Wealth
When we first arrived in Seattle in the late 1990s, the price of a single-family home within the city limits seemed to be in the mid-$300,000 area. My wife and I thought that was a lot and possibly overpriced. When we bought our home in 2007, houses had risen to the $500,000 to $600,000 range. We thought it was clearly overpriced but we needed a home. Today, the price of those homes exceeds $1 million.
I can’t forecast the prices of real estate or even advisory firm equity, but there are two things I learned from my experience: 1) When you buy a house, you buy a home; and 2) income rarely creates wealth, but equity often does.
When you become a partner in a firm, in a sense you declare that firm a home too. You devote many years of your career and talent to making the place better. You also establish an environment of comfort, a sense of belonging and a place to put your “stuff.” Without that purchase, you are in danger of always floating from one rental to another with all the ensuing upheaval in your career. At some point in time you realize that the best places are seldom rented.
The income-to-wealth issue is also a significant one. In my experience, somehow, somewhere, income is always spent and does not change your wealth. I know: Diligently saving a portion of that income should make a difference. But the conspiracy of bills and temptations always seems to undermine that plan. Equity, on the other hand, tends to patiently but consistently do its job, and equity events then become very material. Professional services people don’t always see this. A CPA shared with me some time ago that when he searched his tax database for clients who had high income but little in assets, he came up with a list of dentists, doctors, attorneys, consultants and … advisors. Such is the nature of income. The tax code also makes a difference—regular income rates versus capital gains.
Conclusion
I guess to summarize all these thoughts on boats and partnerships: A business is a vessel traveling against the current. It can be a lonesome and adventurous kayak, and when it is you’d better paddle as hard as you can because otherwise the current will deny you the journey you seek. It could be a boat like a rowing eight that flies through the water powered by the synchronous effort of the partners (or stuck by tangled oars and a frustrated coxswain). It can also be a luxurious cruise ship where you don’t have to row much and you can enjoy the view, but if so you can’t complain about the line at the bar or the price of the cabin. It is your journey as a professional to choose. After all, our world is mostly water.
Philip Palaveev is the CEO of the Ensemble Practice LLC. He’s an industry consultant, author of the books G2: Building the Next Generation and The Ensemble Practice and the lead faculty member for the G2 Institute.