Why Understanding Your Actual Earnings Is Crucial for Maximizing Growth
In our experience speaking with investment advisers, many assume their compensation is straightforward but don’t always have a clear picture of what they’re truly taking home. This can sometimes result in financial surprises and missed opportunities for higher earnings. For instance, we’ve seen advisers who thought their payout was 90%, only to find out it was closer to 75% after all deductions were accounted for. The following guide outlines factors that can affect your compensation and provides insights to help you better understand your real earnings.
1. The Headline Payout: What It Promises vs. What You Actually Receive
Firms often advertise a “headline” payout rate, which is usually a percentage of the revenue you generate. However, this rate is just the starting point, as various deductions can occur before you receive your payout.
- Advertised vs. Effective Payout: The advertised payout might be 80%, but after factoring in platform fees, hidden costs, and other deductions, your actual payout could be much lower. For example, advisers expecting 80% may find that they take home closer to 65% after all costs are considered.
- Revenue-Tier Structures: Some firms use tiered payout systems, where your payout percentage changes based on revenue thresholds, which can make calculating your actual earnings more complicated.
2. Key Deductions: Identifying Hidden Costs
To get a true sense of your compensation, it’s important to understand potential hidden fees that may reduce your payout:
- Custodial Fees: Partnering with certain custodians may result in fees that decrease your earnings.
- Platform Fees: Many firms charge for access to essential technology platforms, such as CRM systems, portfolio management tools, and compliance software. These fees may be bundled or charged separately.
- Revenue Sharing: Some firms have revenue-sharing agreements with third-party providers, which can reduce your revenue share.
- Ticket Charges: Small transaction fees for trades can accumulate over time and lower your effective payout.
3. Understanding the Trade-offs of Lower Payouts
Firms may offer a range of services in exchange for lower payout rates, and it’s important to evaluate whether these services meet your specific needs. While these offerings can provide value, it’s worth considering if the trade-offs are beneficial for your business.
- Marketing Support: Some firms offer marketing services and materials, but it’s helpful to assess if these resources align with your goals or if you might achieve similar results on your own at a different cost.
- Administrative Support: Firms may handle tasks like client onboarding, compliance management, and other back-office operations, but it’s important to ensure these services meet your expectations and are cost-effective for your practice.
- Professional Development: Ongoing training, conferences, and educational opportunities can be part of your compensation package. As you evaluate these offerings, consider how well they align with your career goals and if they provide value that justifies the associated costs.
4. Additional Costs to Consider
Other expenses can also impact your payout beyond fees and revenue-sharing agreements. Here are some other items to think about:
- Errors & Omissions (E&O) Insurance: Some firms cover this, while others pass the cost onto advisers.
- Compliance Fees: Registration costs, compliance consultants, legal counsel, internal and external audits, and data security measures.
- Continuing Education: Maintaining your registration and fulfilling continuing education requirements.
5. Asking the Right Questions: What You Should Know About Your Payout
To gain a clearer picture of your compensation, consider asking these key questions:
- What is the topline payout, and what is my effective payout after fees?
- What are the technology and platform fees?
- Are there ticket charges or transaction fees?
- Are there revenue-sharing agreements that impact my payout?
- How are custodial fees structured, and what portion do I bear?
- Are there additional administrative, compliance, or insurance costs?
- What services justify a lower payout, and do they align with my needs?
6. How to Calculate Your True Payout
To calculate your actual payout, you can follow these steps:
- Gross Revenue: Start with the total revenue from your book of business.
- Topline Payout: Apply the advertised payout percentage.
- Deductions: Subtract fees for custodial services, platforms, ticket charges, E&O insurance, back-office support, marketing, investment models, and regulatory compliance costs.
- Net Payout: The result is your true take-home earnings.
7. Why It’s Important to Know Your True Payout
Understanding your real earnings is crucial for making informed decisions about your financial future, career satisfaction, and the value of your practice. Knowing your true payout allows you to:
- Plan your financial goals with greater accuracy.
- Negotiate better terms by identifying and addressing hidden costs.
- Evaluate new opportunities with other firms or consider going independent, where you may have more control over expenses.
Take Control of Your Earnings
We believe gaining clarity on your true payout is key to maximizing your income and ensuring long-term career satisfaction. By understanding hidden fees, costs, and deductions, you’ll be better prepared to make informed decisions about your future. Take control of your earnings and ensure every dollar is working for you.