G2: Building the Next Generation. Palaveev Philip

of firms that advisors do not defect to a competing firm that is trying to take away clients. Advisors are asked to remain with the firm – ideally for the duration of their careers – since clients do not look forward to changing professionals. These dual expectations of excellence and longevity are unique to professional service firms and even more pronounced in financial advisory firms. While attorneys and CPAs can and do change employers, advisory firms expect to hold onto their professionals and clients for many, many years.

      It seems to me that for every 100 or so additional clients, a firm needs to hire at least one professional who brings both an extraordinary skillset and a dedication to the firm. The new hire must be experienced and credible enough to lead clients, be loyal to the firm, and be integrated into its culture to stay for a long time. Before these professionals become the successors, they will be the leaders of growth. This is why every firm needs its own G2 advisors and cannot have enough of them.

      Many firms have tried to bypass the need to hire and develop G2 advisors by leveraging the founders more. I have worked with clients where single founders or small groups of founders have surrounded themselves with capable service people. These service people tackle much of the work, but they cannot lead client relationships. This means of leverage, combined with careful client selection, can certainly take a firm to a billion or more in assets under management (AUM). But even with leverage, the day will come when capacity is exhausted. Moreover, a firm with extreme leverage can be very fragile.

      Beyond increasing a firm's capacity, G2 professionals bring a skillset that perhaps the founders never had. Many hold MBA degrees and have experience in management and operations. Often the proponents of structure and process, they become the first COOs of many firms. They help clarify organizational structures, define positions, and establish career tracks. Their growth puts pressure on firms to create governance and ownership structures that can allow for many to participate, and they encourage founders to remember the long view.

       G2s as the Gateway to the Next Generation of Clients

      As advisors age, so do their clients. My experience has been that clients brought in by the founders are typically no more than five years older than their advisor's age and usually no younger than 10 or 15 years. As clients age, their assets shift into distribution mode, their rate of new referrals declines, and their exit from the firm nears. Many firms intellectually understand the need to attract younger clients but struggle to do so.

      G2 advisors are the gateway to younger clients. Just as the founders brought in their peers – business owners, executives, and professionals who shared their social network and stage of life – G2 professionals can do the same. A 65‐year‐old founder is not likely to find a 35‐year‐old doctor to bring in as a client, but a G2 professional is. That young doctor has her entire career ahead of her and will soon be the kind of client that every firm wants. The same is true for the emerging entrepreneurs and executives, and perhaps even the second generation of wealthy families. The G2 generation of advisors will bring the next generation of clients.

       G2s as Managers, Leaders, and Successors

      G2 professionals are not just the advisors of the future. They are the managers of the future, as well. As the number of clients grows, so will the number of people in the firm. What used to be a small firm with 10 to 15 people on staff will quickly become a true organization with 50 to 80 employees. Every employee needs direction, management, encouragement, explanation, training, mentoring, and, above all, attention. As the organization grows, the ability of the founders to remain in control and, more importantly, to manage their ever‐growing team diminishes.

      There are many theories about how many direct reports a manager can have, but few sources will argue that one or two founders can control and manage an organization with 50 people on staff. According to a Harvard Business Review article, the typical CEO has between 5 and 10 direct reports.4 Another author argues that managers should ideally spend around six hours a week with their direct reports.5 Again, this implies a number of direct reports no larger than seven. It is not my intention to debate the best number of direct reports. Rather, the point is that as a firm grows, founders need to delegate management to their G2 colleagues. Retaining full control over all management responsibilities is unfeasible.

      G2 professionals may also be able to relate much better to new employees in the firm. Since G2 advisors are typically in their thirties and forties, they are in a better position to communicate and manage the Millennials joining the firm. I know from personal experience as a subordinate, that the best person to be your manager is someone who has been in your shoes in the not‐so‐distant past and understands the challenges and characteristics of your position.

      As G2 professionals become better managers, many will also develop into leaders of the firm. A leader is someone who makes difficult decisions and leads others by example to implement those decisions. Most firms need more leaders. As the scope of operations grows, as the number of people increases, and as firms enter into new markets and new locations, they need more leaders who can propagate the culture of the firm and guide its ever‐growing team. That is the role of G2 professionals. They are leaders who will help the firm grow.

      Of course, they are (potentially) successors, too. Every founder will need to eventually exit the business, one way or another. When that day comes, firms that have a strong cadre of G2 professionals will have many options. They can keep the ownership of the firm within the team and focus on internal succession. Alternatively, they can merge with another team and become part of a bigger regional or national firm. Finally, they can be acquired, and chances are that a motivated group of younger professionals will increase the number of potential buyers and the price they are willing to pay. Some of those options, of course, are available to firms who don't have G2s but in those cases, when internal succession is not possible, the terms of a merger or a sale will never be as good. Firms with G2 professionals hold all the cards.

      Just Hiring Them Is Not Enough (But Start There)

      At Moss Adams, we always looked to hire consultants with five years of experience. Unfortunately, those are hard to find. One day it dawned on us that for a seven‐year period we had been looking for professionals with five years of experience. If you want to have experienced professionals on your team, you need to be willing to grow them within your organization.

       Limitations of the Free Agent Market

      Relying on the free agent market alone is rarely a good strategy. First, the free agent market in the advisory industry is not very active. The 2015 Adviser Compensation & Staffing Study produced by The Ensemble Practice LLC estimates that for professional positions, the turnover in the industry is less than 5 percent. This means that the supply of experienced talent is not very abundant. What is more, integrating experienced professionals in the processes, structures, and culture of a firm is a difficult and slow process.

      Every firm dreams of hiring a professional who has years of experience and can manage 100 client relationships while developing new business and helping to grow and manage the firm. Furthermore, most firms hope to find a professional who is collaborative and open to integrating into the culture of the firm. Of course, this unicorn profile is in high demand. Fulfilling it practically pays for itself and generates an immediate addition to profits. While every firm seeks this dream professional, such a person is rarely available for hire. Chances are that people like this are highly valuable members of a team where they are well compensated. Very likely they are part of the ownership of their firm.

       Developing Professionals Who Fit the Dream Profile

      There is another profile that is quite available for hire, but firms don't seem willing to give it attention. These are the many young professionals with finance degrees, often even MBAs and CFP certifications, who are looking to begin their careers in the industry and struggling to find firms that will hire them at the entry level. The recognition of the financial advisory industry and the increase in the number of schools teaching personal financial advice is helping create a supply of inexperienced professionals. They can certainly fit the dream profile, but they need firms that will invest in 10 years of training and developing to help them grow into it.

      The

4

Gary L. Neilson and Julie Wulf, “How Many Direct Reports?” Harvard Business Review (April 2012).

5

Laura Vanderkam, “Why Managers Should Spend Exactly Six Hours a Week with Each Employee,” Fast Company (July 14, 2014).