From the October 2008 issue of Investment Advisor • Subscribe!

One Small (Big) Step

The advisory industry has taken a giant leap forward. Attendees at this year's FPA NexGen conference clearly have made progress at getting small pieces of equity in their firms.

It's often educational to skip a conference for a year or two; it makes the changes stand out more. This year's FPA NexGen Conference, held at the end of July at St. John's University in Minnesota, was a perfect example. I've been actively involved with NexGen advisors, the forming of their virtual organization, their chat boards, and the creation of the NexGen Conference in conjunction with the FPA. But as my consulting business has taken off, I didn't make it last year.

What I found was a gathering so different from the one I last attended that I wouldn't have been surprised to learn I was at the wrong conference. For one thing, some 80% of the attendees came for the first time, so I didn't know most of the folks there. Then too, the old people didn't show up--er, I mean, there weren't nearly as many "established" financial advisors who attended. But most striking, the NexGen advisors seemed to be more sophisticated, more knowledgeable, making comments and asking questions about technical planning issues and practice management that I wasn't always sure I knew the answers to.

There was something else, another tone to their questions that I picked up on right away, but couldn't quite put my finger on. Then it hit me: These NexGeners weren't worried about how to approach their owners about how to get a partnership interest in their firms as they were two years earlier; now, they are partners or prospective partners, concerned about the best ways to structure, evaluate, negotiate, and finance their equity stakes; how to decide if they even want to be partners at all; and looking to find the best ways to build equity for their retirement.

Granted, in most cases, we're not talking about a big partnership stake--2% or less in many firms, and perhaps a bit more than that in smaller practices. Yet if the attendees were at all representative of the current status of young advisors (my work and anecdotal research tells me that they are), in two short years, Next Generation advisors have taken a quantum step in their careers--from employees to part-owners--and the independent advisory industry has made an even larger leap from one- and two-person shops to professional practices that can train and groom their successors internally, with the potential to grow far beyond the abilities and life spans of their founders.

Why It Matters

One can't really overstate the impact that firm ownership, however small, has on a young financial advisor. Probably for the first time in their lives, they have more than just a job. I suspect that many older advisors don't truly grasp this distinction, in no small part due to the direction of their own careers. Historically, independent advisors typically started as stockbrokers or insurance agents (or at American Express Financial Advisors, now Ameriprise), where, although they technically might have been employees, the "entrepreneurial" culture made it very clear that their livelihoods and careers depended solely on their ability to attract their own clients (which once attracted, the firm was more than happy to claim both during and after their tenure with the firm).

An employee at most independent advisory firms is in a far different situation. At a typical firm, virtually all the client contact is handled by the partner(s). The employees function largely in support roles, handling the back office, planning, and investment work that can be done behind the scenes, with actual client presentations made by the advisor/owner(s). If the employee does have client contact, it's usually in a clerical capacity (answer the phone, tracking down documents, solving problems), and that role is almost always subtly, but clearly, communicated to the client.

Recognizing Their Value to the Firm

It can take years for most young professionals to get the client contact and professional respect they thought they signed on for when they became financial planners, that the older generations (whether they deserved it or not) got virtually right out of the career box. One of the first steps on the path toward achieving those goals is the recognition of their value to the firm, their maturation as advisors, and their mentor's commitment to them that comes with partnership, however small the actual ownership stake. At least psychologically, becoming a partner takes them out of their purely supporting role, and puts them on the starting team: Maybe not the shooting guard or the power forward, but no longer warming the bench, either.

This difference in attitude from employee to owner was nicely verbalized by one of the two NexGen advisors--Sara Bailey--on Mark Tibergien's opening-day panel called "Straight Talk About Ownership." "I do most of the same things that I did before I made partner," Sara said. "But now I have more responsibility, which gives me more confidence, and more credibility, with the clients."

