25 Ways Your Incentive Compensation Programs Can Be Leaking Profits from Your Wealth Management Business
Leaks are rarely a good thing, and hidden leaks are the worst kind. Homeowners know that a slowly leaking pipe or roof is about the last thing they want to discover. Car owners grow frustrated that a slow leak in a tire can be the hardest kind to fix. And you don’t have to be a boat owner to know, as Benjamin Franklin said, that “A small leak will sink a big ship.” Your financial services business may be losing revenue and profits in the same way, through a wide range of seemingly small inefficiencies, poor procedures, misalignments, and human errors in your compensation system and compensation program. These leaks are often written off as an annoyance, rather than a problem that needs immediate fixing. But over time, the leaks turn into losses and reduce your bottom line. “Watch the little things; a small leak will sink a big ship.” ~ Benjamin Franklin How Big a Problem is Revenue and Profit Leakage? Profit leakage – in this context – erupts from the unintended (or unnoticed) loss of revenue from your business and poorly optimized operations, resulting in a significant loss in overall profitability. Statistics vary, but it’s generally estimated that every company, regardless of sector, experiences addressable leakage in a range of 1 to 5 percent of EBITDA (Source: EY). In our experience, profit leakage is a considerable and often overlooked problem in the wealth management industry and has root causes that are behavioral, structural and operational in nature. Behavioral causes stem from actions that are induced, usually unintentionally, by the compensation, metrics and performance management program. Operational causes are often the result of business complexity and fragmented business processes. Finally, Structural causes relate to the design of the business model and/or the technology tools that support it and insufficient or unreliable data to fuel it. Firms may experience one, two or all these root causes, contributing to significant recurring loss in revenues and profitability if not addressed. We’ve identified the 25 ways in which your compensation system, procedures and program are likely allowing profit to leak out of your wealth management business. 25 Root Causes of Revenue and Profit Leakage Compensation Plans are not Supportive of Corporate Goals and Objectives. When compensation and reward structures are not designed, implemented and communicated to support your firm’s business strategy and performance objectives, this results in suboptimal organizational performance and therefore impairment of top-line performance is a drag on profitability. Compensation Plans are Inconsistent or Not Aligned Across Business Units. Business units that are meant to cooperate will be more successful when there is alignment of measurement and reward. Bringing multiple compensation regimes into alignment across multiple lines of business is difficult, but critical to avoiding counterproductive activities and organizational friction. Aligned measurement and compensation makes execution smoother and ensures focus is on value creating activities. Failing to Measure the Contribution of Compensation Plans. Not measuring (or inadequately measuring) the contribution of the compensation plans and programs hides profit drains. Measuring compensation program performance is typically challenged by a lack of adequate and available data or the absence of organizational accountability for compensation performance ROI. Delays in Compensation Plan Design and Rollout Compensation program changes are often needed to enhance alignment with corporate objectives, to address shifts in the market and to respond to changes in the business or team. Every day that passes between the decision to change the program and the implementation of the changes, represents leakage. It delays addressing sales and service focus issues, decreases rep/advisor satisfaction, persists operational burden and prevents all the oars pulling in one direction. Your compensation programs should be easily updated or replaced. Time-consuming requirements for custom programming or technical intervention is costly, and a warning sign that your compensation regime is not likely nimble enough to support your business. Don’t accept when the capabilities (or lack thereof) in your compensation system stand in the way of rewarding for the right customers, the right revenue, or the right performance standards. Overly Complex Compensation Plans Allowing compensation plans to become too complex ultimately results in them becoming less effective. Focused and easily understood are the key design considerations for impactful compensation programs. Complexity creates friction with the participants and that impairs their execution – exactly what you don’t want. Complex plans make it difficult to ensure that everything is correct and paid out appropriately to the right participants. The errors that spring from complex plans are themselves so complex that they can frequently only be resolved by extended research and then implementing time-consuming and costly manual adjustments. An Unruly Herd of Compensation Programs The sheer number of plans in use is not, in and of itself, a problem. However, how these plans relate and how they are managed can be a problem and can cause considerable errors and excess compensation. Plans should be easily created, named, managed, audited, understood and retired, as necessary. Poor process and oversight in plan selection, deployment and management can give rise to the wrong compensation plan or the wrong rules being deployed which results in compensation errors, reporting inaccuracies and contributes to significant leakage that can compound over time. A clean and organized user interface, logical workflow processes and efficient oversight processes mitigate many costly errors. Lack of Full Visibility and Transparency Ideally a full and completely granular view into plan set-up, input data and the calculations, is available to business leaders, managers and advisors. A lack of this visibility complicates the process of finding and reconciling errors and resolving disputes. This wastes valuable advisor, front office and operations time and erodes trust which impairs revenue and adds costs. Data Type Classification Inconsistencies Each discrete data type – especially product, service and asset/security types – must be associated to a classification that aligns with the compensation program. Frequently this means that several new products or securities may need to be assigned within the classification each day. While an automated process is desirable, many firms have workflows that include manual process that often are time consuming, have key-person
PureFacts selected to the WealthTech100 for 2024
PureFacts has been honoured with a spot on the WealthTech100 2024 list! This recognition (our second time!) is a testament to the commitment the PureFacts team has to innovation, transformation, and excellence in supporting the wealth management industry. At PureFacts, we believe in the power of technology to drive positive change and enhance the client experience. Our PureFees application has been a leader since our founding, PureRewards created its category in the US in the late 90s and continues to define the incentive compensation segment and our PureInsights service is changing how Wealth Management firms manage and optimize their businesses. And now we have pioneered an innovative end-to-end revenue management platform that helps our clients calculate, collect, distribute, incentivise and optimise their revenues across their entire revenue lifecycle. The WealthTech100 is a benchmark defined by the recognized companies, who, like us, strive to develop compelling solutions that empower our clients to navigate the complexities of wealth management with confidence and ease. We appreciate being counted among firms we hold in high regard, and we especially note the new firms on the list. This is a sign of a healthy wealthtech market and advances the entire sector! On November 6th we look forward to joining other WealthTech100 firms and Wealth Management leaders for the Global WealthTech Summit 2024 in London, UK. It is the focus on clients and users that drive our innovation, and this event is sure to be rich with compelling dialogue. Wealth Management can change lives. Ensuring wealth management is more accessible, transparent, personalized, and successful than ever before will create lasting value for generations of families. PureFacts team: Cheers to you! This is only possible because of your efforts and determination every day.