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Many RIAs reach a point of growth when informal compensation arrangements no longer scale. Early on, paying advisors can be a one-off, case-by-case decision. However, as a firm grows, brings on additional advisors, and professionalizes its employment agreements, compensation stops being something that can be handled informally and becomes a core part of how the firm operates.
Firms need a compensation structure that is appealing to advisors; scalable, so it can apply to a team, the members of which will inevitably talk to each other about how they’re being paid; and aligned with long-term business goals.
In this context, how should RIAs think about advisor cash compensation? This article focuses on the salary, bonus, and benefits arrangements commonly used in the industry and typically documented in investment advisor representative (IAR) agreements. The goal is not to prescribe a single “right” approach or address every possible structure, but to outline several of the more common models and the key considerations that come with them. Equity compensation, profits interests, phantom equity, and similar arrangements are beyond the scope of this article and will be a topic for another day.
A Big Picture Question
Before getting to the finer details, RIAs need to consider a big-picture question: How much do you want to pay your advisors all in? Do you have a cap in mind, or can the compensation be potentially unlimited and driven by revenue generation? The answer to these questions will inform the rest of the decisions.
For RIAs that want to work backward from a target compensation amount or cap, the 2022 Schwab survey provides a useful reference point for setting compensation for an individual advisor or a particular group of similarly situated advisors. Take a look at the National Compensation Results, beginning on page 30. The numbers there are quite detailed and provide a sense of the market from just a few years ago. Note that Schwab has put out more recent versions of this survey, but the newer versions (at least the ones that I’ve seen) don’t actually list out compensation like the 2022 version.
Of course, benchmarking data should be only a starting point. A firm’s approach to compensation should reflect its own economics, service model, and growth expectations — and the degree to which the firm (as opposed to the individual advisor) is generating and supporting the client relationships.
AUM-Based Compensation vs. Salary and Bonus
After considering the big picture questions above, firms should decide if they want to simply pay advisors a percentage of their AUM-based revenue, or pay a base salary with an opportunity for a bonus (we discuss potential ways to calculate the bonus below).
Of course, firms are not really paying on “AUM” in the abstract. They are paying based on some combination of revenue generated or credited to the advisor, which is typically tied to the advisor’s AUM. That distinction matters, because two advisors with similar AUM can generate very different economics for the firm depending on fee schedules, household complexity, and servicing demands.
A pure AUM-based model is predictable for the advisor and aligns pay with revenue generation, but it’s less flexible for the firm. This approach looks a lot like the independent contractor/platform model. When an advisor has a portable book of business and brings it to a platform that provides compliance and certain other support services, the platform typically retains some portion of the advisor’s revenue in exchange for its services.
But firms with traditional IAR employment relationships can pay in a similar way. In this case, cash compensation is driven primarily by the advisor’s revenue. There is little discretion for the firm to increase compensation for non-AUM-based contributions or reduce compensation that falls outside the firm’s target range.
Especially for newer advisors with fairly low AUM, this approach may be less than ideal; their starting compensation may not make the job economically viable. For more experienced advisors with higher AUM, this approach can be a significant retention mechanism. It makes the relationship look more like the advisor manages their own practice and reaps the fruits of their labor, and less like a traditional employment relationship.1
On the other hand, when an advisor’s AUM is driven primarily by the firm’s relationships, marketing, brand, and investments in the advisor’s practice, paying the advisor purely on their AUM-based revenue may not reflect the business reality underlying the source of the advisor’s AUM.
Based on these considerations, some firms opt for a salary-plus-bonus model. It provides more income stability for the advisor, while giving the firm flexibility to reward performance as it deems appropriate. A newer advisor building their book of business has the comfort of knowing that they’ll be paid regardless of their AUM in the early days of their career with the firm. For its part, the firm has the flexibility to adjust compensation based on considerations such as the firm’s contributions to the advisor’s practice, the advisor’s success in business development, and the advisor’s non-monetary contributions to the firm.
In many firms, this middle-ground approach is the most natural fit. It recognizes that advisor compensation should usually reflect both individual production and the fact that the firm is providing infrastructure, branding, compliance support, operations, staffing, and often a meaningful stream of opportunities that the advisor did not create alone.
Bonus Considerations
If a bonus is part of the structure, the next question is how it will be calculated. Many firms base bonuses on specific key performance indicators (KPIs). Common KPIs include retention of existing clients, new assets from existing clients, new assets from new clients, and the overall revenue or AUM attributable to the advisor. Each of these metrics rewards slightly different behavior, and firms can be intentional about what they want to incentivize.
Instead of advisor-specific KPIs — or in addition to them — a bonus can also be tied to the firm’s overall financial performance. This approach emphasizes teamwork and alignment with firm-wide goals, but it can feel less directly controllable from the advisor’s perspective.
Firms should also consider whether the bonus should account for profitability or margin, not just top-line growth. An advisor who grows assets rapidly, but does so through lower-fee relationships or service-intensive client relationships, may be creating less economic value for the firm than AUM growth alone suggests.
In many cases, basing the bonus on overall AUM-based revenue is the simplest and most intuitive option. It captures both growth from existing relationships and new client development, and it is easy for advisors to understand and track. It can also be conditioned on maintaining a minimum client retention rate, so that growth is not coming at the expense of client attrition.
That said, simplicity can obscure important differences. A bonus based solely on overall AUM or AUM-based revenue may not distinguish between market appreciation and actual business development, and it may not account for differences in the level of firm support required to service particular clients or generate the assets in question. For that reason, some firms prefer to tie at least part of the bonus to net new assets, new revenue, retention, or another metric that better captures advisor-generated value.
