If you’re like most financial planners, whether you’re a solo practitioner or have formed an ensemble, sooner or later you’ve realized that you could leverage your talents by hiring an “associate” planner. So you hire someone to write plans, track portfolios, handle simple client questions, and undertake research on more complex client issues.

After a few years of working with you, attending continuing education programs, and completing on-the-job training, these associates become fairly competent planners in their own right. You’re probably starting to rely on them to handle broader issues, make recommendations, and even handle some clients who don’t really need your level of expertise. It’s only natural that they start thinking about having clients of their own, taking a larger role in managing their work environment, and reaping a larger share of the economic rewards of their work.

But you don’t see any reason to give up a piece of the firm you’ve worked hard to build from nothing, especially to someone you’ve trained who still isn’t half the planner you are. After all, didn’t you get into this business to call your own shots? Why should you think about sharing and taking a risk on someone else’s skills now?

So you put them off, maybe expanding their job and paying them a little more money. But eventually they leave to pursue the same dream that you started with, and often taking some of your clients with them.

This is the way the profession of financial planning has spent its first quarter century. Planners train and mentor their eventual competitors. But things are changing. One of the most encouraging trends we found in the 2003 FPA Compensation and Staffing Study is that not only are more financial planners banding together to form ensemble firms, but the greatest source of new partners today is internal promotion. This is an incredibly important development in the evolution of the profession. Moreover, it’s a vital step in a professional career path and creates a seamless succession plan that will enable firms to support the retirement of senior partners while continuing to serve clients long after their founders are gone.

The Professional Firm Model

The creation of professional firms has long been one of the foundations of law and accounting practices. Many top college graduates have historically chosen careers in professional services specifically for the environment created by these firms: the initial economic freedom to develop their professional skills and experience; reliance on the firm’s reputation to create better opportunities; the mentoring by senior partners; a career path to their own practices, first as employees and then as partners; and an exit strategy that provides for a comfortable retirement.

The benefits of such an arrangement to the firm itself are also attractive. The first-class training with the potential of eventually becoming a partner in a successful firm is a powerful recruiting and retention tool. And the long-term nature of such a career path gives the firm ample time to observe and evaluate prospective partners, as well as a very real, but distant, incentive for high-quality performance.

The Two Big Truths

As the practice of financial planning has matured, planners have come to realize two important business realities: (1) that focusing on the few jobs that make up their expertise, such as client contact or investment selection, while delegating other tasks to other folks, benefits their clients, their finances, and their personal well-being, and (2) that sharing the cost of these “other folks” greatly increases economic efficiency. Consequently, over the past five years we’ve seen a gradual transition from a solo practice model to larger ensemble practices that share staffs. We found, for instance, that during 2001 and 2002 (not exactly boom times for financial services) the average planning firm increased its staff by 15%.

Initially, ensemble firms shared administrative staffs. But more recently, the economic realities that compelled other professions to expand the firm structure to include professionals, and more importantly, professionals on a partnership track, have had the same effect in the planning community. As Figure 1 shows, over half (57%) of the firms who have added new partners during the past three years promoted those partners from within their own employee ranks, as opposed to merging in a partner with a developed practice (28%) or adding an outside partner with no practice (24%).

While the trend lines haven’t crossed over yet, the handwriting is on the wall: While the majority of today’s financial advisors left a large financial institution to start their own practices, this current trend reveals a new generation of advisors who will have grown up inside a financial planning firm. Offering mentoring and the prospect of ownership will give the planning profession the ability to attract a new level of talent, as well as to create a culture all its own, rather than one borrowed from the securities, insurance, or accounting industries.

How to Select Partners

The first critical decision you’ll face as you translate this into your specific practice is how to select new partners. While planning firms may look at factors such as the number and quality of relationships managed, and revenues generated, fully 78% of new partner decisions come down to how the old partners feel about the prospect.

This may strike some as too subjective, and more objective partnership “formulas” based on hard revenue or client management numbers are sometimes suggested. However, the successful integration of a new partner into a firm is a delicate process that warrants at least some degree of subjectivity. We suggest that firms establish partnership guidelines tailored to a firm’s needs, that aid, but don’t restrict, the senior partners in their evaluations.

The legal and accounting professions have long established standards for new partner selection. The typical process used for evaluating and admitting partners includes the following questions:

Can the firm afford a new partner? Adding any new employee–professional or administrative–will increase costs and potentially reduce the income of existing partners. Before hiring anyone, senior partners need to specify clearly how the new addition will either increase revenues or increase the efficiency of existing revenue generators in excess of the costs involved. Firms that are in a strong financial position may elect to “invest” in a new employee or partner, covering an initial loss in anticipation of a larger future profit. However, the expectations of such an “investment” should be clearly detailed, with a timetable and parameters set to evaluate whether the new partner is living up to expectations.

How does the firm balance between personal contribution and teamwork? Partners are usually required to generate their own revenues, yet contributions to the success of the whole firm are essential. Partners who understand this, firm structures that promote it, and a compensation package that encourages personal and team contributions are essential to most planning firms’ success.

What is the partner compensation structure? Usually the first new partner is the trigger for senior partners to consider issues such as how base salaries are set, how revenues and profits are shared, and how much profit should be retained in the firm.

To determine if the new partner shares the cultural values of the firm, you must first determine those values. Once they are clearly established, senior partners need to establish how they can measure whether an individual is demonstrating adherence to and advancement of those values.

How much is a partnership worth? Establishing reasonable criteria for the valuation of the firm is essential. A value that is unreasonably high will decrease the attraction of a new partnership, and may well foster resentment among prospective new partners. On the other hand, too low a value will dilute the shares owned by existing partners.

Paying for Equity

The next major hurdle in creating a professional career track is deciding how new partners are to pay for their equity in the firm. In Figure 2, almost half (43%) of the firms that added a new partner left it up to that partner to arrange the financing to buy into the firm. Not only can this put considerable financial pressure on new partners, in the form of high payments or personal guarantees, but it might also eliminate prospects who otherwise would prove to be valuable additions to a firm.

Fortunately, Figure 2 also shows that 64% of firms (the numbers add up to more than 100% because some firms employ multiple strategies) use the more partner-friendly options of having the firm make loans to new partners or letting them buy equity out of their income stream. These are the typical methods that accounting and law firms use with great success to attract new partners. If the planning profession is to succeed in creating a professional career track of its own, senior partners at planning firms too will have to bear the burden of financing the equity purchases of their younger partners. After all, it is those younger partners who eventually return the favor by bearing the burden of financing their retirement, one way or another.

Figure 2

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. He can be reached at markt@mossadams.com.