Journal of Financial Planning: October 2019
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Earlier this year, FP Transitions published the Trends in Transactions and Valuations Study, which reviewed valuation data and growth trends for independent financial advisers. One of the most important observations was that firms with a multi-generational ownership structure reported the highest year-over-year revenue growth rate compared to single-owner practices or businesses owned by peers. Firms with multi-generational ownership also showed more diverse client age demographics.
In fact, the underlying data supported the conclusion that the single most important investment a growth-minded practice owner can make is to recruit and retain the next generation of advisers.
The building blocks of a multi-generational ownership structure lie in creating career paths for younger talent. And yet many advisers are anxious about hiring and managing next-generation advisers. Finding the right person can be daunting and time consuming, the generation gap can be tough to navigate, and experience tells successful practitioners that financial advisers are well-paid—so recruiting must be expensive. But the reality is much simpler. Practices as “small” as $50 million in assets under management can take steps to cultivate a connection with the next generation of professionals.
Here are a few ways business owners can gradually expand their team and start laying the foundation for the next generation of ownership.
Create an Internship Program
A stepping stone to building a multi-generational business is to create an internship program. FP Transitions has worked with small firms, starting below $1 million in revenue, who used an annual internship as a successful feeder program into their entry-level positions.
Adding one new staff member each year or so allows the business to keep up with organic client growth and extend capacity to support an occasional acquisition. The internship provides an “extended interview” with the candidate as well as an opportunity for the adviser to hone his or her management style without a long-term commitment. If your first internship experience doesn’t work out, assess what went well and what didn’t and try again next year.
Interns can be sourced from any number of financial planning programs across the country (see a list of CFP Board registered programs at cfp.net). In fact, internships are required for undergraduates at institutions like Kansas State University and Texas Tech, and other schools strongly encourage them as well.
Martin Seay, Ph.D., CFP®, program chair and associate professor of personal financial planning at Kansas State, says the school hosts an event called Connect each year to introduce future interns to potential employers. Above all, Seay encourages practice owners to plan well in advance.
“We scheduled our first Connect event for February, but we found that most of the big firms had already selected their interns by then, so we moved it back to November, and eventually to October 1,” Seay said. And that’s for summer placement. At Kansas State, internships last from May to August for students completing their junior year. By the end of their junior year, most students will have completed their technical coursework but need exposure to the practical elements of financial planning.
Seay describes the typical internship experience at a smaller firm as about half financial planning exposure and half back office work or plan review. This helps the intern practice a wider skill set compared to an internship at a large firm, where they may focus on specific projects. To help practice owners prepare for and onboard an intern, Kansas State provides an internship-in-a-box resource. It serves as a cheat sheet for defining a firm’s brand, creating a job description, and setting expectations, along with other useful recruiting ideas that may not be intuitive to a small business owner.
Internships for Kansas State students must be paid; a requirement consistent with other programs across the country. The wages are modest, however. Seay says most interns earn between $13 and $15 an hour, although a few may secure as high as $20 an hour. William Patterson University in New Jersey reports that their interns will garner anywhere from a few dollars above minimum wage to $20 to 30 an hour, and interns out of Texas Tech bring in $12 to $20 an hour, with the most common rate being $15 per hour.
A successful intern can often transition into a new full-time hire upon graduation, or sometimes even before. Depending on the candidate’s experience and the type of firm they work for, graduates from Kansas State, William Patterson, and Texas Tech (each in a different geographic market) report earning between $40,000 and $60,000, with incentive pay in the range of 10 percent of base, with outliers topping in the $75,000 range. Seay, who is also the 2019 FPA president-elect, encourages graduates to consider the total compensation package— not simply the dollars on the table. This includes evaluating opportunities for advancement within the profession and whether or not an ownership track exists within the firm (more on this in a moment).
Retain Staff with Flexibility
Being part of a growing company can be an exciting experience, but the administration that comes with managing a growing team is often seen as a nuisance. It doesn’t need to be this way.
