Advisors as Owners vs. Employees

This question contains many variables, and one is more important than all the others

Before I begin, I was absolutely thrilled to be Michael Kitces guest on his podcast last week. I mention it here because Michael’s podcast is the best podcast for advisors in our business, bar none. I would love for you to listen to the episode with me, but I also think it is a resource you ought to pay attention to if you previously were not.

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I recently read the new autobiography from Barry Diller, Who Knew. Barry does not share my politics, is not someone I have ever met, his personal life confuses me, and he is essentially one of the most successful media and entertainment executives of all time - not a finance or Wall Street guy. But nevertheless, his story has always fascinated me - a non-college graduate working in the mailroom at William Morris Agency to become a personal assistant to an executive at ABC to running ABC’s home movie department to becoming the CEO of Paramount by age 32 to becoming the pioneer CEO of 20th Century Fox to becoming the brainchild behind QVC to eventually aggregating a media and internet empire that includes Expedia, People Magazine, Vimeo, Tinder, and Home Shopping Network – seriously, what is there not to love in all that?

There was a particular excerpt in his book that hit close to home when it came to my own decision to leave Morgan Stanley in 2014 and start my own firm in 2015. I will quote it all here, but have a lot to say to help qualify it and explain its relevance to my own vision with The Bahnsen Group.

His context here was his decision to leave Fox after nearly a decade building it into the most successful network on television. That career achievement came after a decade making Paramount the most successful Hollywood studio, which itself followed his incredible run at ABC where he made it a potent television success. Barry had been an employee (albeit a very, very well-paid one, and a very, very empowered one) at three different companies (ABC, Paramount, Fox), and had done transformative work at all three.

“I had been thinking about something I hadn’t yet acknowledged to myself: that Fox wasn’t really mine; that however I acted as if it were, it wasn’t. I thought then and think now that a good employee does believe and act as if the company belongs to them. But of course that’s an illusion, one I’d been able to keep full faith in with the three companies I’d worked at for a quarter century. But suddenly the reality that this was an illusion couldn’t be denied.

Either you are or you aren’t.

It’s a harsh and binary concept, and not subject to equivocation. Either you are the principal or you’re not. The rationalizing powers of a good employee are endless. Good employees make decisions on a company’s behalf as if they own it. I acted like a principal, but I wasn’t one. I was an employee, and whatever position and power I had could be revoked at any time. I had gone about as high as a corporatist could go. I’d run two studios. I was making more money than anyone in the entertainment business. But as rarefied as all that was, it could be taken away in an instant. All that power flexed so naturally was devolved from real power. I was craving real independence and had a need to stand on my own. And the only way to do that was to take action, but at such risk.

To be truly independent, beholden to no one but yourself, unprotected by the mothering of a corporation - for a lifelong employee that is a daunting proposition. And thus those words - either you are or you aren’t - were banging around my head with increasing force. You can do all the things executives have been doing since since executive-ing began, fantasize and rationalize all you want, but that binary about independence rules: Either you are or you aren’t.

Most people in the entertainment community are living a kind of pretend life. Most of them talk all sorts of big games: they talk about going out on their own, they excuse away their status, they act big and important. Of course, there is nothing wrong with being an employee. I was a productive one for thirty years, and it served me better than well. Being protected is a good thing, often the only way to accomplish what you hope to accomplish. But if you yearn to be on your own, untethered, than you must take action.”

I believe three things about all of this that are all true at the same time, in tension with one another, but not remotely contradictory:

1. Many advisors are meant to be owners or partners of a business, not employees (I firmly believe I was one of these)

2. Many advisors are meant to be employees of a business, not owners

3. There is nothing wrong with either path, other than being in the one that you don’t belong in

I believe some advisors have a very good situation where they are technically a W2 employee. Their manager helps remove impediments that get in the way of doing business. Their compliance department is not a thorn in their side or an incompetent group of bureaucratic know-nothings. Their company’s brand is not a red flag. The tools and resources they have at their disposal help them to adequately serve clients. And they generally do not want to deal with payroll, HR, furniture, legal, and the various scaffolding that goes into running one’s own business. I admit that I think there are less of those good W2 situations now than there used to be – but I believe they exist, and where one employee situation is good, and one particular advisor’s own DNA and career objectives and [most importantly] ability to properly serve clients does not require a different structure, I think this setup is perfectly sufficient for many.

