At Herbers & Company, we have tracked upper-quartile financial advisor compensation since 2003. Our data, derived from various industry benchmarking studies, including our in-house research, reveals that total compensation tends to rise after bear markets and decrease during bull markets. (The chart excludes several years post-2011, as compensation remained relatively stable during this extended bull market period.)

The explanation for this pattern is straightforward: In bear markets, firm leaders fear losing their advisors, prompting them to increase salaries and incentives. Conversely, during bull markets, leaders are less concerned about advisor retention, as deeper profits can offset potential losses. Notably, compensation levels don’t just move in one direction; they often revert to a long-term average range that remains relatively stable. This dynamic, where compensation benchmarks rise and fall, is one reason private equity investors are attracted to our industry, as it benefits scalability. In other words, advisor compensation does not increase at the same rate as client fees over the same period under the assets under management (AUM) pricing model.

This cycle of fluctuating compensation can create challenges for firms that rely on benchmark data when designing compensation packages. Setting compensation levels at a market high or low point could result in discrepancies with long-term averages. For instance, if compensation is based on bear-market compensation data, employees may become dissatisfied if pay rates drop during a subsequent bull market. Consider the scenario where an advisor was hired in 2005 or 2011, and their compensation followed the benchmark changes depicted in the chart; their earnings would have fluctuated significantly over time.

A Strategic Approach to Financial Advisor Compensation

A more effective approach to structuring compensation is to base it on your firm’s growth vision. However, each firm’s vision is unique, requiring a customized approach to compensation that aligns with the firm’s specific needs and goals, rather than relying on quick benchmarking solutions. When compensation is tailored to the business’s objectives, employees feel like integral members of the organization rather than interchangeable parts driven by data points.

Imagine telling your advisors, “We’re offering you a competitive package based on industry averages.” Now, compare that to communicating the firm’s direction, the values you uphold when working with clients, and the capacity targets that ensure financial advisors can maintain a fulfilling life outside of work.

The former merely placates an advisor, while the latter fosters an engaged workforce focused on making a meaningful impact. It makes employees feel included, trusted, understood, and valued for their roles and responsibilities within the firm. This approach signals that they are vital resources, not just mercenaries driven by industry data.

This leads to another critical aspect of retention: it’s not just about money. Based on Herbers & Company’s two decades of industry consulting, one of the most effective ways to ensure advisor loyalty is to engage them with clients under a clear vision. Once advisors form strong connections with clients, a sense of purpose and responsibility often emerges, significantly influencing their decision to stay with the firm. However, this connection doesn’t develop if the firm isn’t committed to a client-first vision.

“Financial advisory firms often underestimate the power of client connections as a retention tool.”

In our experience, financial advisory firms often underestimate the power of client connections as a retention tool. They fail to recognize the extent to which advisors become attached to clients and feel responsible for their long-term well-being. Advisors who work directly with clients typically remain with a firm for extended periods, driven by a desire to maintain these clients relationships. (There is a common misconception that most clients will follow an advisor who moves from one independent RIA to another, but the transfer success rate is generally less than 20%, regardless of the language and restrictive covenants in an advisor’s employment contract. This low success rate serves as a natural retention incentive for advisory firms.)

Unfortunately, the fear of losing clients can influence firms’ decisions regarding advisor roles and compensation. Firm leaders who experience the departure of an advisor and some clients may worry it could happen again. However, the reality is that the number of advisors who leave and take clients receives far more media attention than their actual prevalence warrants.

Parenthetically, offering raises during bear markets, which contributes to the cyclical nature of compensation, is often unnecessary. In down markets, advisors are typically focused on protecting and communicating with their clients, with few considering changing firms or starting their own businesses.

The key takeaway is that retaining and motivating advisors involves more than just compensation. The best results occur when firm leaders thoroughly understand their business, know where they want to take it, and have a clear plan for getting there. When this is the case, determining how and how much to pay your people naturally falls into place.