It seems that the term “’grid payout” (the percentage of an advisor’s revenue that is paid out to the advisor) has been part of the wealth management industry’s vocabulary for decades. It might even pre-date “financial planning” or “asset allocation” and it remains the way most advisors are paid in today’s world.
To be fair, there are very good reasons behind that and it genuinely serves the interests of both the advisor and the parent firm. The parent firm wins because they are able to tie compensation to revenue, it incentivizes growth and it protects the firm if the market falls and revenues drop. The advisor wins when they build a client book and bring in revenue, there is a predictable formula that will decide what they are paid. There are no third parties or office politics that can affect that outcome. That is understandably attractive and it helps drive the sense of entrepreneurship that this industry is well known for.
However, particularly in the wirehouse world, the grid payout system has become something it is not. It has become the way you compare two jobs. You hear it all the time “…the advisor moved firms for a better grid payout.” At Dynasty, we help advisors launch their own firms and we often hear advisors ask “what could my payout percentage be if I launch my own firm.” We politely tell them they are missing the point.
Here are the top five reasons why your grid payout does not really matter anymore:
- First the obvious one: hidden costs
I still find it pretty shocking how many advisors take it as a given that any published grid payout system will also be partnered with a collection of hidden taxes. “Reporting fee”…or..”Account origination fee” or “Platform fee,” we have all heard them. “Complex fee” is my particular favorite, if you decide to have cheaper coffee delivered to your branch office, does that mean the complex fee goes down? Thought not.
It goes without saying, but any comparison of situations requires and apples for apples comparison of costs. This is easier to understand in the RIA world because many of these costs are unbundled. The custodians take their fee, you pay your support/technology costs through invoices and your advisory fee is separated out, it is simple and transparent.
When we help an advisor launch their own firm we run a complete P&L analysis. We show them how much money they are making today with their grid payout and then we show them how much setting up your own firm actually costs, both in start-up costs and ongoing. Having that apples for apples comparison is crucial.
- What does your grid payout not cover?
Let me be clear, I am not talking about the nickel and dime stuff above. I am talking about key things you actually need to run your business. Technology costs are often named here. The advisor might receive a basic technology package from their parent firm but they often find they might need to supplement that with other technology (e.g. – financial planning software). Even worse, the package might be so bad that you actually end up paying for software to replace it.
- Who pays your support staff and would you actually need the same number of support staff in a different world?
Advisors might brag about a large grid payout but they then have to pay for all their support staff themselves. There is nothing essentially wrong with that but you have to look at the bottom line. At Dynasty, we always talk about EBAC (Earnings before Advisor Compensation). Take your revenue and subtract out all the support costs (eg – rent, technology, support staff compensation). What is left to actually pay out to the partners of the firm?
What has become more common is that some advisors, due to the poor technology offered by their parent firm, have to hire staff to create manual processes to compensate for the poor technology. In today’s independent world, there are numerous examples where good technology replaces the need for overstaffing. In short, opening up your own RIA can often lead to a more efficient and effective operation typically allowing for a 30% reduction in staff leading to a wider bottom line.
- Think bigger
Your grid payout is a percentage on your revenue, but what limitations are placed on how that revenue is decided. When an advisor launches their own firm, we often see them “thinking bigger” and looking outside the box when it comes to revenue.
For starters, many advisors actually charge a higher advisory fee in the independent world because they can now offer additional services to their clients (e.g. – asset management, family office services, etc). Also, many advisors enjoy the greater flexibility to set up a fee schedule that both the advisor and the client agrees upon. This might involve fixed amount fees or tiered levels of service with different fee rates. In short, look at both sides of the equation.
- What other intangibles are included?
This is perhaps the most compelling in today’s world. In the past, your parent firm would keep a certain percentage of your revenue and in return you would receive many of the things we have talked about in this article: technology, compliance oversight, perhaps even some marketing, etc. However, there was another factor included in all of this: the brand image of a particular institution. The advisor was able to align themselves with a brand and an identity. To be fair, that trade-off was worth it for many decades and having a certain brand on your business card probably did help bring in clients. However, I would argue that this is perhaps no longer the case. We live in a world where financial size no longer inspires trust. Even worse, some advisors who are amazing at their job and really care for their clients have had to explain to clients why their parent firm were involved in ethical scandals and technology breaches. We now live in a world where the most important thing is the trust and relationship between an advisor and the client. Did a parent company create that? Do they deserve a certain percentage of an advisor’s revenue for that? In our opinion, we do not think that trade-off works anymore and it is time for advisors to seek out their true enterprise value.
Gordon Ross is Director – Enterprise Group at Dynasty Financial Partners and Conrad York is Founder of Conrad York Consulting.