As originally published in Financial Advisor magazine.
Every year, a friend and I go on a kayaking trip to the wildest places we can find. We enjoy tremendously the adventure, the solitude and the wilderness of mountain lakes and Canadian islands. Somehow, last year we had trouble planning our trip, so at the last minute we joined an organized kayaking tour in the San Juan Islands—hardly an adventure of solitude or wilderness. We feared that it wouldn’t be the same, that it would be crowded and devoid of experiences. But you know what? We loved it! There weren’t any bears or glaciers, but we made a bunch of friends, we saw a lot of beautiful places and we also didn’t get eaten alive by the highly organized Canadian mosquitoes.
A lot of younger professionals see their own careers as adventures too, in that they don’t see how much fun they could have with something big and organized. In other words, they think a larger firm can’t give them the same experience they’d have going off the beaten path and founding firms on their own.
For that reason, it’s becoming less attractive to them to aim for partner positions at large firms. As advisories grow larger, young people fear they won’t see any opportunities to become entrepreneurs, and that the large firms, with their slower growth and high valuations, won’t give them an opportunity to create wealth for themselves or earn the kind of control the founders have.
But I want to reassure them: There are still many adventures to be had in our profession. There is still a lot of wealth and income, there are a lot of experiences to be had, and there are many chances to lead the way. Most important, you are not missing anything when it comes to chasing mosquito bites and frozen nights in the wilderness … or bootstrapping a fledgling business.
Today, large advisory ownership involves a complex structure of capital, governance and management mechanisms that allows for a large team of professionals to pursue an ambitious vision. Many firms already have institutional ownership and strategic partners. In a survey performed by our firm, the Ensemble Practice, 16% of the advisories we contacted reported that they have investors who aren’t working in the business. This includes organizations such as HighTower, Bluespring Wealth Partners, Focus, Mercer and others that continue to invest in many businesses. Eight percent of the medium-size firms report such partnerships.
In the owner-operated firms, the picture is not dramatically different—the ownership is distributed across as many as 50 or more partners.
Professionals in large firms often wonder if purchasing 1% or even 0.5% of a firm will still have any positive effect on their careers and lives. They certainly see that making such an investment is very expensive. With a bit of personal experience (I was a partner in a firm where I had 240 partners and I owned zero-point-nada percent of the shares) and a lot of professional experience, I still believe that there is a lot of fun to be had.
In 1899, a gentleman by the name of Charles Duell who ran the United States Patent Office infamously declared that everything had already been invented. I guess he missed out on the Snuggie (a blanket and sweater combination) and Tetris (can’t wait for the movie!)
“Intrapreneur” was a term coined in the late 1990s and early 2000s to label those that invent and create new services and new businesses within an existing organization. In fact, most of the inventions we use today don’t come from a start-up but are instead developed by well-established firms. New partners in advisory firms may become exactly that kind of intrapreneur.
For those who want to create new services and enter new markets, the adventure is just beginning. Our industry is just now starting to explore what it can do for clients and how. The industry is transitioning from generic service propositions to focusing on specific types of clients. In doing so, it is creating processes that better help the distinct needs of groups old and new.
There are firms in the industry expanding into fascinating directions—from building communities to venturing into health and well-being, even genetic data. From providing therapy and personal coaching to helping women executives move from one city to another.
What’s really exciting is that all these ideas are coming from firms with institutional partners. Having an institutional investor does not stop the creative process—on the contrary. Van Gogh was poor but Picasso was not. The spark to create can sometimes use batteries to turn into a beam.
It’s also important to consider that most firms are still in their management infancy. Some of the most interesting and challenging experiences are still ahead. Firms are beginning to expand from one office to regional offices and a national presence. Mergers and acquisitions are just starting. The heavyweight competition between national enterprises is in its first round. We don’t have a Big 4 yet. Our industry has the Big Baby 100. A new partner looking for management responsibilities and challenges will have no trouble finding an arena to compete in.
Our industry also has yet to become more diverse. Only 15% of partners in advisory firms are female. Only 11% of the CEOs. We need more accents, more backgrounds and more neighborhoods represented in our firms and in the clients we serve. If you want to leave a mark—here’s your chance—hire and mentor someone whose background is very different from yours.
Control is one of the biggest issues that next generation partners have with larger and institutionalized firms. Younger people are concerned that if they become partners they still won’t be able to influence the direction of their firms or have a voice at the table. I hear that concern a lot and I certainly appreciate it—I had those thoughts myself when I joined the partner ranks at accounting firm Moss Adams.
As firms mature, decisions inevitably move from a small group of partners to a large and institutionalized governance process. Several of the largest firms in the industry already have very sophisticated board-of-director charters and elections. Many firms are also steered by professional “captains” with years of experience. This does not leave a lot of decisions in the hands of the newer partners.
Then again … if your passion is to steer the ship, there is no shortage of positions in the cockpit. Even in the largest of partnerships there are many chances to lead a team, a division, an office. My former partner and good friend Rebecca Pomering (Rebecca—are we still friends?) is today the chief practice officer at Moss Adams, a firm with $700 million in revenue. Graduates of our G2 program today are presidents (Steve Stelljes, the president of client services at the Colony Group) and even chairmen of the board (such as Eric Kittner, chairman at Moneta). There are too many COOs to list here and many others in positions of leadership.
I would also say that, much like in singing, the voice that people want to hear is the voice of someone who sings well. If you want to sing a solo, be good. Likewise, if you’re a good partner, a good steward of the business and a thoughtful contributor, your voice will be heard. Yes, there are some choir politics, but ultimately a solo is something you earn rather than buy. This is true even in the smaller ensembles. The work you do at a small firm is often akin to singing in the shower—there is not much of an audience (thankfully). In a larger firm, your voice may be in the choir, but look at the many faces fixed on your performance.
Many advisors express concern and even anxiety over the future of their businesses. They see a horizon full of down markets and price compression, of consolidation and fierce competition, and they are reluctant to invest in the firms they work for and become owners of. I guess all I can say here is what any hiker will tell you: “If you are afraid of the bear, don’t go in the woods.”
The risks of building a business don’t disappear with size—they just change in nature. A small firm is vulnerable in that it relies on the time, energy and effort of a few partners. A large firm faces different risks related to the success or failure of its strategies and the complexity of its politics. We tend to underestimate the risks we are used to and overestimate the risks we have never experienced. My former partner Stuart can’t understand why I box and I can’t understand why he thinks that heli-skiing through avalanche country is fun. Similarly, new partners don’t see why starting a firm is a risk when they didn’t have to buy the equity. Meanwhile, founders don’t understand why new partners are afraid to buy a million dollars’ worth of stock in a very profitable company.
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.
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.