Carnegie Private Wealth, a Charlotte, N.C.-based registered investment advisor in LPL Financial’s corporate RIA channel with $2.2 billion in assets under management, has restructured its compensation program to better position itself for long-term growth.
In a move that experts see as becoming more common among RIAs, Carnegie has launched a profit-sharing setup among its 26 team members (with plans for two hires in the coming months). The program also includes a 360-degree review for employees twice a year and unlimited paid time off—two common tools in corporate America, but not necessarily in the generally founder-led RIA sector.
“Now that we’re three years in after launching the firm, we wanted to find a way to really reward people for all the hard work that they do and the way that they contribute,” said Jordan Raniszeski, a senior managing partner at Carnegie who was part of the creation of the firm three years ago when it moved from Wells Fargo to LPL’s RIA channel. “But we also didn’t want it to be just like, ad hoc, pulling numbers out of the air.”
As with many financial advisors, Raniszeski and his partners, who include Senior Managing Partner Angela Ostendarp, didn’t have a background in creating compensation structures for growing teams. That was especially true for junior members, who may not have built client books yet, and for senior leaders who aren’t advisors, but are focused more on operations and business development.
“Producers are one thing,” Raniszeski said. “In our old world, when you’re at a wirehouse, client service people get paid as your business increases. That’s great, but we wanted to get away from that concept for a variety of reasons—I don’t think it always incentivizes the right behavior … I felt like it was better to base it on things that actually mattered to us, like profitability.”
Carnegie is part of a trend of RIAs adopting or exploring profit-sharing models, according to industry consultant Mark Tibergien of Mark Tibergien Insights.
“The introduction of a profit-sharing model is becoming more common as RIAs are hoping to provide both a reward for labor and a reward for ownership,” Tibergien said. “The former recognizes their value for what they do in their job, the latter is to recognize the success of the enterprise. In some cases, the profit sharing and bonus structures may also be deferred, which is a way to help their employees build up their net worth in a non-taxable manner.”
Tibergien, the former CEO of BNY Pershing, said there are several reasons RIAs may be considering changing their compensation structures. Those include a desire to shift some costs “from fixed to variable” to incentivize advisors to do more business development, a way to get brokers off a sales-grid approach and onto a salary-and-bonus plan, or to get their gross profit margins more in line with industry benchmarks.
In general, Tibergien considers himself a fan of profit-sharing setups for RIAs, as they can help firms “lock into enterprise success” when well-designed.
“The risks to some RIA firms of other individual comp plans is to over-reward individual performance instead of team or business success,” he said. “While it’s good to have instant recognition for some things to address a more urgent issue, such as slow organic growth, what many firms realize is that money is not a substitute for active management. Or training, skill development and cultural alignment.”
For Carnegie, the first step was figuring out how to properly set up its new structure. For help, it turned to a local, Charlotte-based firm called SpanHR.
The firm started Carnegie out by having them do a rigorous profit-and-loss analysis, followed by a forward-looking forecast for the year ahead.
Using that material, the HR consultant helped the RIA develop a profit-sharing system tailored to their needs. In that setup, if the RIA exceeds its profit target, about 40% to 50% of those dollars go into a profit-sharing pool, Raniszeski said.
The targets, however, are made up of 80% profits and 20% net new assets. That is designed to account for a potential market downturn, which would crimp profitability but could be an opportunity to bring in new clients.
“I think back to 2008, which was one of the best net new asset years we’ve ever had,” he said. “Everybody was talking about financial issues, and so there was a lot of movement of people switching advisors or being proactive in getting advisors.”
The setup also seeks to reward high performers through a review process from everyone they work with. That process, which will be done twice a year, will establish a ranking system by which a top performer will see a larger payment for the year.
Finally, Raniszeski and team decided on an unlimited PTO setup made popular by technology companies a few years ago. He pointed to one staffer who was taking off three weeks to get married and go on a honeymoon.
“I wanted him to do that, of course, but then not have any time left to celebrate Christmas and Thanksgiving with his family,” he said. “I know our people well enough to know that they will be respectful. The biggest thing we always ask is that you talk to your teammates to make sure coverage is in place.”
Consultant Tibergien warned that profit-sharing setups should not be seen as a “panacea,” as they can backfire if not set up with intention.
“These types of plans require very thoughtful design so as not to inspire cultural dysfunction, team disruption or in some cases, inappropriate behavior,” he said.
In the final analysis, he expects more RIAs to consider some kind of compensation plan change as they recognize “their firms are no longer entrepreneurships or practices, but real businesses that are becoming complex enterprises.”
