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Practice Management > Building Your Business

Filling the Gap

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Last summer, an article appeared in an industry publication about a financial advisor in California who was frustrated with her situation. She managed the majority of her firm’s larger clients, and consequently was bringing in a little over half of its $1.5 million in annual revenues. However, the founder and owner of the firm (who held over 75% of the equity in the firm) expressed little interest in expanding her 5% stake or even increasing her compensation to reflect her value to the firm.

Like many advisors in similar situations, she didn’t want to start her own firm, but increasingly felt the only way she would ever reap the benefits of her labor was to leave and take as many of the firm’s clients as she could. In desperation, she showed the article to her boss (without saying that it was written about her), hoping it would prompt a discussion of possible solutions for the small career problem she faced, and the larger problem her boss would face if she left. “The article makes some good points,” the owner replied. “But these problems simply don’t exist in my company.”

In my experience as a young planner who’s been graced with the opportunity to work with hundreds of advisory practices, first with the Garrett Planning Network and then in my own consulting firm, I’ve heard plenty of stories, but that one is a classic. Nearly every day I hear a similar complaint from a young planner, or I hear from an experienced planner who has wasted effort and money attempting to incorporate the next generation of talent into his business.

Last month, I presented several problems that many young and new advisors commonly face: cultural differences between planning pioneers and well-educated, well-trained new planners; mismanagement of young talent; the absence of a clearly defined professional career track; failure to offer meaningful ownership participation in established firms; and discouragement from above in getting a CFP certificate. These problems lead to high employee turnover rates that cost established planners millions of dollars every year and threaten the future of the profession.

This month, I’m going to offer some solutions. Of course, the career development crisis in our profession is not going to be solved overnight, nor is there one turnkey solution for every situation. However, here are a few suggestions that I’ve used successfully in my work with advisory firms, along with some larger strategies for the profession as a whole.

Many experienced planners approach me expressing their concerns about the unrealistically high expectations of new planners in the profession, specifically the ones they’ve hired. Admittedly, young planners often do have high expectations of the industry and their own opportunities for advancement. That’s not the problem. Rather, we should ask how those expectations got so high.

High expectations in the minds of young planners can be narrowed down to three related sources. First, as in most professions, the next generation of talent enters financial planning brimming with academic success. Graduates of planning programs at nearly 200 universities, they are well trained not only in facts and figures but also in solving clients’ problems. Consequently, they expect to reach the top of the profession, working with clients and reaping the benefits of ownership in their firms.

Second, there is no clearly defined career path to reach the top rung of success in planning, no clear vision of what to expect when entering the profession, nor what would be a reasonable timeline to achieve it. As a result, young planners create their own career-path timetable that may not be realistic. Again, they believe they are ready to be full-fledged financial planners right out of the gate, so they tend to assume they’ll need a much shorter learning curve than experienced planners consider reasonable.

Finally, during the hiring process, many firm owners make vague, unrealistic promises to candidates about the future without much thought about providing real opportunities for advancement in their firm. Much of the “expectation problem” could be solved if hiring practices were more sophisticated. That would require owners to develop a clearly defined business plan for the direction of their firms, including the roles of new planners and the expectations for reaching each level of advancement. Clearly communicating what you expect from new employees is the most effective strategy for hiring and, more important, retaining talented people.

Two years ago, I was contacted by a young planner who was considering a job at an advisory firm that required him to relocate out of his home state of Texas. My advice was for him to ask to see the written business plan outlining the job and his opportunities for advancement. Much to my surprise, the firm owner had such a plan and the young planner took the job. Last month, he e-mailed me: “The best thing I ever did before taking this job was asking for the company business plan. The plan clearly outlined the business objective, needs, and reason for hiring me. I knew then what was expected of me and how my talents could contribute to the success of the firm. I’ve targeted goals to gain opportunities for advancement and bonuses at the end of the year. I can honestly say I am motivated and feel I have been rewarded for my efforts.”

Create a Partnership Track

Part of any workable professional career track includes the opportunity to earn meaningful ownership in the firm. It doesn’t have to happen right away: in fact, partnership in the firm can happen years in the future. It does have to be possible, and likely, under clearly defined, written criteria. As you’re probably aware, the alternative in the back of every young planner’s mind is to leave and start his own firm–much the way you did. The challenge for the profession, and your firm, is to find a formula that will make that leave-taking unnecessary.

