getting paid a base salary. But maybe you want to put some extra emphasis, and it's one of the incentive drivers on the performance incentive plan.

Another thing could be like I said, mentoring the next generation, leadership responsibilities, supervision or management of team members. Any key initiatives for the firm that, you know, maybe there some new software, some new planning software, or a new planning process, or something that you want this person to sort of run point on.

Then in addition to that, you could, also, firms do have a sales incentive. So there is a much smaller percentage of revenue as a one-time for bringing in new clients. Or it could be, I wouldn't do it more than three years for some firms. They like to do, on new business that's brought in, they like to do a percentage of revenue that decreases over three years.

So depending on what you're trying to drive, so let's say business development, is a big, you know, a big initiative for the firm, then maybe there are some good reasons why you want to pay out a new sales percentage of revenue over three years, or a one-time fee. So there's different ways to design it depending on what is it you're trying to motivate the position to do.

Michael: And, I mean, I'm just imagining some firms saying like, you know, "If I only pay one time payments or three years or something, aren't these people just going to go somewhere else where they can earn, you know, percentage of revenue lifetime trails?" Can you be competitive in attracting talent this way in a world where other firms are still paying percentages of revenue?

Kelli: I think you can. I think that's too something we haven't really talked much about, which is culture match and what the culture of the firm is. So I think for firms that pay a percentage of revenue for a defined period where they ended after, you know, whether it's one year or three years, the culture is one of a team based culture, and one where part of your role is to business develop, but it's not your entire role.

Your role is really, first and foremost, about retaining the current client base, and, you know, servicing the best of your ability, and the business development role takes, you know, second place to that.

Michael: Okay.

Kelli: A pure business development role, which I've seen very few firms have a high degree of success with, is a different story. You know, that may be one where you want to have there being more comp that's highly leveraged, and then it could be a percentage of revenue, you know, for ongoing. But we certainly wouldn't want to see an advisor who has primary responsibility for servicing clients being compensated in that kind of a highly leveraged way.

Michael: Okay.

Kelli: So that's the advisory piece. The non-advisors, what I typically see, and I see it for advisors as well, is there is still probably about 20% to 30% of the firms out there paying discretionary bonuses. That's just the easiest way to do it. You know, if the firm makes, you know, has a good year, then at the end of the year, you can kind of dole it out, but it's not tied to anything tangible. So moving to more of a performance-based plan, incentive plan, just creates more transparency, and you can really drive the kind of behavior you're looking to. But it becomes more difficult for, I think, non-advisory roles for most firm owners because first of all, they're not in those non-advisory roles so it's harder for them to sort of wrap their heads around well, what would I incent people to do?

So I like to talk about well, what are some of the key initiatives that the firm needs to accomplish over the next 12 to 24 months, and how does your, you know, non-advisory support staff…? They're going to be most likely very integral to some of these projects or initiatives, and so tying them to those projects through a performance-based bonus makes a lot of sense. So things like client segmentation projects, client events, marketing projects, updating the website, software updates, technology projects, client service type deliverables. You know, those are all things that you can tie people, you know, more tangibly to, and assign an incentive to that.

Michael: So how do these numbers ultimately boil out? Like, how much of someone's compensation should be base versus incentive? I mean, I get it on the advisor side, like, you can kind of dial that up and down depending on how hungry you want to make them to sort of drive them towards new business. But, you know, for at least, not heavily business development oriented advisor roles, or for the rest of the non-advisor roles, do you look at some ideal mixture of how much of this should be base pay, and then how much should be bonuses and bonus plans?

Kelli: Yeah, definitely. And this is going back to the benchmark, you know, we talked about. This is where the benchmarking can be helpful to see where, you know, how you're paying someone on base and incentive. Or if you're not paying incentive right now, it's totally discretionary, what industry data is telling us, so that you can kind of calibrate it so that you get to a total cash comp number that is, you know, sustainable and manageable, from a spending perspective on the numbers on the expense.

So for advisors, I would say I usually see it somewhere between 15% of base pay on the lower end to maybe 30%, maybe as high as 35%. Probably somewhere around the 20% to 25%. These are also…a bit of range 15% to 30%. Most of the plans I design, probably 20% to 25% of base.