It was a theme that was repeated by her co-panelist Jason McGarraugh and by many of the young advisors I talked to throughout the conference. In my work, too, I've witnessed the remarkable effect on a young professional when they begin to realize they no longer are working for the man, but are, in fact, becoming "the man" or woman.

The impact on an advisory firm itself is also quite remarkable when one or more of its young professionals is elevated to junior partnership status. The promotion often affects every one of the staff because the very nature of the firm has changed, probably forever. No longer is it a solo or mom-and-pop (or pop-and-pop) shop, with the rest of the staff in permanent supporting roles. From that point on, it's at least possible for each and every member of the staff to become a partner in the firm. Sure, they might have to finish college and get their CFP, etc., but it could be done. Suddenly, the future at that firm is open to anyone who wants to make the effort.

Different From the Outside

What's more, the addition of junior partners changes the appearance of the practice from both the owners' and the clients' perspectives. For owners, adding partners increases the potential for the firm to grow--particularly beyond the limitations of the current owner(s). If you can add one partner, you can at least in principle add more, with each new partner adding another multiple to the number of clients the firm can service. Moreover, younger owners also represent a succession plan for the senior partners: A ready and increasingly financially viable market for the balance of their equity when they choose to call it a day. The practice is no longer a glorified, albeit well-paying, job. It's a business with a life, and a value, beyond the founding owners.

To its clients, and prospective clients, the advisory firm has substantially changed, too. It's no longer a practice that will close its doors when the advisor retires: it's now a firm, again, with at least the potential to continue servicing the clients after the founder no longer can or cares to do so. Even better, the successor isn't some unknown pinch-hitter that the clients will have to make a quick decision about. Instead, it's an advisor they've known for years, and watched grow up with the firm, almost like family. The younger partners are also more likely to form relationships with clients' children (and their friends), greatly increasing the chances of transitioning the advisory practice into a multi-generational firm.

In Front of Our Very Eyes

Yet for all the benefits that adding NexGen partners brings to firm owner(s), the firm itself, and the firm's clients, the thought that kept running through my head as it dawned on me how many of the NexGen advisors at the conference were now partners in their firms, is the radical impact this must be having, and will increasingly have, on the independent advisory industry. With the growing success that independent advisors have had since the mid-1990s--with a slight interruption by the dot.com correction--a flood of new clients has gone predominantly to established firms. To handle this new business and to take advantage of the potential for even more business, large numbers of advisory firms looked to add professional help.

While that kind of growth is for the most part a good thing, it usually doesn't happen without growing pains, and that's certainly been true for independent advisors. As I pointed out in my controversial feature in Investment Advisor, "The Great Divide" in February 2005 (an article that young advisors still e-mail me about), simply adding young professionals into firms that were ill prepared to train, compensate, manage, or motivate them often created at least as many problems as it solved (and helped spawn work for consulting firms such as mine, Moss Adams's, and many others).

Perhaps the biggest problem of all was the lack of any uniform career track that young planners could progress along toward their goals of firm ownership and working with their own clients.

Most established advisors were and still are essentially entrepreneurs who launched their firms by breaking away from their brokerage firm, insurance company, or the occasional accounting firm with as many of their clients as they could take. The prospect of giving up a portion of the firm on which they staked their career and their family's well-being, took out a second mortgage, faced SEC audits, and worked 100 hours a week to start, wasn't very attractive. It's not hard to understand why many independent advisors resisted promoting their young employees to junior partners.

Yet economics were against this trend. With relatively few barriers to entry, and ownership as the goal of most young advisors, the option that all employer/advisors are bidding against is for employee/advisors to leave and hang their shingle across the street, often taking some of "the firm's" clients with them. Losing a young professional is surprisingly costly to a practice, considering the one to two years it took to recruit and train them, the two to three more years of mentoring it took to maximize their professional productivity, and the next two years it will take to replace them.

