Why broad ownership can enrich an advisory practice

Top-performing advisory firms, on average, have more than one owner, pay those owners better and seem to be getting more from those owners in terms of management skill and engagement.
APR 28, 2011
By  Kelli Cruz
Top-performing advisory firms, on average, have more than one owner, pay those owners better and seem to be getting more from those owners in terms of management skill and engagement. Those were some of the key findings from the 2010 InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms. The study's conclusions were contrary to what many financial advisers believe about ownership. In general, a majority of advisers view broader ownership as a potential dilution of their equity or as a challenge to their control over the business. In truth, multiple owners can translate into more resources for running the business and increasing business development efforts, two key areas contributing to outperformance, the study concluded. Broader ownership can be a powerful boost to revenue growth and profitability, which ultimately increases the equity value and compensation of all the firm's owners.

DELEGATE RESPONSIBILITY

The successful owners with whom I have worked over the years recognize what is needed to expand their firms and figure out what expertise is missing. They focus on what they do best and fill in the gaps with other talent. This may include increasing ownership as they divvy up the running of the business on a day-to-day basis. Stepping into the most suitable role is the first critical step toward working on, as opposed to in, the business. Too many founders of advisory firms try to do everything, from managing human capital, finances and key client relationships to selecting and managing technology. It's no wonder that they have little time to spend on generating revenue through business development activities. Interestingly enough, spending more time on business development is the No. 1 thing advisers would like to change about their business, the study concluded. By trying to do everything themselves, they are weakening their own efforts and costing the firm in the process. How does an adviser go about making the transformation to focus on what he or she loves to do and do well? The key is to identify where your personal skills and talents create the most value and then build a team that supports your role. While the answer may be simple, the execution isn't. Begin to delegate all other responsibilities to specialists and, where needed, recruit talent or promote talent from within your firm. Find people who fill the firm's skill gaps yet fit within the culture. Define clear roles and responsibilities, and make sure you give your leaders the autonomy and decision-making authority to manage their respective areas. This will enable you to manage your firm with a real ownership mentality.

SHAREHOLDER CULTURE

For those of you who still aren't sold on the idea of expanding ownership immediately, I encourage you to focus on building an ownership or shareholder culture in your firm. Not every employee wants the responsibilities and risks associated with being an owner. However, most do want what is best for clients and want to see the firm do well overall. Be honest in assessing your people; if they are neither potential owners nor motivated employees with an emotional stake in the firm's future, perhaps you shouldn't keep them around. You can structure your compensation plan to reward employees for behaving more like owners without giving them ownership. In addition to a fixed base salary, create a variable bonus or incentive plan so that all employees have some pay at risk. This incentive bonus should be based on the individual's performance as well as the firm's overall results. Rewarding employees for behaving like owners through your incentive compensation plan can greatly enhance your firm's performance. In addition, some advisory firms have created programs where employees are rewarded for coming up with creative solutions to a client or operational issue. A “suggestion program” designed to resolve such issues can be a powerful way to get employees to act in the best interests of the firm while creating an engaging and empowering culture. Developing a culture that focuses on creating enterprise value will benefit you, your employees and, most of all, your clients. Kelli Cruz is director of research and consulting at InvestmentNews. She will moderate an IN webcast, “The Power and Importance of Ownership,” on April 20 at 4 p.m. ET.

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