Structuring the compensation strategy for your financial planning firm is one of the most vital areas for firm owners to address to sustain a successful growing firm year after year. Set your compensation too low, and you can end up with a bunch of average performers who does not do anything to move your firm forward, and risk doing irreparable harm in some cases. On the other hand, if you set your compensation too high, you might wind up with a team full of people who are solely motivated by money and do not fit the culture, nor believe in the mission and vision you have set forth.

To deal with this issue, some firm owners take a stab and develop their plan, others hire compensation experts or practice management consultant types, others ask what their peers are doing and try to duplicate, and still others rely on the handful of salary surveys that are available annually.  In our work with over two hundred financial planning firms, we have witnessed successes and failures using these approaches. In this month’s article, we are looking at some of the pitfalls associated with salary surveys.

The genesis of the salary surveys was over a decade ago with the Moss Adams Compensation and Staffing Study, designed to assist firms in gauging business performance in relation to their peers, as well as guide leadership in making better financial and business decisions. It was the beginning of “big data” for the financial planning profession, and it has been a useful tool for decision makers considering it was not that long ago that a “big” firm was characterized as having $100 million in AUM, and now “big” is >$ 1 billion in AUM!

Nonetheless, we find that a growing number of firms are taking a problematic view in using these studies. Here are some things to watch out for:

• Limited sample size – Depending on the study, participation can be anywhere from a few hundred firms to around a thousand. Although this is growing each year, it still pales in comparison to the estimated 40k Federal and state-Registered Investment Adviser firms that could participate, and 200,000+ advisors at independent broker-dealers. Even at a thousand firms participating, there are inconsistencies between business models, service offerings, job titles, and responsibilities, that don’t necessarily get accurately captured, and make the results more challenging to discern. The participation seems to depend heavily on the vendor sponsoring the survey. Which is why organizations like restricted-access mutual fund companies and custodians are more likely to pull people into the fold that are similar, over media companies sending the link to their mailing list.
• Data skewing – This happens both intentionally and unintentionally. The surveys can be rather lengthy and firm owners who are tight for time can sometimes provide data that is inaccurate because they are sharing what they think they are doing instead of pulling everything and documenting what they are actually doing. Others have more blatantly artificially inflated numbers to protect the image that they are a “top firm” with internal people who compile the data. Additionally, an increasing number of job seekers are registering and providing inaccurate information to get a copy of the report to negotiate pay increases.
• Static data -  In terms of hiring, compensation trends change on a more frequent basis than the reports are published (which is usually only every year or two). Working with stale figures might provide a place to start, but might not secure the candidate of your dreams. Keep in mind, when hiring someone it doesn’t really matter what a report that was released a year or two ago says you should offer the candidate. If you want to hire the person, you should offer what it will take to get them, and sometimes these two figures can differ substantially.

These are the issues that we have seen and hear about most frequently. Realize, too, that we suggest firms participate in these surveys because they can add value. However, we want to caution firms to not rely solely on these data points for decisions that have substantial impacts to a business. Just like any other decision-making process, these tools should be a part of a myriad of resources/experts consulted in the delicate crafting of compensation plans.