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The Importance of Human Capital – A Founder's Perspective

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Looking back over the past few decades, you can easily spot the trends and physical changes in our industry. Since 2000, when FP Transitions formally opened its doors, I’ve seen our profession, especially in those working under an independent broker-dealer or hybrid model, steadily shift to fee and advice-based solutions. Early on, most practices that we represented were made up primarily of transaction or non-recurring revenue; today advisors build businesses with a focus on fee-based income streams. Independent insurance companies are evolving as well with a sophisticated and wide array of recurring revenue.

Along the way, these practices have become not just more valuable, they are also physically larger and stronger. This requires more qualified people to analyze, give advice, produce revenue, as well as the adjunct talent to support these professionals. Looking forward, we see an ever increasing need to recruit and retain the best talent in the industry to support not just where your practice is today, but where that growing business will be ten years from now. Everyone has read about the need for recruiting; but the story has shifted in the past few years and will continue to do so going forward. Rather than simply hiring next gen talent as the need arises, this could well turn into a fierce competition to adequately reward and retain that talent as more and more advisory businesses reach the next level of success and draw upon a talent pool that has scarcity written all over it. 

By the Numbers

Over the next ten years, most independent advisors (RR’s, RIA’s, IAR’s, Planners, et. al.) could see their practices double in size, which I’ll equate for now with gross revenue. As an entrepreneur myself, I don’t believe that growth is automatic, but if growth is the goal, it is there to be had. As a former securities regulator, I’ve long argued that the regulatory structure supports those who play by the rules–it is an entire system designed to help you and your clients succeed. In addition, ours is an aging industry, so growth by acquisition or merger is a reality which adds a layer of complexity to the staffing debate. Add to this fact that over the next several decades, the biggest and wealthiest generation in U.S. history will transfer over $30 to $50 trillion in assets to their children, who will need advice and help in managing that wealth. The business is there to be had–if you have the people and the talent to support you.

Simply stated, if growth is one of your top priorities, you will need more people. Taking it one step further, I’d also argue that you’ll need a higher level of talent as well, because the competition is not going to get any easier.

It’s Not About Finding More Entrepreneurs 

Most growing advisory practices know they need to add staff members and additional advisors. However, founders struggle with the criteria. The constant refrain we hear is, “How do I find people who will work as hard and care as much about the clients as I do?”

The best way to frame this argument is to recognize that taking a start-up business from literally nothing to $1 million, or $2 million in value, is a very special job. It requires a short decision-chain, management agility, and an individual who is bold, brave, and not afraid to go it alone. However, as the business grows, its needs change as does the search for talent; the journey from $2 million to $4 million in value is very different. Remember also that most founding owners (we use the term “G1” for the first generation of ownership) will start to plateau in terms of applied energy and business growth as they gradually throttle-back in terms of their weekly work and time commitment. Ultimately, it’s critical to see that sustainable growth is about systems, processes, and talent beyond the founder.

The biggest mistake most G1’s make lies in trying to find another “you.” Founders often look for younger versions of themselves, specifically, entrepreneurs. In most cases, this is the wrong approach, or, said differently, these are the wrong attributes to focus on. Building onto an existing practice requires different skill sets than starting a business from scratch. As the future unfolds and your business continues to grow, you need to hire people with skills that surpass your own, and that can be challenging. Remember also that your talents evolved as you built your practice. Therefore, not all recruits will present on day one with a perfect match of your talent wish list–they’ll need a mentor and time to develop their skill sets.

Recruiting, Retaining, and Rewarding the Best Talent 

When we write or speak about building sustainable businesses or hiring talent to support a succession or continuity plan, we focus on helping advisors master the “Three R’s”:

  • Recruit qualified talent
  • Retain the most talented of the next generation advisors by…
  • Rewarding that talent using compensation and equity

Let’s start with recruiting qualified talent. Over the past 20 years, as a fellow owner and entrepreneur, I’ve learned three things the hard way:

Here are a few observations from the school of hard knocks:

(a) When it comes to hiring support staff (which is every bit as important to your long-term success as hiring advisors/producers), delegate this responsibility to someone younger and smarter–preferably a leader within your organization who you trust, who’s closer in age and skill sets to the person or people that you need to hire.

(b) When expectations turn to “hope”, end it–quickly–and try again. Small businesses can’t afford to make long-term mistakes and every individual is important to success.

(c) With the previous lessons in mind, utilize interns from a local university whenever possible. If they’re great, find a way to keep them; if they’re not, or they’re not quite ready for a career commitment, move on to the next one. Our industry is complicated and requires a long learning curve. Hiring out of school works well if you acknowledge the lead time and are willing to teach and train.

(d) Recognize that some hires will naturally want to take on more responsibility. Have a plan on what added responsibilities you can offer.

(e) Look outside to professional help such as a recruiter or a coach.

Don’t Discount Culture 

Initially, compensation and benefits are the tools used to retain and reward great talent (staying away from revenue sharing or revenue splits – these do more harm than good), but don’t overlook the working environment. Even though the employment scene has become more competitive, office atmosphere is extremely important. You don’t need to copy Silicon Valley with nap rooms or ping-pong tables, but do create a collegial setting that encourages learning. At FP Transitions, we have lunch brought in for the entire team every Friday. This gives us a chance to have a comfortable, relaxed opportunity to sit and talk and get to know each other a little better. It creates extra time for the CEO to chat with our Office Coordinator, or for our VP of Analytics to talk informally with our Valuations Director, perhaps with one of our new law clerks listening in. It’s been a tradition at FP Transitions since day one and it’s one of the many things that makes the company unique.

Tell people that you appreciate them, and the work that they do on a regular basis. Focus on something they do on a regular basis that makes a difference elsewhere in the company and explain the connection. Pick up a couple of coffee shop gift cards and give them to your hard workers with a compliment. It seems small, but these things really mean a lot and I try to do something like this every week.

Equity As A Bottom Line

Of course, while all of these soft benefits contribute to the culture, I firmly believe that equity is the key to building a strong business model, and to retaining and adequately rewarding next generation talent–when and if it is earned. Equity is a powerful building tool and, depending on your entity structure, this can be comprised of real stock or what we call “synthetic equity” (profit interests, capital interests, phantom stock or phantom equity, etc.). Equity is what next gen advisors actually invest in–certainly invest a career in–and is a reward above and beyond compensation and benefits. It is special, and it should be reserved for the very best, but you should talk about it during the initial recruitment and hiring process. Tell your key players that you have a plan, and that if they work hard and earn it, they can be an integral part of the future–an owner. Then let your junior owners–the second generation/G2 owners–recruit and develop their own business partners, with guidance and oversight from G1.

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