From the November 2013 issue of Investment Advisor • Subscribe!

Tibergien: Act Like an Owner

Partnership is a special role reserved for those who act responsibly

When asked why a certain individual was not promoted to partnership, advisors frequently respond “because he or she does not act like an owner.” I’ve long pondered this expression. What does it mean to “act like an owner”?

The answer to this question crystallized for me during a discussion at Pershing’s U.K. Advisor Council meeting in Lower Slaughter, a 1,000-year-old village located in the Cotswold region of England. In addition to the usual English and Scottish contingent, several members of our U.S. Advisory Council participated as well. It was enlightening to learn that the challenges of running an advisory business are universal, especially when it comes to questions about recruitment, retention, compensation and ownership.

The discussion about what it means to “act like an owner” started following comments by the CEO of a very large advisory firm. He shared: “Our business is not the same now as when it was founded. We grew, but without an organizational chart and performance reviews. Now that we have more partners, more people and more moving parts, we have to standardize the way in which we do business. We have to balance the wishes of the founder to be entrepreneurial with the needs of the business to develop people and hold them accountable.”

In describing the history of his firm, this CEO went on to explain, “When we started this firm, we had to write checks to buy equity. That was a financial strain for many of us, but that is what it takes to create a business. Nobody gives it to you.

“When subsequent employees were invited to become partners, they complained about not having the ability to fund the purchase, so we loaned them the money from the company and issued dividends to help them cover their payments. In a way, it was a riskless transaction for them since they didn’t have to pull from their own savings to buy in.

“Some obtained their equity in 2007, the point of its highest value. We loaned a lot of money to make this happen. As you can imagine, the firm’s valuation declined with the market. When we sold the business in 2010, many of these shareholders were underwater in terms of valuation, just like a lot of homeowners who had heavily mortgaged their homes. They wanted us to write off the loans as worthless.”

When asked by meeting participants what he would have done differently, the CEO cogently stated three key recommendations:

  • Never give away equity, always sell it; partners need to write a check to feel like owners.

  • Remind all partners continuously and repeatedly of the obligations, responsibilities and liabilities of ownership.

  • Be diligent in the evaluation process to ensure that prospective partners grasp the concept of ownership and are willing to accept the risks to enjoy the rewards that come with it.

On this final point, the other meeting participants jumped into the fray. “What does it mean to be an owner?” someone asked.

The exchange of ideas was fast and furious. “If you see something, say something.” “Hold your partners accountable for their commitments.” “Develop others in your firm.” “Make prudent decisions about spending money.” “Speak as one voice to the employees to show a shared vision and commitment.” And most of all, “You’re not an employee anymore, so take responsibility for what you are doing and what the firm is doing.”

The essence of the discussion boiled down to the concept that becoming an owner in an advisory business is much like becoming a member of an exclusive club. Why is it so difficult to gain entry into this prestigious club? What are the most important characteristics of a qualified partner and what behaviors hinder wannabes from achieving this goal?

First and foremost, advisors tell us that the prospective partner must make a meaningful financial contribution to the business. Measuring this contribution can be challenging, however. Is value determined by new business development or client retention? Interestingly, most advisors generate over 90% of their annual revenue from existing clients, so the current paradigm of stressing new business alone has to change. If associates manage relationships well and obtain additional revenue as a result, isn’t this work just as valuable as attracting new clients?

Well, it is all about achieving a balance. If everybody focused solely on retention over new business development, then the practice would not grow fast enough. A partner’s financial contribution is best measured through a combination of new and existing business, even if the latter came via someone else in the firm generating the opportunity.

The second essential quality of a prospective partner is his or her willingness and ability to develop other people. Those who do not help in the development of younger associates are not helping build a business to last. The next generation will dictate whether the business has a sustainable future. An individual who takes credit for successes yet does not take the time to teach, mentor or coach lacks one of the most important attributes of a firm owner.

Third, take a look at an associate’s attitude and approach to safety. It’s not uncommon for advisors to say that compliance is the CCO’s job and to abdicate all responsibility for this area. In reality, the CCO is not the company cop, but a center of excellence that helps the firm to serve its clients with integrity and in accordance with the rules promulgated by the regulators. The obligation to operate by these rules applies to everybody in the firm, especially those who perceive themselves as future partners. Safety is not just an issue of compliance. Client acceptance and retention, behavior in and out of the office, managing to profitability—all contribute to whether an associate is partner material.

The fourth essential quality relates to leadership and management. Lone rangers do not make good partners, no matter how much business they bring in or how many assets they manage. If you accept that partnership is a privileged role, then you must accept that non-partners will look to you as an example and an inspiration, someone who is interested in the careers of others and committed to the firm’s vision. Leaders balance strategic and tactical thinking, communicate with clarity, listen attentively and accept responsibility for their actions. One does not need a title to be a leader. Oftentimes those who do not make the cut are those who wait to be appointed to something before accepting responsibility to act.

Finally, a partner must be likeable, a culture carrier, someone whom others want to spend time with. This quality may be subjective but remember, the current partners make the decision about who gets invited in. It’s hard to imagine why partners would choose to spend any time—let alone partners’ meetings or executive off-sites—with someone they cannot relate to or even look forward to seeing. This is not to suggest that people need to change their personalities to fit the role, but it may be prudent for aspiring partners to make sure they are not offensive, irritating or out-of-sync with others in the firm.

To act like an owner is to recognize the responsibilities that come with the role, to act with confidence, to make good and ethical decisions, to hold others accountable and to contribute in a meaningful way to the organization’s success. Seniority doesn’t matter, nor does where you went to university, where you worked before or what your current job is. It’s all about possessing the positive traits and skills required to help lead the business.

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