Company-wide HR policies are a way of formalizing your culture and setting expectations for everyone on the team. Neela Hummel, CFP®, partner and chief of advisers at Abacus Wealth Partners in Santa Monica, Calif., says they started simple.
“Our first step was to create extremely flexible policies,” Hummel shared. “The worst time waste of HR is monitoring your staff and scolding them for perceived violations.”
Working together in growing a firm requires teamwork and trust. Simple HR policies provide more opportunity to nurture young talent and focus on clients—both of which are good for your business.
At Abacus, which now has more than 30 employees, the benefits of creating a culture built on trust and flexibility are measurable. As a result of implementing generous paid time off and family friendly policies, Hummel says the firm has very low turnover and a more diverse workforce than the industry, on average.
For entrepreneurs who are worried about being taken advantage of, Hummel recommends a bit of introspection. “Understand what the people you’re hiring actually want,” she suggests. “There is a big generational shift occurring in the workplace, and millennials are the first generation to value experiences over things.”
Additionally, encouraging staff to take time away reduces burnout, enhances creativity, and fosters redundancies within the client workflow, which is better for business continuity and the client experience.
Incentivize with Ownership
Once you’ve identified and onboarded a few great employees, one good way to keep them motivated is by offering an equity incentive. A career path that culminates in ownership is an attractive draw for next-generation talent and is essential for building a multi-generational business.
The path to ownership needs to be clear—and documented. A frequent refrain I hear at conferences and networking events is, “If the ownership track isn’t in writing, it doesn’t exist.” This truism arises from younger advisers’ experience with founders dangling ownership as an incentive, but never following through. The problem is that most advisers simply don’t know where to begin; or they get started but lose momentum due to the complexity.
In truth, most equity pathways start slowly. “We call the first stage an incubation stage,” says David Grau Sr., J.D., president and founder of FP Transitions. “For a first-time owner, investing in even a single-digit equity share provides tangible financial and psychological incentive for ownership behavior.”
Larger firms with more experienced employees may benefit from a more aggressive approach. Regardless of its current size, designing an ownership track within a growing business requires reviewing the compensation strategy, entity structure, and valuation to craft a viable opportunity for both parties. That process should begin with a simple, focused assessment to outline an approach that is in line with the founder’s goals and the resources of the team. A successful ownership track must be a win-win, and with experienced guidance and goodwill from the participants, it usually is.
Recruiting and retaining the next generation of professionals can take time and finesse, and yet the benefits are clear: stronger growth, broader client base, and an eventual solution to the succession problem when the relationship advances. Taking simple, appropriate steps to lay the foundation for the next generation will provide future sustainability for the business, scale for acquisition, and fuel for growth and succession when the founder eventually envisions retirement.
Christine Sjölin is a partner and vice president of strategic development and operations at FP Transitions.
Sidebar:
Working with a Recruiter
When your business needs the support of a financial adviser who has a bit more experience, it may be beneficial to work with a recruiter. National recruiting firms usually have local offices with a division focused on placing financial professionals, although they don’t necessarily focus on financial advisers.
Recruiters get paid if a candidate is successfully placed, typically based on a percentage of first-year salary. Traditional recruiting firms can be effective at sourcing a large number of prospects, but they don’t always excel at zeroing in on the specific business need and finding just the right person.
Financial advisory practices have an alternative resource in New Planner Recruiting, which focuses exclusively on sourcing financial professionals and operates on a retainer structure. As part of the retainer, New Planner Recruiting works with business owners to identify what roles they need to fill and how the new employee will fit into the overall team. “When an employer says, ‘I just need someone to…’ fill in the blank, they may not know what they actually need,” explains Caleb Brown, CFP®, founder of New Planner Recruiting, which also helps advisers refine expectations and job descriptions.
A retainer with New Planner Recruiting lasts six months, yet in 2019, the company is averaging about 60 days to fill an opening, according to Brown. New Planner Recruiting does collect a success fee when a candidate is hired, but it is a tiered fee rather than a percentage of salary and is generally lower than what traditional recruiters charge.
—Christine Sjölin