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What is the best way to pay wealth managers?

What is the best way to pay wealth managers?

When WH Ireland recently announced in its interim results that it was changing the way it paid its wealth managers, it hailed the move as a step away from the old way of doing things.

Chief executive Richard Killingbeck (pictured) told Wealth Manager the refocus was all about client outcomes and profitability.

The company said its pay structure had shifted from being ‘old revenue based’ to a ‘direct-contribution profit basis’.

Killingbeck explained: ‘This helps align our key client facing members of the team with best client outcomes and also with the wider group focus on profitability.

‘Discretionary awards are made from recommendations from senior members of the division, reviewed by a divisional remuneration committee and receive final approval from the WH Ireland Group remuneration committee.’

He added that the pay structure included ‘clawback features which can be applied under certain specific circumstances’.

This came after Charles Stanley, following a long and drawn out saga, struck a pay deal with its wealth managers so remuneration is based on profit contributions instead of revenue.

Charles Stanley’s deal with its staff means the ratio of remuneration is lowered, but investment managers have the potential to increase their total pay according to profit contribution.

Brooks Macdonald has also talked in the past about how it incentivises staff with ‘salaries and profit shares based on performance’ instead of revenue.

Distancing from investment banking

According to Dan Macey, associate director at wealth management recruitment firm Suffolk Lane Search, shifting to ‘on profit share’ will become more common, especially among the bigger players.

He said: ‘I think it is a model people will move towards, especially the larger firms as they try to become more compliant.

‘From their point of view, the argument is that it’s about looking after the client and trying to foster a culture the opposite of investment banking – looking after clients, and being opposite to that short-termism.’

Compliance is a big part of this. In its interim results, WH Ireland said it was changing pay to create a structure focusing on ‘profitability, compliance and culture rather than purely revenue’.

Former Tilney head of product Niral Parekh, who now works at Capco as head of UK retail asset and wealth management, said the Financial Conduct Authority (FCA) is particularly interested in how wealth managers’ pay aligns with what’s best for the client.

Parekh said: ‘It’s a very hot topic for the regulator, there’s a lot of focus on client outcomes. Incentivising staff should align with a firm’s operating model and client outcomes.’

That’s how the argument goes for those changing their structures. What they’re less keen to mention is that it also reduces costs for them, hence allowing them, as in WH Ireland’s case, to move to being a ‘consistently profitable company’.

While becoming more popular with companies, wealth managers are not as keen on this type of pay deal, according to Macey, who added that it could mean more opportunities for smaller players to attract big stars.

Macey said: ‘If you asked wealth managers themselves, I think they are very keen on a revenue share.

‘People are always attracted to that transparency of pay, because it’s easily definable what you will earn. But then if you make it part of culture and compliance, it’s hard to know what you’re actually going to earn and in my experience wealth managers aren’t very keen on that. So there will be smaller companies which will offer that.’

Though he added small firms will still need brand value to convince potential employees: ‘From a wealth manager’s point of view you have to ask, do they have that name above the door which helps you bring in clients?’

Pulling power

One firm making a name for itself in this regard seems to be Redmayne-Bentley. Joint chief executive David Loudon has consistently spoken about his company’s pulling power in attracting investment managers from other firms.

Speaking in December after his firm’s results, which saw pre-tax profit, operating profit, revenue and assets under management all go up, Loudon put part of the success down to money brought in by recruits from rivals.

He said at the time: ‘We are very much open to business for investment managers who are finding life uncomfortable in their firm because of changes to revenue sharing arrangements or indeed the breadth of service that clients are being offered.’

For those firms like Charles Stanley and WH Ireland who have radically overhauled their pay structures, Parekh said the onus is on them to show clients and staff where the freed up funds are going.

He said: ‘Are the savings going towards better services, better technology, investing in new apps or online services to make it easier for clients?

‘In advice, in wealth management, firms who are able to demonstrate that they are measuring client outcomes will come out on top.’

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