Be Careful What You Wish For

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.