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January 19, 2017 at 05:55 AM
Now that we’re well into the retirement phase of Baby Boom firm owners and advisors, we’re seeing increasing numbers of Next-Gen advisors advancing to take their places as partners. This is, of course, the goal of most young advisors from the time they get out of school and start their first job. And for many of them, this step hasn’t come nearly soon enough.
So it may seem surprising to hear that in my experience, after the initial euphoria wears off, a fairly large number of these newly minted junior partners become disillusioned with their new status—and some even request to go back to their old jobs and/or change jobs.
To help younger advisors better understand how becoming a partner in their firm will affect them, and therefore make more informed decisions about accepting the promotion or not, I suggest they ask the following four questions of the owner of their firm, and other partners, if possible, and to carefully consider the answers:
1) What will be my new responsibilities?
As with most jobs, becoming a part-owner in a business looks a lot different from the outside than it does when you’re actually sitting in that chair. While most junior advisors understand on some level that they’ll have to work harder when they are partners, they usually don’t understand how that will impact their lives. Not only is more expected of firm owners, there is also more pressure to perform at a high quality, and to make good decisions—usually a lot more pressure. This usually translates into working longer hours, and a lot more weekends and holidays: which can make a pretty significant change in one’s quality of life. This doesn’t have to be a bad thing, but it can be if you and your spouse aren’t prepared for it.
2) What new authority will I have?
This is the other side to the responsibility coin, but contrary to what most new firm owners think, the answer is almost always “not very much.” In a small business, virtually all the authority rests with the majority owner. As a junior partner, you might manage more people (which nine times out of 10 is more a headache than a perk), and the senior partner will probably seek your counsel more often, but beyond that your working life will probably be about the same, there will just be more of it.
3) How are the profits going to be distributed?
I’m often surprised at how little most NextGen advisors understand about partnerships, even when they think they do. In a partnership, there are many ways that profits can be distributed, so be sure you understand how your firm is structured. What’s more, partners generally have to pay taxes on those profits, sometimes even on profits they don’t get. So it’s not unusual for a new partner to make the same amount of money but pay higher taxes. If you add in paying on a partnership loan, they can end up making less money in the early years. That’s not necessarily a bad thing: it can translate into a lot more income down the road, but it can be a rude awakening if you’re not prepared for it.
