COVER STORY
I ’ ve encountered advisors who are either unwilling to purchase equity or have purchased very little , yet they believe they should earn more of the profits because they do the most work and have the most clients .
clients might not even be an owner in the firm .
I once worked with a firm full of amazingly smart people who had MBAs from Stanford and Harvard . They designed a complex system of keeping track of people ’ s time , trying to analytically establish which activity added the most value to the firm . Turns out the most valuable activity was entering your time in the timetracking system .
So you see , this isn ’ t an easy question .
Can You Separate Profit From Compensation ? In theory , compensation and income are two different concepts . I have spent my entire career trying to convince advisors that an owner in a practice receives compensation for their work but p r o fi t from their ownership . That ’ s why someone who owns a majority stake in the firm will receive the most profits but should not necessarily have the highest salary . For example , Steve Ballmer and Bill Gates are the two largest individual shareholders of Microsoft , but neither has drawn a salary there in many years .
People seem to have a hard time believing me , though , and everyone still mixes up the concepts . They ’ re still frustrated about the reasons why , say , Jeff makes more money than David , even when Jeff barely comes to the office and
David works like a mule . It ’ s that Jeff has 60 % ownership of the firm , being the founder , and the firm is very profitable . David has the biggest job , so he likely has a bigger salary . But profits outweigh salary , which is why Jeff makes more .
This might seem fair , if not logical . The mental accounting of ownership is not very logical .
Who Owns This ? We feel a strong connection to things we ’ ve created , whether we ’ re children with cube towers or business owners . “ Creator ” in many minds means “ owner .”
But what if someone else has substantially modified our creation ? What if they have competing claims ? That happens often in our industry .
If those rival claims come up , the equity tends to favor history — those who came first have invested the most . Equity rewards taking risk . Note that these are not necessarily claims to merit .
I ’ ve encountered advisors who are either unwilling to purchase equity or have purchased very little , yet they believe they should earn more of the profits because they do the most work and have the most clients . Again , for meritocracy to fully function , everyone needs to understand and accept what merit looks like . Many firms would
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NOVEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 35