It is one of the stranger ironies of the financial planning business that advisors who once fled large financial services firms to strike out on their own are now considered doomed to extinction unless they band together to form–guess what?–large financial services firms.
For some time now, Undiscovered Managers’ Mark Hurley has been predicting the end of cottage-industry planning as we know it; Michael Gerber of “E-myth” notoriety has made an entire career out of exhorting advisors and other entrepreneurs to build corporate enterprises rather than one-man shows. But wait a minute. If large financial firms were a bad idea in the old days, why should they be such a good idea now?
Glenda Kemple and Woody Young of Quest Capital Management in Dallas can list a whole host of reasons. Their firm, formed from the merger of their practices in 1987, has mushroomed to a total staff of more than 30 people, and they’ve mapped out ambitious plans to keep right on growing. What do they think makes their firm better than the big, bad firms of the past? Some of their reasons won’t surprise you: They offer comprehensive planning services, they’re compensated primarily by fees, all their planners are CFPs, and their securities transactions are funneled through an independent broker/dealer, Raymond James Financial Services. But there’s more. For instance, all the advisors own a portion of the firm, the business has a clear career path for young planners, and all clients work with a team of advisors, rather than one particular individual. The cult of personality doesn’t cut it at Quest Capital Management. What matters to Kemple and Young is increasing the value and effectiveness of their firm, providing for their own eventual retirement, and making sure their clients will continue to be served after Kemple and Young have departed. All of that is best achieved, they believe, through a large, team-oriented company structure.
E Pluribus Unum
The transformation from small individual practices to a sizable integrated financial planning firm isn’t always easy, and in Quest’s case, it didn’t happen overnight. The story of the firm’s evolution is an edifying one for any planner who has ever felt the urge to merge.
Entrepreneurs are not exactly known for their willingness to hew to others’ wishes, and financial planning entrepreneurs are no exception. Before Young merged his single-owner practice with Kemple’s in 1987, he had his clients, his support staff, his account statements, and his own way of doing things. After the merger, he kept right on doing them–and Kemple forged right ahead doing things her own way, too. Sure, the two shared overhead expenses, a software system, and a name, Quest. They even had a written business plan, a concept both planners still swear by. But even after the two invited four other planners to join the firm, everyone’s work stayed separate. “We basically had six little subcompanies, with their own expenses for their own people, their own furniture,” says Young, 57. “Glenda and I had offices next to each other for 11 years without ever meeting with each other’s clients.”
Members of the firm couldn’t figure out whether they were a single firm or half a dozen, so it was hardly sur
| Glenda Kemple and Woody Young
8235 Douglas Avenue, Suite 500
Dallas, Texas 75225
Joint practice founded: 1987
Number of planners/staff in office: Two principals, seven client-planners, 21 staff members
Number of clients of the firm: 500
Compensation method(s): Primarily fees; some commissions
Average fee for a comprehensive financial plan: $6,500
Fee for managing assets: Sliding scale decreasing from 1% of managed assets
Hourly rate: $225
Client demographics: High-net-worth executives and professionals of the Dallas/Ft. Worth area
Education: BA in business, University of Missouri
Previous incarnations: Controller and treasurer, marketing manager
Professional designation(s): CPA, CFP
Outside interests: Traveling
Education: BA in political science, University of Oklahoma
Previous incarnations: U.S. Marine Corps officer, president of a business planning firm
Professional designation(s): CFP
Outside interests: Boating, music
prising when referral sources started to have the same problem. The result was that those sources had to play favorites whether they liked it or not. “If you were an attorney who worked with both Glenda and me, you knew that if you called me, I’d get the revenue and if you called Glenda, she’d get it,” says Young. “That strategy of ‘eat what you kill’ was putting our referral sources and our professional relationships in an awkward position.”
The other problem with functioning as separate entities was that huge strides in efficiency–always touted as a primary reason to band together in the first place–weren’t materializing. With everyone doing their own marketing and handling all the quotidian chores of running a business, the planners spent “maybe 20% of their time” directly serving clients, says Young. He and Kemple started to have an inkling that they needed to do things differently, but they weren’t sure what.
Serious medical situations have a way of focusing the mind, and that’s exactly what it took for the two principals of Quest. In 1997, when everyone else was returning unwanted Christmas presents, Young fell victim to a heart attack and had to have quadruple bypass heart surgery. He was out of the office for nearly five months. The good news was that his personal financial matters were well in hand–the firm has a policy that all planners must have an up-to-date financial plan. The bad news was that Kemple and the other planners had no idea how to pinch-hit for him. “It was, ‘Wait a minute, how do I run this business by myself? I don’t even know Woody’s clients! They don’t know me!’” says Kemple, 51. To add to the turmoil, Young’s support staff wasn’t wild about letting anybody, even Kemple, barge in and try to serve “their” clients. “There was a some level of ‘Well, I work for Woody’ as opposed to ‘I work for Quest,’ and some reluctance to include me in meetings or allow me to help out,” says Kemple. “It became fairly obvious that we did not have a firm at all; we had practices.”
