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Incentive Compensation Strategies for the Paraplanner Career Path

By Kelsey Brennan

For most RIAs seeking growth and a potential internal succession plan, the long-term benefits of hiring a paraplanner are easy to see. The difficulty comes with creating the right career path for them within your firm to ensure that they stick around.

Defining the Career Path

Before deciding on incentives, you must first determine what outcome you are trying to incentivize. Do you want your paraplanner to remain in a behind-the-scenes role permanently? Do you want them to become a lead advisor? Are you looking for a potential succession plan? Whatever your answer, you should sit down with the prospective paraplanner and lay out the potential career paths within your firm. Without a clear expression of your vision for the future, it is impossible to know if your long-term expectations align with their goals.

Once you have laid out your expectations, they will look to you for a roadmap on how to meet them. From there, you should review these expectations periodically. Regular performance reviews are a great way to do so. Why is this important? It is incredibly difficult to figure out how to incentivize someone without knowing where things are going or what their motivations are.

Structuring a Compensation Plan

What combination of base pay and bonus incentives will ensure that a paraplanner feels valued and motivated as they progress in their career? The truth is, it depends on what you are trying to accomplish.

This is not an all-encompassing list, but some common financial incentives that I have seen are

  • Discretionary bonus
  • Professional development bonus
  • Revenue-based bonus
  • Profit-based bonus
  • Phantom equity

Discretionary Bonus
A discretionary bonus is given without being tied to any predetermined target. This is a great way to show recognition and appreciation for hard work. However, it rewards only past performance, without any long-term incentives.

Professional Development Bonus
A nondiscretionary bonus is tied to a predetermined target, such as revenue, profit, or professional development. Unlike a discretionary bonus, it offers a way to incentivize future performance. Some examples of professional development goals may include passing an exam, earning a certification, completing a special project, or being with the company for a certain length of time.

Revenue-Based Bonus
If your paraplanner moves into an advisor role, they will eventually start bringing in their own clients and may even take over existing client relationships. Bonuses based on client revenue offer an incentive for them to generate new business. 

Some firms offer these as a set percentage of revenue while others offer a flat dollar amount based on a threshold (e.g., $2,000 for every $10,000 of revenue the advisor generates). In addition, some firms offer bonuses in a tiered structure where the percentage or dollar amount is reduced each year. Beyond that, they may either taper off completely or remain fixed. The amounts may also differ if the advisor takes over an existing client relationship instead of bringing in a new client.

Revenue-based bonuses are straightforward and easy to calculate, and they encourage advisors to grow their own client base. The downside is that they focus only on top-line revenue without regard to the profitability of the firm. The advisor may be motivated more by the short-term reward, without considering the quality and long-term profitability of the clients they bring on.

Profit-Based Bonus
Some firms have experienced success by offering bonuses based on the firm’s profit rather than client revenue. Profit-based bonuses incentivize advisors to take an interest in the profitability of the firm rather than just focusing on revenue. This can be useful if you are considering offering them ownership in the future.

On the other hand, unlike revenue-based bonuses, these are not as transparent. Compared to the revenue-based model, advisors have less individual control over their bonuses and may, therefore, be less motivated to bring in new business. Those who do not want ownership may feel like they have no direct say in the financial decisions that affect their income stream. Some owners have dealt with disgruntled employees during periods where expenses were higher than usual because it negatively affected such bonuses.

Phantom Equity
Phantom equity plans grant employees phantom shares of stock based on the underlying value of the firm’s stock, without actually diluting ownership. The value and appreciation of the shares can either be determined based on a formal valuation of the firm or on some kind of performance metric, such as revenue or profitability. Usually, there is a vesting schedule that is triggered by a period of time or a specific event upon which the employee receives cash equal to the value.

Some firms have used this to structure an internal succession plan. Even though no actual ownership rights are given, it is designed to stimulate the feeling of ownership and ultimately encourage a desire to buy into the business. Owners can use it as a way to incentivize advisors to take a vested interest in the firm’s long-term profitability. This can be useful for an advisor who has shown interest in ownership but is not yet willing or able to act. Upon vesting, the cash received can be used toward the buy-in.

These types of plans are much more complex to establish due to legal and tax implications, so they are not for everyone. In addition, though phantom stock is designed to encourage ownership, there is no guarantee that the advisor will choose to buy in.

Bottom Line: Choose What Works for Your Firm

Determining the best way to motivate and retain a paraplanner as they grow within your firm will depend on your long-term goals, the culture of your firm, and the time and resources available to you. The right choices can go a long way to improving your relationship with your paraplanner.

Kelsey Brennan, CFP®, is a financial advisor and partner of Perennial Advisors Group LLC.

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