From the April 2003 issue of Investment Advisor • Subscribe!

Be Careful What You Wish For

Sometimes success can contain the seeds of failure

Ispend much of my time talking about, writing about, and counseling advisors on the advantages of forming ensemble firms. So when my friend and former client, Glenda Kemple, announced last January that she was leaving Quest Financial, a firm she co-founded 15 years ago, it was a powerful reminder of how important it is for advisors to think about where they really want to go before they start building a practice to get there. I call this creating your Personal Definition of Success, and the more successful you are at identifying your PDS, the more successful you'll be as a financial advisor.

Glenda Kemple and Woody Young were financial planners in Dallas who formed Quest Financial Services in 1987 (and were profiled in IA in August 2001). Although they were more committed than most to building a business, like most planning "firms" Quest was initially just two advisors sharing office space and some overhead. Each had their own clients, generated their own revenues, took home their own profits, and made their own choices about the support they needed. "If I wanted a better computer system or additional help," recalls Kemple, "I just paid for them myself."

Quest had a business plan from the beginning, and the partners had a buy/sell agreement in place, both of which put them ahead of most planning practices. Says Young, "We both had some business experience, which gave us a head start. But the reality was we had our own fiefdoms. It was a typical 'eat what you kill' environment."

They continued this way until December 1997, when Young had a series of heart attacks followed by quadruple by-pass surgery. While his recovery went well, the impact on his business left a lasting impression. "I had a team in place," he remembers. "But they were rookies. None of the other planners had ever even met my clients."

What's more, there wasn't any basis to compensate the other planners for working with Young's clients. Kemple helped out where she could, but she had her own burgeoning practice to run. They realized that their firm needed to evolve further.

At this point, Kemple and Young asked me to take a look at Quest. I did, and made three observations, as gently as I could. First, their buy/sell agreement had many holes, one of the most significant of which was that it didn't nail down how the practice would be valued. I pointed out that a crisis is not the time to make that kind of decision. Second, I told them that their practices weren't worth nearly what they thought. That was because, third, their "firm" wasn't really a firm at all. To truly create a firm, and realize the economies, the client service, and the value that a true firm offers, they would have to integrate their separate practices into a structured business.

That's just what they did. "When we combined our practices," says Young today, "it wasn't evolutionary, it was revolutionary. We learned that the whole could be better, and of more value, than the parts. Clearly we were much better together."

A Rocky Start, Then Smoother Sailing

At first, it wasn't easy for them. In the initial meetings with the two principals and six other junior planners who would become partners in the firm, everyone was defensive, protecting their own turf. But gradually, as they worked through the issues, and thought about the benefits, a transformation took place, and everyone started to think first of the good of the firm.

For the eight advisors who formed the new Quest, including Young as CEO and Kemple as head of business development and marketing, and the now 30 or so employees of the firm, it has been a success by many measures. They've weathered the tough times of the past few years, retained their clients, and kept revenues high. "We instituted systems so that all our financial plans look the same, all our asset allocation looks the same, and we successfully transitioned our clients from being reliant on us to working with other planners," says Kemple. "All our clients are now Quest clients."

Adds Young: "The payback has been substantial. We do better work, our clients are better served, the firm is more profitable, and we're having more fun."

Well, most of them are having more fun. And therein lies the problem. An advisor whose general identity is defined by and wrapped up in his or her professional life will likely find it difficult to relinquish the autonomy enjoyed in a solo or small firm. Becoming part of a larger organization offers advantages, but it also may well mean a work life subject to more rules and restrictions. For an established advisor who has long enjoyed autonomy, conformity can create an unattractive environment.

Unfortunately, that's where Kemple ended up. "I didn't feel like it was my firm anymore," she says. "When you start feeling like an employee, it's not as much fun. You get the ego recognition for being the top producer, not from building a business."

