Morningstar - Q1 2024 - 14

Dispatches
When Should
Advisors Hire?
Taking on staff seems
costly, but it can lead
to growth.
Sheryl Rowling
ADVISOR INSIGHTS
I recently received a question from an advisor:
" My daughter has been working as a financial
advisor for a large company since graduating from
college five years ago. She has been quite
successful, and even I'm impressed with her
growing expertise. Now that she's earned her chops,
we have been talking about bringing her in
to my solo practice to both create a succession plan
and update the firm's vision moving forward.
I'm concerned about pulling the trigger because
my income will be affected. I also struggle with
the best way to structure her equity participation. "
This is really three questions:
1 Should I hire someone now?
2 Should I hire my daughter?
3 How do I approach sharing equity?
Let's address each question.
Should I Hire Someone Now?
Before addressing who should be hired, you
must first determine whether it's the right
time to hire and what role the new hire should fill.
With solo firms, I generally favor adding an
employee if for no other reason than for backup.
What if the advisor becomes ill or disabled,
wants to take a vacation from internet connectivity,
passes away? From a financial standpoint,
this could destroy the value of the business.
Worse, it could leave clients in the lurch.
As much as being a sole practitioner avoids the
hassles of being an employer, it's not the
best way to function in the long run.
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Morningstar Q1 2024
So, if it's the right time to hire, how can you
justify and afford the expense? Obviously, growth
is required to be able to absorb the cost of
an employee. But growth is required for every
firm. Why? Because stability is impossible.
If your firm is not growing, it's decaying. Think
about it. No matter how loyal your clients
are, you will lose some over time-to moves,
marriage or divorce, assumption of assets
by a trustee, death, or some other unanticipated
event. Without new clients, the business
will decline. The bottom line is that growth
should pay for the cost of an employee.
Moving from a solo practitioner to a multiperson
firm can actually help bring growth. That
the firm no longer relies on only one person can
encourage more clients to make referrals and
can convert more prospects to clients.
Although it would seem less costly to bring
someone on in an administrative role,
I think the solo practitioner's first hire should be
professional. This provides valid backup to
the primary advisor and builds a foundation for
further growth. My recommendation would
be to hire someone who:
gHas at least three to five years of experience.
gHolds a professional designation, such as
a certified financial planner, personal financial
specialist, or chartered financial analyst.
gIs willing to pitch in on nonprofessional tasks
that are often required at a small firm.
Should I Hire My Daughter?
Now that you've decided to hire someone, does
it make sense to hire your daughter?
Based on your description of her education and
experience, she seems to meet the basic
criteria for a first hire. Beyond that, as with any
employee, you need to critically consider
whether she has the right personality, work ethic,
and culture fit to perform well in your firm.
Because she's your daughter, you also need to
evaluate whether a boss-employee relationship
can be successful. Could your personal
relationship be at risk? Do you both have the
ability to separate work roles from family roles?
What if it doesn't work out? Are your spouses/
significant others supportive? And, at
a basic level, does your daughter want to
work with you?
How to best use an additional employee could
be an entire series of articles. But deciding
when and whom to hire is an important first step
in ensuring the continuity of your practice.
How Do I Approach Sharing Equity?
Unless you're looking at a merger or sale to
another firm, committing to or even discussing
an equity-sharing agreement before you've
worked together is premature. Generally, equity
should be considered once:
gYou've worked with an employee for a while.
gThe employee has become integral to the firm.
gThe employee has proved capable of bringing
in new clients.
gThe employee has expressed an interest in
becoming an owner.
gYou've become comfortable with sharing
ownership with the employee-or anyone!
Finally, before discussing equity sharing, it's a
good idea to work with a consultant familiar with
structuring deals. Most forms of ownership
transfer should come with a financial commitment.
This might not be critical when dealing with your
daughter. However, in my experience, a financial
buy-in cements the level of commitment.
Hiring decisions should not be taken lightly. Yet
because practicing solo can leave the advisor
and clients at risk, I recommend moving forward as
soon as practically possible. K
Sheryl Rowling, CPA, is an editorial director at Morningstar.
The views expressed here are not necessarily those of
Morningstar.
https://www.morningstar.com/people/sheryl-rowling
Morningstar - Q1 2024

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