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.