While it may seem “safer” to stay put, there are risks in doing so that many advisors are unaware of.
For many advisors, life at their firm isn’t what it used to be.
Increasing bureaucracy, rising compliance restrictions, diminishing freedom over investments, and client communications—just a few of the issues we hear about from advisors every day.
Yet they stay the course since, for now, it’s still tolerable.
Why is this so common? Why knowingly accept a sub-par situation?
Typically, the reason they stay is because, on par, things are “good enough” and they can still serve their clients well despite their own day to day frustrations. Add to that the fact that change is scary, risky, and disruptive—so it’s natural to think that maintaining the status quo is the safe bet. And we’ve all heard the saying: The devil you know is better than the devil you don’t.
But is it really?
The reality is that staying the course comes with its own unintended consequences. Consider these seven…
- Business growth slows or levels off
Advisors who feel they are operating in an environment that is bureaucratic and managed to the lowest common denominator often find that the growth of their business is negatively impacted. For some, it may result from not having ready access to the holistic and high-end resources needed to land and retain HNW and UHNW clients. Or growth may be stymied by an inability to utilize social media and marketing to differentiate and develop new prospects. In fact, we find that advisors are often so busy making a sub-optimal situation work they don’t even realize they are limiting themselves and forgoing potential growth mechanisms. However, the danger of continually trying to restrict yourself to fit the confines approved by the firm is that it ultimately squashes creativity and results in a less differentiated and less growth-oriented business.
- Staff experiences burnout and attrition
In this tight labor market, a persistent concern for advisors is in retaining experienced staff. The best team members make a wealth management business operate like a well-oiled machine. They are often clients’ first and most frequent point of contact, ensuring that service is impeccable and that clients are happy. However, growing compliance mandates and bureaucracy, plus increasing revenue hurdles that advisors must hit to receive a fully paid support person, are resulting in understaffed teams—leaving the support staff overworked and frustrated. And when key staff members leave, it can set advisors back substantially as they often take on the administrative and client service tasks while spending months trying to hire and train an acceptable replacement.
- Relationships with management become strained
A strong management team can often make a less-than-ideal situation good by blocking and tackling an advisor’s need to get exceptions, hire staff, or even voice concerns to senior management. That said, a weak management team can negatively impact how advisors feel about their firm, resulting in frustration that erupts after being bottled up for too long. Plus, having it out with management, even when done respectfully, can put you on the radar as “disgruntled” or a “flight risk”—and firms have been known to double-down on the scrutiny of unhappy advisors, in some cases launching internal investigations of their businesses.
- Clients become frustrated
It’s every advisor’s nightmare: being blindsided by the loss of an important client. Operational delays, difficulty getting things done, and poor service from other areas of the firm sometimes lead to client losses. Advisors work hard to bubble wrap clients, protecting them from any deficiencies by stepping into the void to ensure excellent service. Even when done successfully, efforts to insulate clients from the firm are at their core counterproductive, since advisors could ideally use this time for prospecting or fostering existing relationships. And sometimes advisors can’t protect clients when they interact with another part of the firm, such as to get a mortgage or business loan—and are left so frustrated and angry that they pull the entire relationship.
- The handcuffs of unvested deferred compensation tighten
Although making a move isn’t all about the economics, of course, it’s an important factor. And many advisors find it hard to walk away from their deferred compensation, viewing this as money they have already earned. It’s particularly hard when an advisor has built up so much unvested deferred comp that it substantially eats away at the economics of a move. The good news is that many firms will add an extra percentage of an advisor’s production into a deal to partially make up for the deferred an advisor leaves behind. And in a move to independence, the combination of upfront transition capital and a higher net take home also helps to defray a portion of what’s left behind. So for advisors planning on one well-timed move in their career, it’s important to remember that since deferred compensation balances typically increase over time, if you feel handcuffed by deferred compensation now, it’s liable to only get worse, not better, in the future.
- Bound by sunset agreements
The ability to acquire businesses from retiring advisors is a great way to leapfrog an advisor’s growth. At the same time, acquiring a book through a firm’s sunset program requires the acquiring advisor or team to sign a contract that effectively ties the business to the firm for 5-8 years. And large teams with many advisors are often continuously fulfilling a sunset buyout for a retiring team member—creating a continuous cycle that can be difficult to break. The net result is that advisors lose agency over their future since they are continually “recommitting” their business back to the firm as they acquire additional businesses.
- Forgoing the opportunity to maximize career enterprise value
While staying the course can minimize disruption and eliminate the risk of transitioning the business, in most cases, it results in sub-optimal career enterprise value. Why? Advisors that don’t take the opportunity to make one well-timed move are forgoing a transition deal, which, at current levels, can deliver as much as 300-400% of an advisor’s recruited production. Or they are missing out on transitioning to independence, which offers higher net take-home pay—plus the ability to sell the business down the road at market-based multiples, yielding a larger gross monetization than retiring in-place and a higher net since proceeds will be taxed at long-term capital gains rates. In addition, other positive catalysts may result from a move, including faster growth, book acquisition opportunities, and new teaming potential, that all play into the enterprise value an advisor creates over time. Plus, don’t forget the happiness quotient, a non-economic source of value that we shouldn’t ignore.
Although it may appear on the surface that staying the course is the safest bet, it’s clear that there are risks involved in settling for the status quo. So, it’s essential for advisors to challenge their thinking and evaluate all the potential positive and negative impacts of staying put versus taking the leap of faith to land somewhere better.
As seen on InvestmentNews.com…
