The Self-Employed Adviser Trap (and How to Escape It)

Some owner-advisers reading my recent white paper, If Incentives Worked We’d All Be Amazing By Now, might realise they’ve got some self-employed advisers on completely untenable remuneration packages. 

What might that look like?

Your remuneration is completely untenable if you’re paying away more than 40% of the gross revenue that the adviser manages (new business and ongoing revenue). And in modern financial planning firms, I’d argue that paying away even 40% of gross revenue is still too high. 

As firms grow and mature, it is the business itself which starts to generate more and more of the inbound leads. Yes, great advisers contribute to that significantly for their part in generating referrals. However, so do all other parts of the business. 

If processing of work in the back office takes forever, you’re not going to get many referrals, regardless of how fantastic the client-facing adviser is. Financial planning is a team sport. 

Additionally, as the firm grows, we might be “giving” up-and-coming advisers a client bank and associated revenue stream. And in that situation, there’s no need to be paying away huge percentages of gross revenue. A salary package, set at the right level to recognise the skills of the servicing adviser, is perfectly adequate. It doesn’t have to be tied to a percentage of ongoing revenue.

If you don’t understand your own profitability metrics as well as you should, then watch my free PFS Power webinar called, Know Your Numbers.

So how do you handle a potentially difficult conversation with a self-employed adviser when you realise you are paying them too much?

Self-employed advisers are, as the name implies, working for themselves, but under your umbrella. That doesn’t make them bad people. If you hired them on that basis, they are simply acting in line with the incentives you offered.

As I covered in last week’s blog, typically it’s some variation of this remuneration model:

E.g. Base salary: £40,000
Variable Component: 35% of all revenue above £120,000 (3x qualifying level)

To properly evaluate your self-employed adviser contracts, you must know your numbers (so watch my free webinar above if you don’t understand what the right metrics are for a financial planning business).

In a lot of cases, I see self-employed advisers receiving 50 – 60% of gross revenues (sometimes even higher). I assure you, you’re not making a profit as the business owner in that scenario unless the self-employed adviser does all of their own administration and paraplanning or hires their own staff (which is not common and a massive compliance risk to boot).

Additionally, if you have a team of self-employed advisers, what are you building and what will you have to sell in the future? Sure, the revenue looks nice as a vanity metric, but if you’re not genuinely profitable and you don’t actually own* the clients and associated revenue stream, then what do you actually own and have to sell at some future date? 

Where’s the value creation for you?

It just doesn’t work in my opinion.

*(Forgive me for that expression – I realise no one “owns” the client in reality, but I couldn’t think of another way to express it. I hope you get my point nonetheless.)

What to do

If the situation doesn’t work for you, then change the incentives (or remove them entirely).

Your top priority is to both reduce the pay away (ideally down to about 35%) and to bring the advisers in-house so that everyone is part of the one business entity. 

How do you do that?

With great difficulty, in all honesty. 

If you’ve got a long-standing good quality relationship with the self-employed advisers, you can share the financial metrics from my Know Your Numbers webinar, which at least gives them insight into the problem.

You might then make a commitment to reduce the pay-away to the advisers step-by-step, over say 3 years, to give them time to adjust. 

They might also tell you to bugger off, but that’s the conversation you need to have. 

If you can gain agreement to the reduced pay-away, the second challenge is, how do you bring them in-house so that all clients and income streams become an asset of the business?

In this situation, you are probably looking to either purchase their client bank (although this might be incredibly risky for you – they could just leave in the future) or bring them in as equity owners into the larger business entity, with equity apportioned to them based on the size of their annual revenue stream.

As I’m sure you are already realising, this step might be:

• Unattractive to you (do you want these advisers as your business partners?)
• Unattractive to them (they might be very happy with the income and flexibility they now enjoy)
• Hugely complex from a legal and taxation perspective
• Take up huge amounts of your time over the next 2 years in protracted negotiations and legals.

So what’s the alternative?

In more than a few instances, I’ve recommended that there is an amicable parting of the ways between the business and the self-employed advisers. The self-employed advisers can go and find another home for themselves (there are still plenty of firms happy to take them on), and the business owner can strip the organisation back to its true core. 

That might lead to a reduction in total top-line revenue, but it very quickly frees up the business owner from a load of management hassle, simplifies the business and the support team, and allows the owner to focus on building real embedded value by growing a business full of clients loyal to the firm rather than individual advisers. 

Conclusion

I know. This is a tricky issue. But not addressing it is simply storing up an ever larger problem for the future – particularly when you come to sell the business. 

As the Operations Manager in my Australian financial planning business was fond of telling me, “Bad news doesn’t get better with time.”

Hopefully, this blog gives you some food for thought when it comes to reviewing your remuneration strategy for the self-employed advisers in your business. 

Let me know how you go.

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