From the April 2008 issue of Investment Advisor • Subscribe!

The Long and Short of Business Life

Advisory firms can live on when their owners take steps to build continuity

In Aristotle's treatise titled "On Longevity and Shortness of Life," he observed "it is not clear whether it is a single or diverse cause that makes some to be long-lived, others short-lived." Aristotle was referring to plants and animals but one could make the same observation about advisory firms. Some last a few short years and others evolve through multiple generations.

Now I don't claim to be an Aristotle aficionado, but I know the guy liked to stir the pot when it came to critical thinking about all things that matter. He intuitively understood how environment, nurturing, and genes all collaborate to produce an outcome. His insights provide guidance for the healthy growth of the advisory business.

Like people, some advisory firms are positioned for long-term growth while others will not make it past adolescence. We are nearing a turning point in which the future of our profession hinges on the actions of its leaders today. A primary concern is the profession's failure to consciously and systematically recruit people to this business, contributing to the loss of talented individuals to other industries.

The typical principal in an advisory firm is getting older, with the average age now falling in the mid--50s. The profession is not adding younger colleagues at a rate commensurate with the growing need. Every pundit, professor, and practitioner who knows this industry says we're nearing a critical shortage of competent people.

Ironically, the current market contains a surfeit of clients and a shortage of professionals to provide them advice. The law of supply and demand should render this environment ideal for creating growth for advisory firms. In most cases, however, the demand curve is driving up compensation for professional staff at a rate that outpaces firm productivity.

Another odd element in this particular talent shortage is that multiple surveys about career choices praise the advisory profession. For the most part, financial advisors have independence, good compensation, and the opportunity to live a balanced life. Just recently, Portfolio.com (February 22, 2008) named "financial analyst or advisor" as one of the "top 20 jobs for 2008."

What's Wrong With This Picture?

A stimulating career path, the opportunity to deal directly with clients, intellectual challenges, the potential for equity, and a substantial income; except for long walks on the beach, this is the perfect personal ad. Why aren't people drawn to this business in droves? Are we missing something?

Perhaps the appeal of this profession represents wishful thinking on the part of industry veterans. Perhaps younger people reject the business when they see how hard the practice founders worked? Or once they have experienced and witnessed the grind? Is something blinding us to reality? Why are job prospects turned off by the financial advisory business?

For years now I've been a voice in a Greek chorus of concern about how little has been done to check this talent drought. I'm now starting to believe that the issue is not just about the lack of available talent, but also the lack of talent development within advisory firms themselves.

Those canny advisory firms that are successfully addressing the talent shortage have three things in common:

  1. They articulate the nature of the work they ask people to perform.
  2. They focus on matching the right people with the right jobs.
  3. They create an environment in which motivated people will flourish.

Each of these characteristics is linked to the others. Many advisory firms rely solely on better technology and investment performance to drive their success. Ultimately, firms that do not build capacity with the right talent and develop their future advisors, managers, and leaders will not thrive.

Most firm managers are also advisors who must make difficult choices about where to spend their valuable time--on clients or on the business. Enlightened owners recognize that they must invest in the next generation of leaders in order to carry the business to a new level.

Where to Turn?

Lamentably, industry organizations such as the CFP Board of Standards do not include practice management in their continuing education offerings. Many who come into the profession are not prepared to manage, let alone lead, a practice. Many of the university programs in financial planning are under the auspices of social sciences colleges, and focus more on the counseling aspects of the profession than the business aspects. Exceptions do exist, such as Texas Tech University in Lubbock, which collaborates with their business school to offer a master's degree in financial planning.

There are any number of reasons why it may be difficult for advisors to send their associates to places like Texas Tech or Stanford University's leadership program. For the most part, leadership and management development fall on the advisors themselves, who may not have had much training in this realm either.

In reality, every area within a practice needs management including strategy, business development, operations, investment management, planning, compliance, and administration. Typically these responsibilities are concentrated in the hands of one or a few principals. By grooming the next generation of advisors, operations people, and business developers, owners put their businesses in a better position to capitalize on the demand for advice.

Whether practitioners generate their own curriculum or seek help from others, several essential skills must be emphasized in the development of leadership talent:

  1. Clarify firm vision: Train leaders to define the business, who they serve, and what they need to do to accomplish firm goals. Align each area of management with the goals, visions, and values of the overall business. Understanding the firm's strategic planning allows future leaders to make informed decisions for continued growth.
  2. Communicate and direct: Leaders must be able to inspire others to pursue the vision and accomplish the goals of the business. While most advisors are adept at persuading clients to action, oftentimes they are reluctant to push their own associates to higher levels of performance. While some lead by position, the most effective lead by persuasion.
  3. Challenge the process: As businesses evolve and grow with the clients they serve, processes often need updating. Good leaders will monitor what's working and what's not, and have the courage to make changes that may temporarily unsettle staff and clients.
  4. Enable others to act: Perhaps the hardest part of being a leader is effective delegation. While in the short term it may be "quicker to do it than to teach it,"allowing others to make mistakes and learn helps the firm in the long run. With delegation comes accountability, so holding people to their responsibilities is a key part of effective delegation.
  5. Acknowledge talent: Every good leader knows that people need, want, and deserve to be credited for their contributions to the success of the business. It may be difficult to subordinate one's personal ego when managing a team or managing a business, but people will almost always respond to positive reinforcement. At the top of the house, owners must lead by example, applying the same encouragement to other partners and leaders in the firm.

Share the Wealth

Before implementing a leadership development program, owners of advisory firms must decide to share authority with others. Giving accountability to others should include the power to act. Of all the decisions that practice leaders need to make, when to lighten the grip on the rudder is the biggest of all.

Reluctance to entrust associates with management responsibilities is the hobgoblin of every small business owner. It's often hard to see the people you hired have matured in their abilities and character since they joined you. Vesting in them the responsibility to help transform the practice into something greater raises a whole new level of concerns.

This shortsighted approach exists even in advisory firms that have been sold to consolidators. They have managed to transition ownership to a rollup firm or a bank, but they have not been able to develop their successors in business development, business management, and financial advice.

Unlike plants or animals, advisors have the opportunity to ensure the longevity of their firms. But they must rise to the challenge.

While industry providers are part of the solution, the trade associations, custodians, and broker/dealers can only do so much to tee up this issue for independent advisors. Ultimately, owners need to invest time, money, management, and energy in a talent recruitment and development program for their own businesses. Associates within practices need to step up and take ownership of their future as well. It's worth it.

Building a strong practice that endures for the long term benefits both clients and the staff that will grow and succeed you.

Reprints Discuss this story
This is where the comments go.