Research Analyst Comp Structure at Small RIA

I am wondering if a few people here can provide some insight into my dilemma. I am a research analyst at a small RIA ($100-300 million AUM) and I am seeking some suggestions on compensation structure as I approach my 3rd year with the firm. Sorry in advance for the novel that follows...

As a disclaimer, I absolutely understand that I am extremely lucky and I am in no way complaining about my situation.

Background:
I graduated with a BS in Finance from a small state university that can only be described as the farthest thing from a target school. Through some lucky networking I secured an internship at a small RIA the summer prior to my senior year. The firm has a single, concentrated, long-only public equity strategy that it manages for high net worth clients and institutions. After graduation, I received a full-time offer to work at the firm as the sole research analyst under the only PM.

Current Role:
I have been in this role for the past three years and my responsibilities have grown substantially. My responsibilities center around generating new ideas to pitch to the PM and get in the book and keeping the PM up to date on the ideas that are currently in the book. One of the six names we have added to the portfolio in the last three years was my own "unique" idea. As per usual, I did the vast majority of the leg work and write-up of all of the other ideas that the PM had me look into as well. My "unique" idea performed exceptionally well over the 18 months we have held it but this has less relevance in the PM's eyes as we are long-term owners. Realistically, I have only been adding value to the idea generation process for the last 12 or 18 months but I am left to operate with complete autonomy on which ideas I bring to the PM other than when he asks me to write-up a name he comes across.

As it seems to be the case with many extremely small firms, my responsibilities include many other parts of the business. I usually create most of the initial drafts for all of our marketing material, I help manage our CRM system and I have built out our portfolio modeling capabilities to allow them to scale easier. I have embedded myself fairly deep in this part of the business and if I were to leave, the PM would have some major logistical issues.

Current Situation:
I am currently in a pretty low COL city and I am paid a salary of $70K with no bonus. The PM has assured me that as the firm scales, the compensation increases will be significant. The asset growth has taken longer than originally thought due to turnover in sales employees and relatively lagging short-term performance. I struggle with just taking people's word when it comes to money so I am looking for a better way to structure my compensation to take advantage of the scaling.

During my undergrad and since starting with the firm, I have completed all three levels of the CFA program. I am waiting on work experience before I can receive my charter. I have started to be contacted by quite a few recruiters and a couple that were filling similar buy-side analyst positions within mutual fund strategies. These couple of positions had compensation ranges that were multiples of my current salary but seemed to present less upside as there was no chance of moving into a portfolio management position. These did not turn into offers as the firms' investment philosophies were not a good match with my own. My PM has hinted that I am on a partner track as long as I perform well but has not explicitly mentioned any details. Again, I don't like to just take his word on this.

My Dilemma:
As a relatively young analyst (25), I struggle with finding comparable compensation numbers. I am operating in the capacity (at least in my opinion) of a reasonably senior research analyst with other wide ranging responsibilities throughout the firm. This is not typically a position that a 25 year old finds himself in. Again, I am not complaining.

Because we are so long-term oriented, having a bonus linked to a portfolio performance number is not particularly applicable as I have not been here long enough to move the long-term numbers. I am considering approaching the PM and asking to change my compensation structure to keep my base salary and allow me to receive a percentage of the firm P&L in the form of an annual bonus. The firm has spent significant resources over the last few years to build out the marketing effort so the bottom line is not super healthy right now but if we see some success in raising assets, that will change rapidly. Having my bonus be tied to the P&L would relieve me from having to broach the "raise" conversation at the first sign of additional assets coming on board.

Does anyone have any idea of how much of the P&L I should reasonably ask for or if even asking for profit sharing is a reasonable request? Am I getting way ahead of myself here? Should I just keep my head down and trust that the money will come later? I appreciate any help you all can provide.

 

I can't imagine a $200 - $300 million, long-only RIA is bringing in any more than $2.5 million top-line a year...after overhead, there likely isn't that much to go around...especially if the founder is using it to enrich himself first.

I'm betting you don't charge a performance fee, and because you don't its inappropriate for you to ask for a % of P&L because the firm itself doesn't make money off performance...you're either a cost center for the firm or you're not.

 
Most Helpful

I see where you are coming from and I appreciate the feedback. I did not think about the lack of a performance fee but I still think something could be arranged.

I believe I have transitioned from simply being a cost center as I am deep in the idea generation process and I at least seem to be pretty integral to it. While we don't have a performance fee, we still charge our base AUM fee so my contributions to investment performance increase assets and increase fees. This would obviously be much more valuable with a larger asset base which is why I thought to tie my comp to the P&L which will be magnified as well as the assets grow.

It is a very light team and I have roughed up what the margins look like so theoretically a portion of the P&L would be small right now and not move my comp number much. It is more to allow for the participation in the upside of the increase in the value I provide if assets were to grow which is far from guaranteed.

I would like to hear your opinion on this thought process.

 

I really don't think you're going to get a performance fee take-rate...any revenue your firm earns has to come out of management fees, there simply isn't a performance bucket to juice this. I'm not questioning your ability to add-value, but you are probably over emphasizing your own contributions to the top-line.

For instance, if your fund is up 10% can you point to exactly how much of that performance was due to you? What about detractors? Lets just say you contributed net 200bps of performance for a year. On a $200 million book this would mean it gained $20 million of which $4 million was directly related to you. Given a management fee range of 45ps - 100bps, you brought in an extra $18,000 - $38,000 in revenue for the year...so what exactly do you want to be paid for that?

You aren't a cost center in the sense that your work allows the firm to continue growing, which is the name of the game at a long-only RIA. I appreciate your point of better performance from your ideas results in higher AUM growth results in higher management fees, but true AUM growth in that business model comes from getting on institutional platforms and watching the inflows come in on their own. So, as long as your ideas aren't causing catastrophic losses and you make the lives of the PM(s) easier, you won't be fired.

Now, if you've been around for 3+ years and get along with everyone well / are contributing to the process then I think a conversation you definitely can have is sitting down with the founder and discussing a long-term plan for you at the firm that can include a partnership buy in. I think you'd be totally justified in asking for that, but it is different than a performance take-rate.

 

I am in a somewhat similar situation- small team, similar age, same salary, LO, but AUM is 5-6x your fund.

Although I was told there would be a bonus component to comp, I have yet to receive one. While it is frustrating since I have tangible evidence that I have added value and I would be making a good amount more had I stayed on the SS, all I can do is trust that my pm will compensate me appropriately over time.

Doing the p&l math will just frustrate you since your comp seems to be such a small percentage of it. But at the end the day the pm will pay you just enough to keep you around and if you are in a city that doesn’t have a lot of other similar opportunities that number is unfortunately a lot lower than numbers thrown around on this site.

 

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