Independent advisory businesses were relatively simple 20 years ago. Most firms were small businesses, owned and run by advisors who founded these practices not only to be their own boss, but usually and more importantly, to deliver a high quality of client-centered financial advice without any outside conflicts or influence.
Since then, the independent advisory industry has undergone dramatic change. Now, most firms are larger. When I started consulting, the average size firm was $400,000 in revenue, a major difference from the average $4 million today. Plus, many of today’s top firms manage $1 billion or more in client assets, and others are setting that mark as their goal.
Along with this prosperity have come other shifts, which while beneficial, also have created challenges for owner advisors. One of these changes typically applies to larger firms and the recent availability of private equity capital.
These outside investments often come at a price — pressure to increase revenues and profits by means that are contrary to those “best interests” of the clients that the founder went independent to protect.
The CEO Challenge
Another new obstacle that today’s independent firm owners are facing — and what I’ll focus on here — is the introduction of a new CEO into an advisory business.
Several aspects of designating someone else to be CEO can be a challenge for advisory firm owners. Let’s start with the CEO’s compensation package: Poorly structured comp plans can create financial conflicts between the CEO, the clients and the business itself.
For second-generation CEOs, the first snag is that they don’t own a controlling interest in the business. I’m not suggesting they should be given a majority stake, as founding owners are not going to go for that, nor should they have to. But in lieu of an ownership transfer, both the firm owner and the new CEO should be aware of the issues created by this situation and take steps to mitigate the challenges it can cause.
The first step is to fully understand the position of a non-founding CEO. The basic problem for second-generation CEOs is that they have control, but no real power, which stays in the hands of the majority stock holder(s). The owners can countermand or refuse to take any steps that the CEO suggests.
This raises the question: Who really is the CEO? Having the title doesn’t always mean you have the power in advisory firms. The solution should come from the firm’s majority owner.
To effectively transfer leadership to a new CEO, the owner has to be clear about which decisions and actions the CEO has the authority to make and which will stay in the owner’s control. Furthermore, the new CEO has to stick by this structure.
A new CEO and his/her firm owner also need to understand that the CEO will constantly be in conflict in a way that the owner never was. It’s worth realizing that businesses in the financial services industry are constantly in conflict. That’s because there is almost always more money to be made by acting against — rather than in — the clients’ best interest.
That said, the owner of an independent advisory firm is in the unique position of only having to answer to their own conscience for decisions and actions. In contrast, the second-generation CEO has two fiduciary duties: The first is to the clients of his/her RIA firm, and the second is to all the shareholder owners of the firm.
Most second-generation CEOs don’t fully understand the position they are in. As a result, balancing these conflicts becomes quite a tough situation in terms of successfully serving clients along with the interests of employees, shareholders and their own agendas.
An Effective Leader