When Young got back on his feet that summer, the two principals brought in Mark Tibergien, who specializes in practice valuation and transactions for Moss Adams LLP in Portland. The consultant spent two days interviewing everyone on site, and informed them that their practices could be worth twice as much as an integrated firm as they were in their current form, as individual practices Scotch-taped together. “He told us, ‘You have too much overhead, and everything is dependent on your personalities,’” says Kemple. “‘If Woody hadn’t made it off that operating table, what would happen to the value of your firm?’”
Fate seemed determined to drive the point home; that winter, it was Kemple on the operating table, in this case undergoing back surgery. She was out of the office for three months, and during her absence, Young struggled with the same client and support staff battles that she had faced while he was out. When Kemple returned to work, both principals were ready to make some serious changes.
“One of the things I was able to contribute during my flat-on-my-back disability period was to make a first step at revising our business plan and bringing [the disparate practices] together,” says Kemple. Separate but equal hadn’t worked; it was time to try integration.
Even the most reasonable adults have a bit of the child left in them, and few of us have fully squelched the trait that, as children, made us grumpily draw lines down the middle of the back seat of the family car and scowl, “This is my side! Keep off!” While the planners of Quest wanted to integrate their practices, “everyone certainly had their territorial concerns: ‘This is my client, and I don’t want to lose control,’” says Kemple. “We had to get away from the terminology of ‘This is my client’ to ‘This is our client.’” The firm’s six members brainstormed and brought back Tibergien to help.
Two decisions helped the firm make the leap from “my” to “our”: The “eat what you kill” payment structure was dismantled in favor of salaries, and the four associates were given part ownership of the firm. “Going on salary meant that one person didn’t get paid more because they closed this big insurance policy–that was revenue for the firm,” says Kemple. And as part owners, the associates suddenly had reason to work together to create revenue, rather than battling each other to get a piece of it.
To determine the number of shares granted to each planner, says Kemple, Tibergien calculated the amount of recurring revenue generated by each planner from asset management and retainer fees, plus the amount of money under management by each practice. The planners agreed upon a multiple of those numbers and a discount factor, which Tibergien used to assign a value to the overall firm. “Then he divvied it up, percentage-wise, by practice, and that determined the number of shares we received,” she says. At the current time, Kemple and Young each own about 35%-40% of the firm, and their planners each own 5% or less. Kemple maintains that even these tiny percentages are enough to motivate the other planners. “Even if they only own 5%-6%, if 40% comes back into the firm [when she or Young retire], they get pro rata based on the existing ownership of the current shareholders,” she says. “They’re incented to have equity for the future, because they believe in the future increase in value of the firm.” Young notes that he and Kemple recently sold additional shares to their planners. “I don’t like going from 41% to 38% ownership, but 38% of something worth $10 million is worth a lot more than 41% of something worth $3 million,” he says. “And they helped us get where we are.”
Surprisingly, assigning valuations and parceling out shares was the easy part of the negotiations. The greater hurdle, it turned out, was hammering out the terms of the shareholder agreement. What kind of non-compete agreements should be put in place? At what valuation will a retiring planner’s shares be purchased? “That was one of the most challenging parts, but in retrospect, it was very positive,” says Kemple. Adds Young, “Everyone went into it thinking, ‘What about me? I’ve got to protect my backside, and if this isn’t going to work out for me, I want to be able to leave when I want to.’ Well, the more we got into it, all of a sudden we started saying, ‘What about us?’ ‘What if Woody goes across the street and starts cherry-picking our good clients?’ It really got us thinking as an organization.”
The firm decided to “try on” its new creation for several months, signing the last shareholder agreement by the summer of 2000. The associates, who became known as client-planners, took over the day-to-day client interaction and and Kemple and Young–following the advice they’d read in both Hurley’s and Gerber’s writings–turned their attention to strategic planning, marketing, and mentoring their associates.
Nobody expected manna to rain down simply because the company had reorganized. They were in for pleasant surprise. “In the first year, we were not at all sure if the stuff about a team being more profitable than practices was just words,” says Young. “But last year, our total revenue grew 40%, and without nearly a corresponding increase in overhead and people.” By centralizing non-planning work such as marketing and operations, the firm was more efficient than ever. And since the planners openly shared their experiences at weekly educational meetings, they increased their knowledge faster than any of them could have alone.
Granted, in an industry that speaks reverently of The Deep Personal Relationship between client and planner, the firm could be seen as missing the boat. After all, each client is expressly told that several staff members will be handling his finances, and clients are meant to form a relationship with the firm, not a single individual.
This, the principals say, is precisely its strength. After Young’s heart attack, his clients were left wondering who would handle their affairs if he didn’t pull through. Now, “they can feel confident that there is an organization here, not just a personality, that will be able to share the same commitment,” he says. Clients also like knowing that more than one set of eyes will review their plan. “I had an attorney in Dallas tell one of our prospective clients that the best thing about us is our team approach,” he says. “We promote that idea of a deep bench.”
As competition in the planning world heats up, perhaps planners should heed the age-old advice of the kindergarten sandbox: Share, hold hands, and stick together.