TRANSITION TALK

The term “synthetic equity” refers to a set of compensation tools that is commonly used to provide key employees some of the economic benefits of ownership without actual stock changing hands. While existing owners may benefit from synthetic equity by capitalizing on employee performance without relinquishing ownership, there are key benefits to next-generation advisors, too.

A large percentage of advisory businesses use some form of revenue-sharing arrangements, or an eat-what-you-kill system, that rewards sales and production tied to the top line, not the bottom line. This is true of small practices as well as larger businesses. “Fracture lines” are built into the practice model as individual books or practices are built in an environment that starts out collaboratively but most often ends up creating competitors. 

It’s important that independent advisors move away from obsolete practices and improper building tools held over from experiences in the wirehouse world. Creating a sustainable and valuable business should be the goal of every advisor. Building efficiently and effectively takes the proper tools, the proper structure, and the proper team.

Advisors need to embrace the most powerful and lucrative tool they have: equity. Equity is the value of the business separate and apart from the cash flow and compensation paid for work performed.

The foundations for FP Transitions were laid in 1999, and that makes our company officially 20 years old this year. I founded this company thinking that I knew a lot more about running a business than I actually did at the time. Armed with a law school diploma and a lot of energy and drive, I thought I was ready to conquer at least a small corner of the business world. Turns out that running a business takes experience and business knowledge.

Along the way, I picked up an important axiom from a local legend who said, “Don’t confuse activity with achievement.” He was right, but it took me a long time to understand the difference. In retrospect, the first ten years of our company were characterized with a lot of activity; the last ten years is where the achievement took place. The difference maker for us was hiring an outside CEO, Brad Bueermann, to come in and help us turn our activities into achievement on a national scale. Until then, I confused being very busy with being very successful, or at least constantly being on the verge of success. Everything revolved around me and the lawyer in me silently rejoiced. But this wasn’t a good, long-term model because eventually I ran out of time and energy. And I got older!

Advisors often mistake activity for achievement too, thinking that their one-owner practice that is 90% or more fee-based and that grows steadily at 10% or more every year is proof that they have built a business and that success has been achieved. I see a lot of independent advisors building what I call “books” and “practices,” but not very many building sustainable businesses. What I’ve learned over the past twenty years is that, while it is incredibly satisfying to have a practice that revolves around the founder, that isn’t a durable model, and it is not “a business.” At some point, if a practice is to outlive its founder and provide services to the clients for their lifetimes, and not just for the length of the founder’s career, significant changes need to be implemented, and the sooner the better.  

Early on, we grew fast and I became totally focused on our top-line success and growth rate. But there came a time when it was clear that without strengthening the foundational aspects of our business, it would never grow past a certain point. I had to move myself out of the center of operations and learn to build and run a business like a shareholder, not like the star attraction. Making myself a part of a stronger, more diverse, and younger team of professionals was hard, but very necessary – more than just changing my leadership style, we had to change the culture of our operation and, frankly, that was beyond my skill set. So, we brought in outside help – people who knew things that I didn’t – and that made all the difference. 

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.