Independent advisory businesses were relatively simple 20 years ago. Most firms were small businesses,
owned and run by advisors who founded
these practices not only to be their own
boss, but usually and more importantly,
to deliver a high quality of client-centered financial advice without any outside conflicts or influence.
Since then, the independent advisory industry has undergone dramatic change. Now, most firms are larger.
When I started consulting, the average
size firm was $400,000 in revenue, a
major difference from the average $4
million today. Plus, many of today’s top
firms manage $1 billion or more in client
assets, and others are setting that mark
as their goal.
Along with this prosperity have come
other shifts, which while beneficial,
also have created challenges for owner
advisors. One of these changes typically
applies to larger firms and the recent
availability of private equity capital.
These outside investments often
come at a price — pressure to increase
revenues and profits by means that are
contrary to those “best interests” of the
clients that the founder went independent to protect.
THE CEO CHALLENGE
Another new obstacle that today’s
independent firm owners are facing —
and what I’ll focus on here — is the
introduction of a new CEO into an
Several aspects of designating some-
one else to be CEO can be a challenge
for advisory firm owners. Let’s start
with the CEO’s compensation package:
Poorly structured comp plans can create
financial conflicts between the CEO, the
clients and the business itself.
For second-generation CEOs, the first
snag is that they don’t own a controlling
interest in the business. I’m not suggesting they should be given a majority
stake, as founding owners are not going
to go for that, nor should they have to.
But in lieu of an ownership transfer,
both the firm owner and the new CEO
should be aware of the issues created by
this situation and take steps to mitigate
the challenges it can cause.
The first step is to fully understand
the position of a non-founding CEO.
The basic problem for second-generation CEOs is that they have control,
but no real power, which stays in the
hands of the majority stock holder(s).
The owners can countermand or refuse
to take any steps that the CEO suggests.
This raises the question: Who really
is the CEO? Having the title doesn’t
always mean you have the power in
advisory firms. The solution should
come from the firm’s majority owner.
To effectively transfer leadership to
a new CEO, the owner has to be clear
about which decisions and actions the
CEO has the authority to make and
which will stay in the owner’s control.
Furthermore, the new CEO has to stick
by this structure.
A new CEO and his/her firm owner
also need to understand that the CEO
will constantly be in conflict in a way
that the owner never was. It’s worth
realizing that businesses in the financial services industry are constantly in
conflict. That’s because there is almost
always more money to be made by acting against — rather than in — the clients’ best interest.
That said, the owner of an independent advisory firm is in the unique posi-
Bringing in a CEO Means Putting Rules in Place
How to help second-generation leaders protect their inherited brands.
Several aspects of
else to be CEO can
be a challenge for
advisory firm owners.
Let’s start with the
plans can create
between the CEO,
the clients and the
THE FAST TRACK
By Angie Herbers