Operation Ownership

At a conference I attended a few years ago, one of the panelists in a “best practices” session proudly boasted that his successful practice had trained virtually all its competitors in his mid-sized city. Maybe it’s a good line for bragging rights in the locker room, but I thought to myself: How much more successful would your firm be if all those advisors still worked for you?

I was reminded of that panelist when I attended the FPA’s first NexGen Conference in August. While the program covered a wide variety of topics of great interest to young professionals, the buzz between sessions revolved around firm ownership. The attendees weren’t talking about the kind of entrepreneurial ownership that comes from starting your own practice: Nearly 80% of the attendees were next-generation employees interested in buying into the existing firms where they had worked for several years. As I listened to their eager conversations, I wondered how many of them would be able to attain that goal.

One of the major failings of the independent advisory industry has been the reluctance of advisors with established practices to extend ownership to junior professionals who helped them attain their success. The profession has collectively realized, however, that even the best advisors have a finite capacity for the number of hours they can work and the number of clients they can handle. To grow beyond that, they need to add more staff to leverage themselves, and more professionals to handle more clients.

These firms have grown, most frequently by adding junior professionals. At first, things go smoothly–young planners are happy to be learning their profession, and owners benefit from offloading the rote work of creating portfolios and writing plans so they can focus on working with clients. Sometime later, usually after four to seven years, junior planners start to get a little restless. By this time, they’re working with clients, typically along with the principal, and some have even brought in a client or two of their own. They see the firm growing, and the owner making more money, and can accurately assess their contribution to both. They start to wonder at that point, however, where their job is going: are they at a dead end, or will they become minority owners in the firm they’re helping to grow?

Unfortunately, the answer for most junior planners has been somewhere between dead end and vague promises of ownership that never seem to become reality. So they’re placed in the position of having to leave the firm if they want to grow professionally and financially. For most firms, it’s a huge setback, whether the junior planners take any clients with them or simply take their years of training and experience across the street. Ironically, judging by the conversations at the conference, it’s the last thing most young professionals want to do. But they feel forced to do so by the lack of any viable alternatives.

If this scenario described an isolated incident or two it would be a shame, but this scene plays out in hundreds of practices around the country every year. On such a scale, it’s nearly a crisis. So why are advisors so reluctant to share ownership, even to the point of greatly stunting the growth of their firms and their own incomes?

The answers I hear to this question from both owners and employees are remarkably consistent. To gain a better understanding of the situation, let’s explore the top five:

“They don’t deserve it.”

Many established advisors seem to feel that to “earn” ownership in an advisory practice, young planners need to face the same struggles they did: starting a firm from scratch, financing the early years with credit cards and second mortgages, slowly attracting clients one at time, struggling through market or economic downturns, and so forth.

This is more of an emotional response than a thoughtful, long-term strategy. It’s only natural to view the practice you started and painstakingly built as, well, yours–and to cringe at giving up even a small piece of it. But in truth, the issue isn’t really fairness, is it? After all, let’s hope none of us gets what we really deserve.

Consider how many Microsoft employees have become mega-millionaires on the coattails of Bill Gates and Paul Allen dropping out of Harvard to spend years in virtual poverty convincing IBM and the world that DOS was the future. Are happy, financially successful employees merely an unfortunate side effect of your own success? Or are they one of the great benefits resulting from your entrepreneurial drive and determination?

“I can’t afford it.”

Many established advisors cringe at the thought of how sharing their ownership stake would affect their own compensation. It’s hard to deny that, at least initially, giving up even a small piece of the pie will be felt in your pocketbook.