Independence Is In The Eye Of The Beholder
And let’s not forget about the clients. What do they want? Everyone seems to believe they are best served by an “independent” firm, but few people bother to define what that means or ask how clients might understand it.
Which means we rarely ask them to weigh in on the trade-offs. “Would you be OK if we are not able to hire and retain the best people to work with you, but in return we remain independent?” How important is independence to them in that case?
Much like beauty, independence is in the eye of the beholder when we’re talking about succession questions. Some may look upon a boat sailing the seas as a symbol of freedom to roam the vast possibilities of the horizon. Others may see a tiny object floating in a vast and unpredictable ocean, prisoner to the whims of the waves and the winds. Independence is not just the absence of restrictions. It requires the ability and the will to make decisions and then act on them. Without that ability and will, independence isn’t much different from ineptitude.
Forty-five percent of advisory firms with more than $1 billion in assets under management said that they have an institutional investor, at least those who participated in the “2020 Study of Pricing & Profitability” developed by the Ensemble Practice LLC and published by Investment News. The ownership stake of institutional investors is very close to 50%. So if half of the firms are half-owned by an institution, what exactly is independence?
I actually don’t have an answer to this question. Perhaps it is something that every firm must decide for itself: “Who are we? What does independence mean to us as owners? To our clients? To our team?” Being dogmatic does not work. Starving to death on a chicken farm because we are vegan is not a workable solution. On the other hand, ignoring reality isn’t a great look, either. We can’t just pretend brussels sprouts with bacon is a vegan dish because bacon is a minority “partner.”
G2s, Be Honest About Buying (Or Not Buying) Equity
Time and again, I observe G2s who are reluctant to buy ownership in their firms. There seem to be two main reasons for this. First, they worry that it is already very expensive (which is, of course, a legitimate concern). Second, they are not sure what will happen to their firms and are nervous to make the leap to ownership. If you are a member of G2 and considering ownership, and if concerns such as these have been holding you back from making a decision, remember that there are really only two options here. Either you buy the equity or an external investor will.
No young professional should feel forced into buying equity. And you shouldn’t buy equity for the wrong reasons. You should instead buy because you are excited to be an owner in a good firm. You should buy because you want to grow the business together with your partners. These are good reasons.
If you don’t have reasons like these, or if you are having trouble thinking of any reasons at all, then ownership is likely not for you. Perhaps this firm is not for you.
Accept That This May Not Be (And Perhaps Should Not Be) Your Job For Life
I find it interesting how the majority of professionals in our industry assume that they will spend the rest of their careers at their current firms. This is a stark difference from other industries, where the standard career advice is that talented people should change jobs every three to five years. Studies suggest that employees who stay in the same job for more than two years are paid up to 50% less than new hires.
While long commitments might be good for the company cultures—creating comfort, relationships, knowledge, trust—they can also create some toxicity. For starters, the firms face enormous and perhaps unfair pressure to live up to the expectation of being lifetime employers, and that can create desperation and anxiety among employers and employees.
If you are a very good advisor, you are in high demand and desired by other firms in your market. So don’t limit yourself by adopting a mindset that your current firm is the only option. When you take vacation with your family and don’t like the resort, you simply go to another one next year. You don’t go back to the same place that disappointed you, sit in the bar and sulk over a drink while complaining about how management refuses to retire.
There is great freedom in the realization that you can leave. What’s more, making a change may expose you to new skills, new mentors, new clients and new levels of compensation and perspective on the industry.
It’s no wonder advisor compensation has not changed over the last five years despite a booming market for the equity of advisory firms. Keep begging to stay at the same resort, and you’re not likely to get a better deal.
Don’t Fear Succession
Equity transactions change a firm. Their impact is felt in every corner of the business, from culture and employment practices to technology and marketing to compensation and benefits. Here is the thing, though. In my experience, an equity transaction has never turned a bad firm good. Likewise, it’s not going to ruin a good firm. The best managed firms in the industry remain that way after they take external investments.
In conclusion, let’s move beyond our succession anxiety and take it step by step. I sometimes wish that firms wouldn’t obsess so much over this planning, and instead spend the energy on creating growth and new opportunities and training their people. As long as you continue to grow at a steady pace and keep adding younger advisors who are excited to be there, I can’t see how or why the future should scare you.
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 Leadership Institute.