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The danger is not to set your goal too high and fail to reach it.
It’s to set your goal too low and reach it.
Georges St-Pierre
Having spent the past seven-plus years working closely with entrepreneurs in the independent wealth advisory space, it is apparent that their psychology follows a relatively defined path. Since entrepreneurs, by nature, are more risk-accepting, there are some deviations. However, there is a psychological arc that aligns with their decision-making and thought process.
The purpose of this article is to explore that arc and to provide best practices for advisors to consider as they pursue their entrepreneurial path.
Stage 1: Bravado, misconceptions, and taking the leap (pre-launch to one year)
Financial advisors have one of the most challenging jobs in wealth management. They attempt to bring a sense of meaning and control to something (the capital markets) that cannot be controlled. Clients entrust advisors with the most valuable aspects of their financial well-being, including long-term savings and their retirement aspirations. In turn, the advisor is to grow and preserve those assets and to help their clients meet their goals and objectives. The intersection between controlling the uncontrollable and the gravity of their responsibility creates a limited ability to be vulnerable.
As an entrepreneur, it is incredibly important to be vulnerable and acutely aware of your own strengths and weaknesses. An advisor leaving a traditional financial institution must take on a whole new set of challenges when starting a registered investment advisor (RIA). Setting aside elements that could be related to their current position, like financial planning technology or CRM systems, the advisor-owners will now need to help their employees select benefits, perform a trademark search for their new name and negotiate leases for their office space.
As the planning for transition moves forward, there might not be enough time to gain a full understanding of all of the elements. During this phase, an advisor can feel anxious, euphoric and overwhelmed. Small items can be blown out of proportion and larger ones can be overlooked – staying focused on the big picture is critically important. With so many different options to choose in order to build one’s practice and with so many new terms, it is challenging.
Frank Zecca, managing director of Octagon Financial Services (OFS), provides insight into the mindset of running a company, “You go from worrying about yourself to worrying about your team, especially as they begin to have families and depend upon you to provide a platform for their growth/careers. It is a stress that most don’t think about.”
The most successful new RIAs do the following things really well: Admit they cannot possibly learn/know everything about becoming a wealth management entrepreneur (paralysis by analysis); identify a partner and/or partners they can trust who have demonstrated consistent excellence navigating this new world of independence; focus on a few key metrics for evaluating the health of their business; and work diligently on tasks that enhance those metrics.
There are many ways to evaluate a business, but as a starting point all businesses must generate revenue. There are costs associated with generating their revenue. In stage one, strong businesses build a pro-forma “what if” profit and loss and track their progress versus the pro-forma. They are able to identify the drivers for both positive and negative performance and they become stronger at identifying trends as the business matures.
As a business owner, one should evaluate their business through multiple facets – what does a five-year plan look like? How will the business evolve and grow? While there are many skills and attributes of a good financial advisor that translate over to being a CEO, there are also many differences. Entrepreneurs need to constantly ask themselves what are the needs of the organization, and where can I go to fill those needs?
Michael Henley, founder and chief executive officer of Brandywine Oak Private Wealth explained some of his early experience as an independent RIA. “In our experience one of the most overlooked aspects of running a successful business is leadership,” he said. “My partner, Alison, and I say that consistently our #1 goal is to create a culture that results in each partner of our firm reaching their full capacity. We always disliked hearing at our prior firm, ‘so and so works for me.’”
Stage 2: Adolescent mistakes, going off to college, and what am I good at? (one to five years)
Once the business is up and running, it is time to make some mistakes.
A common belief is that there are two portions of our brains: a thinking and a feeling part. The analytical-thinking part helps with the planning of the business, but the feeling part allows entrepreneurs to thrust themselves off their metaphysical cliffs into the unknown abyss. Landing means transitioning over clients from your prior firm, taking care of employees – basically starting the business over within the new environment you have built. Feelings of instability start to creep in, however typically that is short-lived as the passion that drove the decision to transition kicks back in.
Similar to going off to college, there is a lot of experimentation that goes on at this point. New lines of business are considered, new positions are created, new client segments and marketing strategies are explored. All of the trial and error is healthy, with one important caveat. The activities all need to either drive revenue, improve client satisfaction, or cut costs (and it needs to be meaningful and measurable). Iteration is key – firms will want to “fail fast,” learn from it and move on.
Speaking of costs, this is typically where the managing partners and other members of the firm begin to look at compensation as part of the P&L more closely. Starting and running a business results in a different set of challenges than working inside a large brokerage firm. Individuals want to be compensated for the work, but also the risk they are undertaking. More often than not they wanted to be compensated “now” rather than later.
The challenge around myopic cost savings is that it does not account for the multi-dimensional impacts of decision-making. For example, let’s say that a staff member wants higher compensation. This employee looks at fixed costs of the business and believes if those costs are eliminated, he or she will pick up the work and can benefit from an increase in compensation. In reality, what often happens though is the opposite. The cost is not eliminated, but rather shifted to a newly hired employee, which then has a higher cost of salary, benefits, and human capital management. As with the addition of costs, cutting services and/or service providers should reviewed with the same type of diligence.
At the end of this arc, there should be a movement toward “declaring a major.” The owners understand their inherent firm strengths and how they relate to driving revenue. They should also have a better understanding of their overhead costs and the corresponding value of those costs. Passion projects should be evaluated with a discerning lens and not become distractions to the greater mission of the business.
Stage 3: Becoming a parent, an adult, driving toward a legacy (five ears and beyond)
Successful businesses attract talented employees. It makes sense, as talented individuals want to be part of a growing and prospering culture (nobody wants to work for, nor thrives at, a firm that is shrinking). Being an entrepreneurial “adult” means that the business has become more systematic – more process oriented. From a wealth management perspective this shift means end client relationships are with the firm versus with one specific advisor at the firm. The value proposition becomes less about what Mr. or Mrs. Advisor does for me versus what Advisory Firm XYZ does for me.
Once the wealth management machine is constructed, defining value becomes much more straightforward. Clients understand what deliverables and commitments are made to them by the firm and the implementation is spread across the organization. Relationships are shared, and although key employees will always exist, human capital risk is minimized.
At this point, if inorganic growth (adding like-minded advisors and/or merging or acquiring other independent firms) is a goal, the firm should be ready to discuss compensation in a succinct manner for both equity and cash. Potential tuck-in advisors should be able to clearly discern the value proposition for themselves, as well as their clients. Being a parent means having the ability to construct a safe place with policies and procedures that would allow members of the firm to optimize their approach to clients. It becomes less about personal organic growth and more about the growth of the organization overall.
Finally, at some point, wealth management entrepreneurs need to think about legacy. Succession is a critical and an often mismanaged concept. Legacy and succession allow the founders to exit the business, remain a beneficiary (depending upon the structure), but most importantly, have something that can be continued on – both for their employees and their clients.
This stage of the arc can be the most difficult. A business can encapsulate many years of hard work and sacrifice and therefore come with a mix of emotions. Sometimes there are logical expectations for the business valuation and sometimes there are not. If allowing the employees to become leaders of the business is important to the founder(s), then there may need to be some financial flexibility. Control – a key element – must be shared and that can at times be quite challenging. Starting earlier than necessary, finding qualified individuals to assist, and have a written plan are all good practices to follow.
Zecca summarized the final stage well, “when an entrepreneur took a leap, so did the younger staff as they followed the leader, either blindly or strategically. If you are successful and you get to stage three and have to worry about legacy, you have done some things well with your team.”
Austin Philbin is the chief administrative officer of Dynasty Financial Partners, an integrated platform provider for the wealth management industry's top independent advisors.
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