The time-honoured methods of succession planning and growth in the traditional professions of accounting and law are to introduce new partners into the practice or to arrange mergers with other firms. Variations on these themes include the buyout of a practice by a current employee or by another professional practitioner or firm.
Whatever the finer details, a principal objective of these arrangements is normally to retain the service standards and professional culture that the founders of the original firm established and their successors have nurtured ever since. Of course, it doesn’t always work out that way because managing business partnerships with numerous minority interests (or their corporate equivalents) can be like herding cats. Believe me, I know. I’ve been there. Nevertheless, intentions are generally honourable and the desire of the participants to serve the public interest and the interests of their clients usually manages to survive all manner of disruptions, arguments and rearrangements of the professional deck chairs.
The discipline of financial advice has developed from a rather different background, principally out of the life insurance and funds management industries where product sales and funds under management have dominated KPIs and corporate cultures. Therefore, one might expect succession planning and growth to be approached differently. However, as the new industry of financial advice has matured and its practitioners have increasingly recognised the unique responsibilities and obligations of being a true professional adviser, the same time-honoured succession planning and growth strategies employed by the traditional professions are being widely adopted.
Concurrently, there have been public conversations about the merits of third-party investors being introduced into professional financial advisory firms. No doubt, the expectations of investors will vary widely. Nevertheless, it’s important to contemplate whether investors who are essentially passive participants would be satisfied with sub-optimal financial outcomes and different priorities which often accompany the necessity to serve the public interest and the interests of clients ahead of other considerations, such as short-term profit maximisation and the accumulation of funds under management.
This is not to suggest that financial advisers should not earn healthy financial rewards to compensate them for their hard work and for the considerable professional risks that they take. But it does suggest that there may be fundamental differences of vision and expectations between passive investors and active participants in professional financial advisory firms. These should be resolved before financial arrangements are completed.
In that regard, a threshold question to consider is whether the interests of third-party passive investors can ever consistently align with the public interest and ethical obligations of genuine professional financial advisory firms.
A clue to answering this question can be found in an analysis of the term “profession”. The idea that the unique purpose of a profession is to serve the public interest, often to the detriment of its participants own financial positions, is a recurring theme in the relevant academic literature. Eminent American legal scholar, Roscoe Pound (1870-1964), put it this way:
“The term profession refers to a group pursuing a learned art as a common calling in the spirit of public service – no less a public service because it may incidentally be a means to a livelihood. Pursuit of the learned art in the spirit of public service is the primary purpose.”
Expanding on this, Australian ethicist Simon Longstaff, wrote:
“The point should be made that to act in the spirit of public service at least implies that one will seek to promote or preserve the public interest. A person who claimed to move in a spirit of public service while harming the public interest could be open to the charge of insincerity or of failing to comprehend what his or her professional commitments really amounted to in practice… if the idea of a profession is to have any significance, then it must hinge on this notion that professionals make a bargain with society in which they promote conscientiously to serve the public interest, even if to do so may, at times, be at their own expense.”
Developing this theme, the Australian Council of Professions asserted in 1993 that a professional person “must at all times place the responsibility for the welfare, health and safety of the community before their responsibility to the profession, to sectional or private interests, or to other members of the profession”.
In the light of this analysis, what are we to make of the notion of third-party passive investors in professional financial advisory firms?
It seems almost inevitable that there will be irreconcilable conflicts between the financial expectations of passive shareholders and the public interest duties and ethical obligations of active professional participants in the firm. I’m not arguing that such conflicts will always exist or that they can never be resolved when they do. However, I am arguing that serious conflicts are hard to avoid in these circumstances and that they may lead to controversy, low morale and poor client outcomes as steps are taken to reconcile them.
Therefore, it is surely sensible to think long, hard and honestly about the potentially unpleasant consequences of introducing third party passive shareholders, lest an attractive short term financial outcome turns into a long term financial and professional nightmare.
