The traditional view of financial advisors is that they are highly motivated by the income potential and upside opportunity of being a financial advisor… and thus why the compensation system for most advisory firms is still predicated on an “Eat What You Kill” performance-based approach. For those who have the business development skill set, and a motivating desire to be rewarded for it, an advisory career can be incredibly lucrative.
However, when evaluated in our recent Kitces Research study of “What Financial Advisors Really Do,” it turns out that the financial rewards of being a financial advisor are actually not the primary motivator after all. Instead, the primary drivers for doing comprehensive financial planning are an intrinsic desire to help and serve others and to apply one’s talents and interest in personal finance. Which happens to also be financially rewarding… though even then, the income potential of being a financial advisor is more about work/life balance and lifestyle flexibility than just the extrinsic motivation of the income potential itself.
Which is significant, because it suggests that the financial services industry at large may not actually be communicating the right messages to make financial planning an appealing career choice in the first place. Simply put, in an industry dominated by money, it turns out that the mentality of a financial planner truly is about helping others with their money, more so than simply being financially rewarded for the advice and getting clients in the first place.
On the other hand, the data suggests that over time, financial advisors who have spent some time in the industry have largely managed to find the pathway that best fits their natural style. Advisors who are more interested in upside income potential do tend to either build their own advisory firms (hiring the staff and support infrastructure around themselves to grow larger) or join large firms where they can pursue a path to partnership. While those most interested in work/life balance are more inclined towards being – and remaining – solo advisors, where they can have ultimate control. And those who really are the most extrinsically motivated by the income potential itself – and not necessarily the desire to serve – are more likely to stay in commission-based channels where such motivators are best rewarded.
The key point, though, is simply that it’s important to understand the true motivators for financial advisors, both for the industry to attract more next-generation talent to close the talent gap, and also for individual advisory firms that want to attract and retain talent. Because when the primary drivers of motivation are intrinsic – a desire to apply one’s own personal interest in personal finance, combined with a desire to help and serve others – offering too much extrinsic motivation, in the form of variable compensation and bonuses, can actually demotivate financial advisors from doing their best work for clients! Especially as a growing number of next-generation advisors are increasingly showing a motivational preference for stable pay over upside income potential anyway!