Once the firm decides what the bonus is measuring, it must decide how the payout works. If the bonus is percentage-based, the percentage may be fixed or tiered. A tiered structure can increase the payout percentage as the advisor reaches higher AUM-based revenue levels, rewarding scale and sustained growth. Alternatively, the payout percentage can decrease at higher levels if the firm wants to keep overall compensation within a target range. Firms can also use milestone-based bonuses, under which specified retention, AUM, or revenue thresholds trigger fixed bonus payments.
When bonuses are formula-driven, firms should also consider whether to impose a cap. A cap can help manage cost predictability and prevent compensation from exceeding the firm’s intended economic model, particularly in years of outsized growth. On the other hand, uncapped bonuses can create a stronger incentive for advisors to grow their practices within the firm.
How Much to Show Behind the Curtain
Another important decision is how much detail and transparency to build into the bonus structure. At one end of the spectrum, the employment agreement can simply state that certain KPIs and/or the firm’s overall performance may be considered in determining bonuses, with the final decision left entirely to the firm’s discretion. This approach maximizes flexibility and minimizes administrative complexity for the firm, but it offers less predictability for the advisor.
At the other end of the spectrum, the bonus can be based on a predetermined formula that is shared with the advisors. While sharing this information promotes transparency and staves off the potential criticism that the firm’s compensation is a “black box,” it also ties the firm to specific compensation outcomes (deviation from which may be considered breach of contract), and takes away discretion to make compensation decisions based on larger management considerations.
There is no universal right answer here. But firms should be realistic about the tradeoff. A bonus that is too discretionary may preserve management flexibility while losing much of its motivational value, because advisors cannot reliably see how day-to-day performance translates into pay. By contrast, a fully formulaic bonus can be highly motivating and easier to defend as fair, but only if the firm is prepared to live with the results when circumstances change.
There is also an important drafting point here. The more objective and formula-based the bonus, the more likely it is to be characterized as earned compensation once the stated conditions are satisfied, which may significantly limit the firm’s ability to withhold or cancel it.
By contrast, a truly discretionary bonus often gives the firm more flexibility to reduce, withhold, or decline to award it. For that reason, if the bonus formula is stated expressly, the agreement should clearly address when the bonus is deemed earned, whether continued employment on the payment date is required, what happens if the advisor departs mid-year or joins partway through the measurement period, and how disputes over the firm’s calculations will be resolved. These are often the issues that lead to compensation disputes.
Timing and Vesting
The timing and vesting of a bonus is another lever. Bonuses can be paid annually as earned, or they can be subject to a vesting schedule designed to encourage retention. Under a simple vesting approach, this year’s bonus is paid next year, and each subsequent year’s bonus follows the same pattern. If the advisor leaves before the payment date, the bonus is forfeited. The result is a rolling incentive that gives advisors a financial reason to remain with the firm.
Firms using deferred or vesting-based bonus arrangements should be careful in how they draft forfeiture provisions and should confirm that the arrangement fits with applicable wage payment rules and other employment law considerations in the relevant jurisdiction. The more the bonus looks earned and non-discretionary, the more important it becomes to think carefully about whether and when it can be withheld, deferred, or subject to forfeiture.
Other Compensation Considerations
Of course, there are some other common elements of compensation that firms should take into account. These include reimbursement of business development and marketing expenses, payment for continuing education and professional development, health insurance, and retirement contributions. Each of these components affects both the firm’s total compensation spend and the advisor’s perception of the overall package.
Firms should also think about consistency and internal equity across similarly situated advisors. Even when two advisors are not paid identically, the firm should be able to articulate a coherent reason for the difference, such as tenure, production, supervisory responsibilities, or business development expectations. As a firm grows, unexplained differences in compensation can become a morale issue just as quickly as an economic one.
Conclusion
Compensation is not just an HR matter; it is a strategic business decision that shapes advisor behavior, retention, firm culture, and long-term profitability. Whether an RIA chooses an AUM-based model, a salary-plus-bonus structure, or some combination of the two, the key is to adopt an approach that fits the firm’s economics, rewards the right behaviors, and can be applied consistently as the firm grows. There is no single correct formula, but there should be a deliberate one.
An ideal compensation structure gives advisors enough clarity to feel that the system is fair, while preserving enough flexibility for the firm to manage the business responsibly. Firms that think carefully about these issues on the front end are better positioned to avoid misunderstandings, align incentives, and build compensation arrangements that remain workable as the organization matures. And while cash compensation is often the starting point, many firms also look beyond salary and bonus to equity participation or equity-based incentives as an additional way to reward and retain key advisors. The topic of equity participation will be covered in a future article.
Endnote
1 Firms should not overread that point. A production-based compensation model may have the feel of an entrepreneurial arrangement, but it does not by itself determine whether the advisor is properly classified as an employee or independent contractor. That analysis turns on the underlying relationship, not just how compensation is calculated. Relatedly, for advisors who are treated as employees rather than independent contractors, firms should keep wage and hour rules in mind when designing compensation. If the firm expects the advisor to qualify for a white-collar exemption, the employee must earn a minimum salary under federal — and potentially state — employment laws. If an advisor’s salary doesn’t meet the applicable “salary threshold test,” they need to be paid minimum wage and overtime.
Isaac Mamaysky is the cofounder and COO of QuantStreet Capital, a New York-based RIA that focuses on systematic asset allocation and offers investment management, compliance, and operational support to advisors.
In addition, Isaac is a partner at Potomac Law Group PLLC, where he founded the firm’s Investment Advisers & Asset Managers practice. He writes the RIA Law Blog and welcomes readers to connect with him on LinkedIn.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