The biggest challenge facing independent advisors in recent years has been to keep its young professionals from leaving and crippling their firm. To do that, they'd have to include the very real prospect of junior partnership. Yet many advisors steadfastly clung to their equity, creating the train-your-competition trend that permeated the industry for 20 years. In virtually every big and mid-size large city in America, you'll find one or two large firms that have trained a majority of all the other independent advisors in town. I can't help but wonder how successful those firms would be had they managed to keep all those advisors.

A Watershed Moment?

At least that's been the trend until now. My takeaway from the 2008 NexGen Conference is that the independent advisory industry has turned a very important corner. Perhaps spurred by the looming need to transition their practices at some point in the near future, the Baby Boom Generation of independent advisors seems to have seen the light, offering junior partnerships in their firms in unprecedented numbers. Again, if the attendees at the conference are representative, young financial advisors are responding with an enthusiasm and a commitment that I've not seen, well, ever.

This is indeed a watershed moment in the evolution of financial advice. By eliminating the primary motivation for the industry's professional revolving door, the business of advice can move up to the next level: with the increased likelihood that young professionals will stay with a firm, increased investment in their training and professional development becomes prudent. For many firms, the issue of transition and succession is solved; recruiting will become far easier, especially from other professions such as law and accounting; and the potential to build far more valuable, ongoing businesses increases exponentially.

Of course, while the widespread opportunity for junior partnership is an important, crucial step, it's more of a beginning than an end in itself. The profession of financial advice needs to increase training at the professional level, by firms formally and through mentoring by senior advisors--in the same way that when doctors or lawyers graduate from their professional school and get their first job, it's really the beginning of their training, rather than the end.

The basis of such professional training is a formalized career track, on which a professional is shepherded along by more experienced colleagues while they get practical experience. At the conference, I had a discussion with a young advisor (well, I guess about my age) who was married to a doctor. He described how he and his wife could track her career from intern to resident to attending physician or private practice. It's not a given that she'll move up to the top rungs of the medical ladder, but it is clear how it's done, and what a doctor's options are at each stage. His point was that there's nothing like that in the advisory world, which is the source of much confusion and frustration among young advisors.

Taking the Next Big Step

Of course, there's the matter of partnership equity itself. Don't get me wrong: some equity is a quantum leap better than no equity. But the next step for advisory firms to address is "meaningful" equity. In a "large" firm with say, $5 million in annual revenues and many partners, 1% or 2% interest in the firm may be appropriate for new junior partners for some years. The more typical case, however, is a small- to mid-size firm with one owner/advisor who handles rainmaking and some of the larger clients and a young professional who does most, if not all, of the service work for the remaining half or even three-quarters of the clients.

From a purely economic perspective, a 5% or even 10% stake in the firm isn't representative of the value this junior partner is bringing to the table. Even if he or she doesn't ever bring in one new client, the workload they take off the founder's desk frees her up to get new clients. Not everybody has to be the quarterback on a football team, but do you know what the second-highest-paid position is in the NFL? Offensive left tackle.

Remember, the other option that firms are competing involves young professionals setting up their own firms: it's bad for the firm, bad for the owner, and in my experience, most young advisors don't want to do it. But they will if they don't think they're being treated fairly--and they can read a P&L as well as anyone else.

Partnership equity that's commensurate with a junior partner's contribution to a firm is an important next step in the evolution of the business of advice. But now that the partnership door has been opened, I suspect that's a foregone conclusion. The independent advisory industry has taken a crucial step toward creating valuable, viable practices and a credible profession that provides an essential public service. I'm both surprised and encouraged that this change has happened as quickly as it did--it's one huge leap toward ensuring that regardless of bad economies or down markets (and maybe because of them) the profession of independent advice has a very bright future, for many generations to come. Now, the real test is this: Will it last? Will the profession take steps toward training, building career tracks, and setting a standard in which all firms can follow to keep the momentum going? Guess we'll find out at the NexGen conferences in the future.


Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at angieherbers@cox.net.
Reprints Discuss this story
This is where the comments go.