Glory Days

I’ve been working with one of my established clients to merge with a much newer firm. The goal is to create more than just two parallel practices–both partners want to share clients, overhead, and management decisions, and split profits evenly. Since both partners are reasonable, goal-oriented, and committed to making the new business work, most decisions have been easy: new office space, furnishings, additional staff, technology issues, and even working together on clients have all gone as smoothly as if they had been together for years. Yet in working out the structure of the new firm, there is one issue that’s proving harder to get right, and it occurs to me that it’s at the root of much of the planning profession’s current struggle with career paths and integrating younger advisors into established practices.

My clients agreed that their compensation (in addition to their owners’ return which will be split 50/50), would be based on the share of revenues they bring in: The more they make for the firm, the more they get to take home. At least that’s the idea. In practice, of course, that simple formula is fraught with complications. For instance, how do you determine the relative values when both partners work with the same clients? What’s the appropriate split when one partner brings in a client for the other partner to work with?

But the biggest challenge they face is that their plan is for the junior partner to eventually assume responsibility for “operations;” that is, to manage the people who do much of the client service work, leveraging the senior partner to bring in more business and focus his expertise on projects that generate higher revenues with larger clients. How do you determine the value of that leverage? How do you create a revenue-sharing structure to reflect that value?

This knotty problem of determining the relative value of leverage vs. revenues makes my clients a microcosm of the financial planning profession today. Studies show financial planning practices are growing at an unprecedented rate. Planners everywhere are realizing that if they leverage themselves, their lives will be better–shorter hours for more money–while their practices can offer more, higher-quality services to a larger number of clients. So more and more practices are not only adding support staff, but also younger professionals to do more of their clients’ planning and investment work.

A New Model Needed

Advisors have yet to devise a model for valuing the contribution of professionals who don’t, strictly speaking, generate revenue, but provide the leverage that enables a senior partner to bring much more money into the firm. This failure to fairly compensate these junior planners for their contribution to their firms’ economic success leads to one of the industry’s most counterproductive trends: hiring and training young planners for four or five years, only to lose them and some clients, as they move across the street and hang out their own shingle.

The more I consider this problem, the more it seems to stem from a misunderstanding over how advisory practices evolve as they grow larger and more successful. When most planners start their practices, they are the firm: they attract the clients, provide all client services, make all business decisions, and take all the financial risks of launching a new venture. They also have all the professional knowledge and expertise.

If not right away, then relatively quickly these advisors realize they’d have more time to work with clients and get new ones if they didn’t have to answer phones, schedule appointments, or file client records. So they hire an assistant, and the process of leveraging begins. Soon other support tasks become time-consuming and more folks are added to take these jobs off the planners’ desk.

During this leveraging process a curious thing happens. The advisor becomes more productive, spending almost all their time working with existing clients, or screening and getting started with new clients, and like magic, client rosters and revenues grow. But the advisor’s relative value to the firm (that is, the percentage of those revenues generated solely from their own efforts) is decreasing. Not a lot: in the early years, maybe down to 80%. The advisor’s portion represents more money than at the start, but it’s a smaller piece of a bigger pie. But the practice is no longer a one- or two-person show–it’s a team effort that is more successful than an advisor could be by herself.

With the addition of more staff, the advisor’s contribution continues to shrink. Still the star player, but on a bigger team. As the firm grows, with more and wealthier clients with more complex needs, the advisor herself has more and more work that only she can do. Even working longer hours with fewer days off, there’s only so much one advisor can do.

This is what’s currently referred to as “The Wall” in management-guru speak. It means that no amount of additional staff will make the advisor, and therefore the firm, more productive. The advisor is maxed out, and the practice is stagnating.

This is a watershed moment in the life of a financial planning practice. The advisor has to make a choice: Stay small, and take steps to maximize efficiency; or add professional help. The studies, and my experience, tell us that more planners than ever are opting for door Number Two, and adding younger professionals to further leverage the founding advisor.

Juiced, Sort Of