The Flip Side of Success

Seems that the partners had survived the first couple of years of operating as a real firm, but when things started to settle down, reality set in. "What I learned," reflects Kemple, "is that I didn't want to run a business: I'm a lousy manager. I love to sell. I enjoy finding solutions to client problems. But I had gotten away from that."

Young puts it this way: "As we went from 'me' to 'we,' we didn't realize that it wasn't just for the underlings: it was for us, too."

Indeed, even though Kemple and Young continued to own 80% of the new firm, it was a very different place. For one thing, to give the junior partners a greater sense of ownership, a number of committees were formed to manage the activities of the firm. But more voices mean more opinions, and making decisions by committee can create inefficiencies that frustrate sole practitioners used to making seat-of-the-pants decisions.

For another, in a structured firm, all partners are subject to job descriptions, accountability, and performance reviews. For successful advisors used to running their own show, this can be a sobering experience. "It was a matter of control," says Glenda. "I just wasn't having any fun."

So after a series of heart-to-heart talks, Kemple and Young agreed it was time for her to go. Although their buy/sell agreement didn't anticipate one of the principals leaving, they amicably negotiated the terms to buy Kemple out. "The new firm did create value, which I was able to realize," she says. "By buying me out, they proved that they can buy out Woody, and that it will work for an outside buyer as well." And although she's leaving her clients, she's not precluded from opening her own advisory practice.

Although the Quest story has a happy ending, Kemple's experience holds lessons for many advisors, the most basic of which is to carefully consider what you want before your create a practice. At Moss Adams, we recommend that every financial advisor create a personal definition of success. It doesn't have to be a lengthy formal document. But at the least, you should carefully consider honest answers to these questions:

What job do you really want? Typical choices would be comprehensive financial planner, specialist, client contact person, administrator, manager, strategist, or rainmaker. The choice of your ideal job will determine both your career path as well as the size and makeup of your practice.

How much do you need to make? If it's $100,000, you have a lot of options. As your income requirement goes up, your options get fewer. If it's more than $1 million, you're probably in the wrong business. In the FPA 2002 Financial Performance Study by Moss Adams, principals at solo firms averaged $96,140 in income, and at ensemble firms, $128,223. Owners at all firms with more than three principals averaged income of $164,901. If having annual income of more than $250,000 is high on your priority list, then creating or forming an ensemble firm is worth your consideration.

How much control do you need to have? Independent advisors are usually independent for this very reason: They are entrepreneurs who want to control how their businesses are run and marketed, who they work with, how and when they work, and often most important, the quality of the products and services their clients receive.

How much time are you willing to spend? Are you up for 80 hours a week in the office, or is 20 or 30 hours more what you have in mind? Obviously, the amount of time you spend working can affect your income and which job you can take, but if you have kids that you want to spend time with, this question could be more important.

What's your exit strategy? Are you looking to build value in your firm to retire on, or are you funding your retirement out of cash flow? Essentially, this choice comes down to a high-cash-flow job or transferable equity in an advisory firm. A job (with you as boss) offers more flexibility in job description, type of clients, and working hours. Building a firm requires a greater commitment to execution, but the retirement benefits of selling your practice for mid-seven figures is hard to duplicate through cash flow.

Clearing Your Vision

Having a clear vision of your choices in each of these areas will go a long way toward telling you what kind of firm will make you the happiest. I would point out, however, that often people are misguided in thinking that being alone fulfills their PDS. Part of the challenge of any practitioner is that they manage time, leverage their practice, provide better client service, access better ideas, invest in technology, and leave a legacy. You must resolve in your mind whether remaining alone will help you to fulfill these goals.

As Glenda Kemple learned, one of the biggest emotional challenges for sole practitioners is allowing another person the same rights they possess; after taking all the risks and building a practice, practitioners often resent someone else voting on the way business is handled. For practitioners who find shared control an insurmountable issue, forming a firm is not the business-expansion path to pursue. For those who can get past this hurdle, however, creating an ensemble firm is well worth considering.

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