I have found that established planners have difficulty sharing firm ownership simply because they don’t know how to structure the firm to achieve their professional and firm objectives without losing control of their company. Putting together a partnership track in your firm will involve knowing your future goals, outlining them to the junior partner during the hiring process, creating a succession plan, and, most importantly, understanding the opportunity cost for new planners starting their own firms. Here is a simple partnership track plan that I’ve seen succeed, to get you started developing your own:

Year 1 to 3: Financial Associate

In the first three years of starting her own firm, a new planner will barely break even. You know it and she knows it. That can’t be the basis of a workable employment agreement, however. The salary and learning opportunities you offer in the first years at your practice must outweigh the long-term benefits of a new planner building her own firm. To retain talent and boost your bottom line, create in writing a Financial Associates Program that offers a partnership track. That track should include clear guidelines on what an associate needs to do to become a firm partner and to keep them focused on building their skills. You should also pay a professional salary that is at least equal to the three-year draw they could take if they started their own firm–that range is from $32,000 to $53,000 a year.

In addition to salary, increase associates’ motivation with a merit bonus of 2% to 10%, based on the value they add to the company. The bonus would be paid for passing the CFP exam, demonstrating involvement in the community, making professional contacts, getting published, continuing their education, assisting in firm marketing programs, developing new skills, following through on client assignments, showing clear quality of work and skill as a team member, and organizing strategic technology or outsourcing programs. Recognizing these new associates’ efforts financially reinforces their behavior. Those areas an associate should focus on are best determined by a designated mentor at the firm, who will also evaluate the associate’s performance and offer advice on career and skill development.

Year 3 through 7: Junior Partner

Before you start calling me crazy for setting the time frame on gaining equity as short as three years for a young associate, let me explain. Associates with potential to become a partner are those who contribute significantly to client management over a five- to seven-year period, or those with natural marketing skills that could be used as quickly as two to five years into the business. If you find such a young rainmaker, you will want to try your best to hold onto this talent. To do so, you’ll have to offer a package that realistically compensates him for the opportunity cost of staying with your firm.

I have worked with a few new rainmakers who started their own firms and took home as much as $160,000 in their third year. Simple economics dictate that if after three years with your firm he is only making a $70,000 salary plus a performance or merit bonus, you’ve already cost him plenty, and chances are good that he will leave. Your alternatives are to pay him a much higher salary, which your firm likely can’t afford, or offer him equity ownership, even as early as within three years of joining the firm.

No matter when you start, to retain young associates you’re going to have to give them the opportunity to become owners in your firms. In my experience, the most effective equity partnerships are offered gradually, with junior partners starting with a very small stake, and slowly increasing their share in the firm. Since the amount of ownership in a firm usually equates to the percentage of profits that are regularly distributed, a good rule of thumb is try to keep junior partners’ equity in line with the share of revenues they contribute (bring in or manage) to the firm.

The last thing you want is a junior partner with 10% equity in your firm who’s generating 50% of your revenues–it’s a recipe for her to open a shop across the street with half your clients. Over time, a successful firm will have two or three junior partners who are generating more revenue, and owning more of the firm, than the founder. At that point, they’re senior partners. That’s the goal: not only is the founder making more money and working less with a smaller piece of a larger pie, but he now has a viable exit strategy where his partners can afford to gradually buy him out. If financial planning is to survive as a profession, it must adopt a firm ownership model similar to this one.

Those advisors who can’t bring themselves to give up even a small amount of firm equity face the prospect of continually high turnover among their professional employees. Their challenge is to create a compensation package so attractive that it outweighs the advantages of owning one’s own firm. High salary, bonuses, profit sharing, phantom stock, education reimbursement, travel perks, and big titles are all tools to induce your valuable employees to stay. Often they will work–for a while. Chances are good, however, that sooner rather than later you’ll find the level of total compensation it takes to come even close to what they could make after four or five years on their own is so high you can’t afford it. You would have been far better off just giving or selling them a minority stake to begin with. If you want to keep them, that’s what you’ll end up doing anyway.

Exploit Those Youngsters!

The key to making a partnership track work in a firm is to exploit the training that today’s young planners already have.

In my consulting work, I hear from many experienced planners and firm owners who suggest that “rainmaking” or new client acquisition is the most valuable skill a new planner can bring to their business. Consider this e-mail I got recently from an experienced planner: “Rainmaking is the key to earning equity ownership in a professional firm. Planners who cannot attract new clients are simply not as valuable as those who can. Until they bring in a significant amount of revenue to the firm, they don’t deserve any equity.”

This thinking, which is pervasive throughout the profession, demonstrates a woeful lack of understanding of the basic principle of practice management, not to mention the value today’s young planners can bring to the bottom line of a firm. Certainly, bringing in new clients is essential to growing a planning firm and, consequently, to its success. It’s also true that most college courses teach technical planning skills, including how to work with clients, rather than the marketing skills needed to bring new clients in the door.