Michael: Okay. That's way more muted than firms that just pay 20%, 30%, 40% or more, of managed revenue and you just move up and down, or ride it up and down with the markets.

Kelli: Right. Right. Well, for a dedicated business development officer, if you wanted to look at that for some of the firms out there that are maybe thinking of that, then you're going to be more like 50% to 75% on the incentive.

Michael: Right. Right, if you're primarily business. Yeah.

Kelli: Yeah. And then dedicated management, probably 15% to 25%, again, depending are we talking an ops manager versus the COO, CCO type of role, C-suite role. But definitely, opportunity there. Your associate or support para-planner type of entry level, I guess I would say, or support advisor, probably about 10% to 15%.

Michael: Okay.

Kelli: Maybe as high as 20% if they have some area of special knowledge that, think of a more of a technical specialist. Maybe they have some trust and estate planning expertise, something like that, depending on what type of firm, you know, you are and what your clients need.

Support stuff then are going to be somewhere between 10% to 15%. Fifteen percent would probably be on the high side. And then your admin, receptionists, administrative assistant, 5% to 10%.

Now, some firms like to say, "Well, I'm just going to make everybody the same percentage." Maybe if it's the very first year, you know, that you're designing this kind of a plan where there's a percentage of base, you're going from a discretionary base, maybe that makes sense to do for ease of implementation, but I really stress differentiating between the roles they do you have a higher impact on your end client, or on the financials of the firm at being more highly leveraged.

Michael: So as we come in towards the tail end here, and just having done this for a lot of years and talked to a lot of firms, just give a number one or two area where you see firms just have the biggest gap that they really need to plug and solve. What's the thing that aggravates you the most that you just wish most firms would fix, because you keep seeing the problem over and over again?

Kelli: That percentage of ongoing revenue, that's just really at a high percentage. It's not helping them be able to really become a real business, you know, to be able to invest more into the firm. And paying out. You know, here's the other thing. For firms that are thinking about that next generation and, you know, wanting to expand ownership, really thinking about the total cash compensation picture, and how is this next generation of new owners going to be able to purchase shares, right? Because the way that they're going to do it is through the current compensation structure and loans.

And if you're giving away a lot on the incentive that's being paid like a percentage of revenue, in other words, kind of paying them like an owner even though they're not an owner, they're not going to ever want to be an owner, because they don't have to.

Michael: True.

Kelli: They're getting paid a percentage of revenue. So, I mean, I'm not against a percentage of revenue, but just don't make it such a high number that it becomes well, why would I…you know, the financials don't make sense for me to become an owner.

Michael: We talked about that. We had David Grau out for Episode 8 of the podcast last year, and kind of talked about that similar theme. You know, if you give the advisor in your firm enough of a percentage of revenue, they basically never have any incentive to actually grow the value of the business and the enterprise. Because they already get all the upside personally by just building a wall around their little fiefdom of clients, and holding on their clients and making sure they can't be ejected from their clients.

And, you know, if you do that throughout your firm because all the advisors are compensated as a percentage of revenue, you end out with a whole bunch of silos of individual advisors who, you know, you're always kind of struggling with the risk that they might leave, because the clients are attached to them and not to the firm, and you can't peel them away from them because they're holding on to their percentage of revenue for dear life, because, you know, I would too at that point.

But, you know, you get…I think David likes to call them "Fracture lines" in the firm that, you know, you may not realize how fragile it's become, but the percentage of revenue payouts over time really create problems. I mean, ironically to me, that's frankly the challenge of the whole broker-dealer model right now, is advisors build practices with independent broker dealers, and then they switch and change firms and they take their clients with them, and the firms watch the revenue walk out the door.

I feel like a lot of advisors, you know, almost all of us started in insurance or broker-dealer channels that were all kind of sales jobs and eat-what-you-kill. If you've been in for longer than about 15 years, it's almost certain that's where you started. I feel like a lot of us, as we grew our firms, you know we built what we know, and what we know is the eat-what-you-kill brokerage model that we keep up with, or that we grew up in, and don't realize that, you know, we're creating for ourselves the same problematic model that all the broker-dealers are struggling with right now as well, for the exact same reason that if your advisers get paid a percentage of revenue, they're not in it for the business, they're in it for themselves.

