When advisors think about employment agreements, many assume they’re optional — something to get to “eventually.” In reality, these agreements exist first and foremost for your advisors. They provide clarity, set expectations, and outline exactly what happens if and when you decide to part ways.
If you're building a growing firm, having a solid agreement in place isn’t just helpful. It’s essential.
Understanding Compensation: What You Can Really Afford
Every firm compensates advisors differently, and there’s no single correct model. But compensation should always align with your profitability — and that starts with knowing your numbers.
A simple breakdown many firms use looks like this:
Revenue
Less:
- Overhead: ~20%
- Labor: ~20–25%
- Marketing: ~20–40%
- Total Expenses: 60–85%
Profit: ~15–40%
Your exact percentages may vary, but you should know them — ideally by reviewing a P&L regularly. Once you understand your margins, a key question becomes clear:
How much can you realistically pay an advisor?
If your profit margin is 40% and you pay an advisor 25%, you’re left with 15%. That may be acceptable, especially if it allows you to scale without doing all the work yourself. But push compensation much higher, and suddenly you’re losing money on each advisor.
For most firms, paying significantly above 25–35% simply isn’t sustainable.
Closers vs. Associates: Not All Advisor Roles Are Equal
Another important distinction:
Advisors who close business independently are worth more than those who simply service accounts after the sale.
- Full-cycle closers: Higher compensation justified
- Service advisors / handoff advisors: Often closer to ~10%
Understanding the value each role brings ensures you’re paying fairly — without undermining your margins.
Structuring Roles: Employee vs. Independent Contractor
Your employment agreement should also clarify how advisors are classified and compensated.
For example, many firms treat advisors as:
- Employees for AUM business, and
- Independent contractors for fixed indexed annuity (FIA) business
This hybrid model allows for clearer, more enforceable restrictions on the employee side, such as non-solicitation provisions and reasonable conduct expectations.
Protecting the Firm: Book-Buyout Terms and Duty of Care
Two often-overlooked components make a big difference:
1. Book Buyout Formula
Your agreement should define:
- Whether advisors can buy their book
- How the price is calculated
If an advisor improperly takes clients and you pursue legal action, having a predefined valuation method makes it far easier for a judge to determine damages.
2. Duty of Care — To the Firm and to the Client
Make sure the agreement outlines the advisor’s obligations:
- To your firm, and
- To your clients
This becomes critical when something goes wrong.
If you choose to fix an advisor’s mistake — even one the client never noticed — the agreement should give you the right to hold the advisor accountable. A clearly defined duty of care strengthens your position in arbitration or litigation.
Non-Solicitation Matters — And It’s Enforceable
Your agreement should include:
- A non-solicitation clause, and
- A do-not-compete clause (DNC) — recognizing that DNCs are harder to enforce
While non-competes can be challenged, non-solicitation agreements often hold up, especially when advisors move to another RIA. When that happens, sending the new firm a copy of the agreement along with a cease-and-desist letter from your attorney tends to get their attention quickly.
Build Now for the Firm You Want Later
Growing your advisory team is one of the fastest ways to scale — but only when you put the right structures in place.
A well-crafted employment agreement:
- Protects your firm
- Sets advisors up for success
- Establishes clear expectations
- Helps maintain profitability
- Reduces the risk of costly disputes
Use these insights in your internal training, onboarding processes, and practice-management discussions. They’re the kinds of foundational elements that help good firms become great ones.
If you’d like, I can also help you:
- Draft a more formal employment-agreement template
- Create a public-facing blog version
- Rewrite this in a shorter, more promotional style
- Build advisor-facing onboarding materials
Just tell me what direction you want next.