But even a quick look at the 2004 FPA/Moss Adams Financial Performance Study will confirm that the key to growing a successful practice is leverage–that is, supporting the most valuable members of a firm so they can add even more value. That means you don’t want a firm of folks all with the same skills. Rather, you should assemble a team whose skills complement each other in a way that makes the whole team produce much more than the sum of its parts. For a typical planning firm, that means you don’t need another rainmaker, at least not at first. In most cases, the founder has built the firm on her rainmaking skills. What you need are people who can take more of the non-rainmaking tasks off your desk, freeing you up to summon even more rain, and help make an even more successful firm. That’s something young planners are well qualified to do (see Sharing the Burden sidebar on page 70).

The FPA’s Role

Individual established planners can build solutions to the career development problem one firm at a time, and save themselves hundreds of thousands of dollars in practice management, hiring, and turnover costs. However, the full support of professional planner associations, notably the FPA, is necessary to effect meaningful profession-wide change. To take the lead in career development, the FPA will have to take some strategic, well-thought-out steps beyond what it’s done so far.

To start, the FPA management needs a better understanding of what career development really is, and how it should be handled in our profession. For example, the director of career development position within the FPA organizational structure should not be relegated to a subdivision of the learning department, with responsibility for merely helping “new and aspiring planners successfully enter the planning profession by connecting them to people, programs, and resources….” The FPA organization needs to show that career development is a major challenge for the profession by creating an interdisciplinary position with ties to professional development, publishing, research, marketing, educational programs, conferences, and even chapter leadership.

Once the organizational structure for career development in the FPA is properly integrated, the group can begin to serve the career needs of all planners; young, new, mid-level, and experienced firm owners who need and want viable internal succession strategies. Much of this can be done through educational programs, conference agendas, strategic marketing, publishing, and chapter programs, all advancing possible solutions for these mid-level issues facing so many of its members.

Many new and mid-level planners have dropped their FPA membership or, sadly, simply don’t see a need in having one at all. They feel that industry organizations give them little assistance in facing their serious career issues. The FPA could solve this problem by giving those planners a venue in which to speak out about their issues and share their success stories. As it now stands, when new planners openly talk about mid-level problems they run the risk of losing their jobs. To help, the FPA could conduct research projects, facilitate new planner advisory boards, and develop publishing projects targeting mid-level planner issues.

Finally, the FPA and the CFP Board could develop a better relationship and leverage the research that has already been conducted on planning practices by taking a more active role in promoting the value of the CFP designation. The 2004 FPA/Moss Adams Study found that having a CFP on staff strongly correlates to superior financial performance of a practice and significantly boosts firm revenue. However, very few experienced planners, financial services firms, and even young planners understand this correlation. If they did, much of the discouragement around obtaining the CFP would be eliminated. Spreading the word with the support of the FPA could boost the number of CFPs and FPA members. It could also yield more satisfied new, mid-level, and experienced planners, boost firm revenues, and finally increase owners’ income. It would be a defining moment in our profession.

A Defining Moment

Over its history, financial planning has seen many such moments that made the profession stronger today than it has ever been. I was too young to take part in most of those moments, but they all have impacted my life. Often feeling disconnected from the profession, many new planners and I have realized our own unique set of defining moments that were a direct result of passionate pioneers and organizations, such as the FPA, who built the profession for us. I found my passion for financial planning after a pioneer CFP taught me how to manage the first business I founded. After college, I started my career with planning pioneer Sheryl Garrett. At age 24, I was named one of Investment Advisor’s first “New Faces of Planning.” From that high, however, my heart sank as I received numerous e-mails and telephone calls about the career and business struggles new and experienced planners were facing. Finally, many mentors helped me find the courage to speak out about my research in career development, and despite my lack of gray hair, to build a consulting business that has helped hundreds of new and experienced planners.

This month, I turn 27. As I reflect back on my short yet eclectic professional career, I cannot imagine where I would be if I didn’t have the help of the FPA and those planning pioneers who graciously gave their time and mentorship, which led me to find my unique place in this profession. I might even be more thankful to those who were not supportive, who motivated and challenged me by saying to my face that I was “young and naive” when telling the truth about my research, consulting work, and the experiences of others in the profession.

For now, I can only hope that before I turn 30, I’ll be able to say that a great defining moment was when many dedicated planning pioneers joined together with the next generation of pioneers in a movement, led by the FPA, to solve the career development challenges we all face. That defining moment will be the creation of a strong, viable career track and a professional association that serves both the successful planner and those new to the profession. Career development encompasses building a strong foundation to carry on the legacy of this great profession. The future of our profession depends on it and we all need do our part to make sure it happens, whether you are young and naive or old and wise. We have a lot to learn from each other. We should start bridging the gap and nourishing the connection today.

Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at [email protected].


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