And they can leave and try to take their clients any time if they don't think they're getting enough from the payout. And you get a, you know, management versus advisor payout debate, instead of getting a, "Hey, we're all partners in this firm, let's make this thing more valuable together," discussion.

Kelli: Completely agree. And I think that's why, I like to say, think through your compensation structure, and think about what the unintended consequences might be of what you've created. And, you know, it may be too late to undo some of those longer tenure folks who are firmly entrenched.

But, you know, the other thing is I worked with one of my first clients. She had this situation going on and, you know, we changed it for the up and coming advisors. We change the comp structure for them. But eventually, that longer tenured person left, and it was really the right thing. It was painful. I'm not saying it wasn't painful, but culturally, that firm had changed, and they were going in this direction of building, a team building clients of the firm, and that old brokerage model just wasn't working to accomplish that, so.

Michael: So, you know, from your end, like for you personally, Kelli Cruz of Cruz y Consulting Group, where is your focus in the coming years? What are you looking to build towards, or build more of at this point?

Kelli: Well, that's a great question. I really, really enjoy the work that I do, because it's so challenging. You know, employees and people are changing every day, and it brings with, you know, challenges in the workplace. But I don't see challenges, by the way, as negative. Anyone who knows me knows I love a good challenge, and that's a positive thing. That's where I get my positive energy, so what I do to sort of regenerate and regroup is I go run Mt. Tamalpais, which I live on, so…

Michael: Cool.

Kelli: …that tells you how crazy I am in terms of challenge. But helping to change as the landscape for industry is changing, which I find so exciting, and keeping up with, you know, what are some of the things that are going to really be necessary to think about from your employees' perspective, and managing talent?

So I'll give you a quick example. One of the things that, you know, we probably should have been thinking about but weren't, but now it's come up much higher on the list about our millenials, you know, one of the things that they're struggling with, why that base compensation is so important to them, is because they're the most highly educated of any generation before them, and they're the most highly indebted as a result of that, with student loan fees.

So now all of a sudden, it's becoming more mainstream to think about helping them repay that student loan as part of the benefit package. So trying to stay on top of what's changing in the workplace, and how to help our independent registered advisors stay competitive, is something that I look forward to.

And, you know, really helping firms with the succession of the next generations as we still have a lot of the founding entrepreneurs running firms, and they're reaching a point where even they realize the runway in front of them is getting shorter and shorter, as my friend Mark likes to say, in terms of their succession and retirement. Helping them in real ways with those challenges is definitely part of what I look forward to doing.

Michael: Very cool. As we come to the end here, you know, this is a podcast about success, and, you know, one of the things I've long observed is that success just means different things to different people. We all, you know, come to define it differently for ourselves. So, you know, you've gone through this fascinating career track of doing HR in large firms, and then consulting for independent advisory firms. You're still the only person I know of that has that background and is not doing that, and worked for mid to large size independent firms.

So you've had this successful career path up to this point. So looking forward from here, I'm just wondering at a personal level, like how do you define success?

Kelli: How do I define success? Well, it's really about adding value. So success, for me, is when a client says to me, I got an email today, "You know, this was really helpful information, and I could have never navigated, you know, through all of this without your help and your counsel."

Like I said before, being able to help firms manage the part of their business that for some seems really foreign, you know, they admit it's their least favorite part of their job, helping that become less stressful, less of a pain point, and putting solutions in their hands that they can run with and not, you know, feel like it's a canned solution that doesn't work for them.

So being creative within a framework of, like I said earlier, you know, there's laws, and policies, and practices, within managing your team that we want to stay within, but then being creative enough to have it be able to work for you as the firm evolves further and be something that's really engaging for the team. And, you know, being flexible as much as we can about how that can work.

Michael: Well, very cool. Well, thank you for coming and joining us here on The Financial Advisors Success podcast, and sharing some of that perspective.

Kelli: Thank you, it was my pleasure, and it was a lot of fun. I appreciate it.

Michael: Absolutely. Thank you.

Kelli: Thanks.