How Much Should You Pay an AFA to Manage a Book?

As your practice grows, you may find yourself considering bringing on a Junior Advisor to help you manage your book of business so you can keep your focus on growing and building the practice.

Ideally, this arrangement should help you not only grow in volume, but also improve the profitability and strength of your firm. Unfortunately, more often than not, Advisors find themselves in arrangements that are not only unprofitable, but also detrimental to the business. Even worse, Advisors often can’t even tell if they are making or losing money with their AFA. To avoid finding yourself in the same situation, you need to consider a number of factors and avoid a few of the common pitfalls.

The Problem with Averages

Generally, Advisors look at what the average AFA is paid and use that information to build a compensation package. The problem with utilizing industry averages is it doesn’t take into consideration your unique practice, including the clients you serve, how you operate, revenue structure, etc. It also doesn’t take into consideration any unique factors about the specific AFA, the cost of bringing on an AFA, and any value they may bring to the practice.

Things to Consider About the Business

Many factors related to the practice itself weigh heavily not only on the decision of how to compensate an AFA, but whether an AFA is needed at all. Key factors considered are:

  • The total number of clients
  • The quality of clients, which are broken down into A,B,C,and D categories based on volume of assets and growth potential
  • The volume of recurring revenue, not transactional revenue
  • Projected growth over the next five years

In reality, the first question to ask yourself isn’t how much should you pay a junior advisor to manage a book a business, but do you need a junior advisor at all. Oftentimes when evaluating these elements of the business, we find that an AFA is not necessary. Instead, the business needs to be restructured and unprofitable clients sold to another practice. This creates a more manageable, scalable, and profitable book of business.

Things to Consider About the AFA

In some cases, the business factors do justify bringing on an AFA. In those situations, it’s important to look at the following for each and every AFA candidate:

  • What is the revenue source for the AFA?
  • Will they be bringing over an existing book of business?
  • Will they be securing clients of their own?
  • What value will they bring to the practice?
  • What support activities will they do, such as helping the practice owner prep for meetings, writing financial plans, etc.?
  • Will the AFA's production help the advisor get a higher payout rate based on their own fee grid/bonus structure?
  • What costs will be incurred by bringing the AFA onboard?

Again, the decision to bring on an AFA must be demonstrated as a sound business case. If the AFA isn’t creating value above and beyond any expenses incurred to have them, then it’s not a profitable arrangement.

Compensation Models are Not Created Equal

The other challenge many advisors run into is the fact that there truly is not a standard, one size fits all compensation model that they can plug and play into their own business. What works in one situation can have detrimental effects in another. Compensations structures run the gamut of a salaried employee position with a bonus structure, to revenue sharing models and other incentive-based structures. The costs associated with each model also vary and must be taken into account. To effectively compare and evaluate different compensation models for each AFA, the Advisor would need to run multiple calculations based on each scenario.

Running the Numbers

As a practice leader, you know that to stay competitive you need to make decisions as quickly and as accurately as possible. When it comes to choosing whether or not to bring on an AFA, how much to compensate, and verifying the numbers, its near impossible to evaluate and calculate it manually with any degree of accuracy or speed. That’s largely why we developed our AFA compensation tool. This proprietary software lets us run through multiple scenarios quickly and easily compare them so that you can get the information you need to make important decisions to improve your firm.

Additionally, because we have helped so many advisors not only run through scenarios but also develop, execute, and monitor AFA arrangements, we have a clear and accurate picture of what is a competitive structure in the marketplace today, as well as how it will impact your firm over the next five years. Yes, there are many things you can DIY in your business, but it is not feasible for any Advisor to effectively and thoroughly explore every avenue when it comes to the decision of how much should you pay a junior advisor to run your business.

If you are considering bringing on an AFA and want to learn more about how we help Advisors with that decision, you can view our presentation on the AFA tool or you may contact one of our representatives and they can walk you through the process.

KMG Logo
© 2022 Key Management Group