It wasn’t for me. I wanted to do things that a W2 employee at a big firm couldn’t do. I wanted to hire and fire who I wanted, pay them what I wanted, title them what I wanted, and make decisions with the P&L of the company as I saw fit (because it would be my money). An employee cannot spend someone else’s money as they want because it is not their money. When Brian and I made the decision to start The Bahnsen Group we were not in the financial position we are now, but we were willing to be risk-takers with our P&L and our balance sheets to have control. I do not believe every advisor cares about control as much as I do. But those who do, well, they have a choice to make. Is “control” adequate in their current setup, or do they need to consider the journey to independence – to true business ownership.

There are, of course, economic considerations, as well. I did not know the reality of balance sheet opportunity when we started TBG. I under-estimated how much business value I would create by owning my own firm. I already had good income and I already knew I had a path to grow wealth via company stock and annual accumulation of excess income and all that kind of stuff. What I found out was that our business now commands attractive valuations around growing multiples and growing free cash flows, especially for big growers. We were and are a big grower, so we “fell” into that benefit. I would take credit for this if I knew it at the time, but I didn’t. The “W2 versus owner” consideration should contemplate economics, because, you know, we sort of do this kind of thing for a living.

But ultimately, once one assesses the pros and cons of their current situation, considers all of the economic realities, and honestly discerns their own DNA, personality, risk tolerance, and career goals, there has to be an assessment of how it will impact clients. Is there any way in which one’s business structure is helping or hurting the way they serve clients, and is there any opportunity to improve that with a change? Would you being an owner of (or a partner in) your own business drive a better client experience? The answer may be no. For us, it was an unequivocal yes. Our ability to deliver a vast array of content without wirehouse filters was a huge part of our value proposition. The addition of a full-service tax department, the addition of a robust family office offering, the removal of investment filters that favored the firm and not the client, the structural separation of advice and custody, a legal fiduciary clarity, and the formation of a team and departmental structure that was customized by us to serve clients as we saw fit – these were all things that drove a better service model, full stop. Our client experience has improved exponentially since we became business owners.

And the end of the day, that’s the issue. Answering who you are, who you want to be, and how you want to do it – the answers to those questions will shine light on the issue of owner vs. employee. There is not one right answer for everyone. But there was one right answer for us.

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Diller said one other thing I wanted to quickly comment on:

“It’s the timing, stupid, for most great business careers.” (playing off of Carville’s famous dictum that ‘it’s the economy, stupid’)

I have been exposed to unlucky timing in plenty of things in my life, but I have been a beneficiary of great timing in many elements of my career. I would rather have not entered adult life in the conditions I did (the premature passing of my father, unable to attend college, etc.), but being “forced” into the Christian music business just as that world was about to have its one and only 5-10 years of industry growth was fortuitous. It was not a business filled with many impressive people, but my timing in (and out) was providentially good.

My entry into financial services was beyond fortunate in terms of timing. I had blown myself up personally in the late 90’s/very early 2000’s with dotcom insanity in the market, but had never hurt a single person with such as an investment professional. The entire business was moving to something advisory and consultative, I entered the business after the market had collapsed and had a totally clean slate. I got to build my business in that context, versus one of mass attrition catalyzed by having given massive bad advice.

Five years later, having built a great solo practice at UBS, I said no to joining Bear Stearns at what would prove to be one year before they imploded. I joined Morgan Stanley and received significant liquidity to my personal balance sheet 18 months before an existential financial crisis. And I hit my stride as an advisor with a high conviction investment philosophy in time to spend the financial crisis years growing like crazy.

I left the big firms for the great terrain of independence in 2014 with just enough years gone by in this new trend that resources existed for the transitional path to be successful, but well before a massive amount of capital and opportunity would follow suit. And I completely re-did my deal with Hightower in 2018, granting me the independence I craved just in time for a major growth spurt and company reinvention that would prove transformative.

I could give plenty of examples of bad timing events in my life, but I am humble enough to recognize that I have been a beneficiary of great timing many times over in my career.

No one is saying - not Barry Diller, and not me - that great business careers are made only by fortunate timing. One can overcome bad timing and one can fumble away good timing. Our responses to various circumstances are profoundly important. But to not recognize the providential reality of timing in how our own careers and business circumstances unfold is arrogant, foolish, and ultimately, may doom us to future poor decision-making as it distorts our own understanding of reality.

Timing matters. And having the humility to see this matters even more.