Podcast Center
Video Center
Webcasts
Resource Center
Events
November 28, 2011 at 07:00 PM
My October column, “Stumbling on Happiness,” generated a lot of chatter on Twitter and in emails, leading me to believe that the problem of owner’s guilt is a lot more prevalent than I thought. Even my own clients who read the column agreed that, although they never thought about it before, they now realize that they suffer from owner’s guilt to the degree that, as one advisor said, “it affects every decision I make.”
The issues relating to owner’s guilt generally fall into two categories: The emails seem to be mostly concerned about how owner’s guilt affects ownership programs for junior advisors, while my clients are more focused on operational problems. In my experience, both issues can create huge problems for owner/advisors and their firms, but can usually be resolved once the problem is identified. As in many things, when we clearly understand the problem, the solution often becomes self-evident.
Let’s start with the ownership issues. As I wrote in my October column, because many advisors feel a fair degree of guilt over their financial success and the relative ease with which it was obtained, they tend to overcompensate by giving their employees whatever they ask for. The problem is that most employees don’t have a very good sense of what they truly want and consequently tend to ask for the wrong things—which often leads to greater unhappiness. A perfect case in point is an ownership stake in the firm.
It’s a fact that most junior advisors believe they want ownership in their advisory firm, but in my experience, what they really want is to feel that they are part of something bigger than themselves and that they play an important role in the firm’s success. What they ask for, though, is ownership and because of owners’ guilt, many owner/advisors comply. In fact, some firm owners feel so guilty about the high value of the firm they’ve built, they feel compelled to sell their junior advisors an equity share of their firm at a deep discount to both its book and market value. Despite the fact that these offers stem from the best of intentions, the result is rarely favorable.
In addition to the tax consequences of selling equity for less than market value (which should be discussed with a tax expert far more knowledgeable than I am), there are myriad problems with this altruistic approach. For starters, junior advisors who have purchased the entire firm from their senior partner often find themselves in a difficult position when a consolidation firm comes along and offers them full market value. While they’d like to comply with the former owner’s intent that the firm remain independent, the prospect of a quick seven-figure payday is often just too enticing.
Even in situations when an owner/advisor sells only a minority interest at a deep discount, problems can arise. You’ve created a reason for the junior advisors to leave the firm and make a windfall when you have to buy them out at fair market value. What’s more, usually in these cases, it’s the firm owner’s intent to create a sense of ownership and responsibility in the junior advisors. Ironically, though, if the young buyers get their ownership stakes too easily, they tend not to value them very highly and don’t appreciate it as much as they should. They don’t feel more connected to the company, and they don’t feel or act like owners. The problem is that they don’t have enough skin in the game to change their behavior, or to feel connected to a greater purpose (which is what they really wanted in the first place). To connect young advisors to their firm, it’s far better to make them earn their ownership stakes by selling them less interest for market value. They’ll appreciate their ownership interest far more and take their ownership role a lot more seriously.
