40,99 €
Mehr erfahren.
- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance Editions
- Sprache: Englisch
This book is going to challenge you and everything you think you know about succession planning. For independent advisors, succession planning is quickly becoming the cornerstone to a strategic growth strategy designed to perpetuate their business and their income streams beyond their own lifetime, while providing a multi-generational service platform that attracts and rewards younger advisors. This makes succession planning one of the most, if not the most, important practice management tools in this industry today. As an independent financial advisor, now is the time to address the question of what will happen to your practice and your clients after you "exit the building." In most cases, the answers are right in front of you. Thankfully, Succession Planning for Financial Advisors: Building an Enduring Business has arrived to transform today's practices into businesses designed to endure and prosper and serve generations of clients. * Learn how to create a "Lifestyle Succession Plan" that can provide a lifetime of income and benefits to the founder even as he/she gradually retires on the job * Unlock the power of equity management - the best planning and building tool an independent advisor owns * Learn how to attract and retain the best of the next generation to help you build a great business and to support your succession plans and care for your clients and their families * Determine precisely when to start a formal succession plan and related continuity plan so that your business can work for you when you need it most * Understand why succession planning and selling your business are completely different strategies, but how they can complement each other when used correctly 95% of independent financial service professionals are one owner practices. To the positive, these practices are among the most valuable professional service models in America. But almost all advisors are assembling their practices using the wrong tools - tools borrowed from historically successful, but vastly different models including wirehouses, broker-dealers, and even OSJ's and branch managers. Revenue sharing, commission splitting and other eat-what-you-kill compensation methods dominate the independent sector and virtually ensure that today's independent practices, if left unchanged, will not survive the end of their founder's career. It is time to change course and this book provides the map and the details to help you do just that. For independent practice owners and staff members, advisors who want to transition to independence, as well as accountants, attorneys, coaches and others involved in the financial services space, there are invaluable lessons to be learned from Succession Planning for Financial Advisors. Written by the leading succession planning expert in the financial services industry, former securities regulator, M&A specialist, and founder of the nationally recognized consulting and equity management firm, FP Transitions, David Grau Sr., JD, has created an unmatched resource that will have an enduring and resounding impact on an entire industry.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 425
Veröffentlichungsjahr: 2014
Ähnliche
Additional Praise for Succession Planning for Financial Advisors
“I firmly believe Succession Planning for Financial Advisors is a fundamental addition to the library of any financial industry professional looking to implement a succession plan or to become a successor. Without a doubt, David Grau Sr. and the FP Transitions team understand the gauntlet of challenges. This resource provides practical tactics that take the pain out of planning a succession strategy to protect your clients and team members, and build a practice that outlives you for generations to come.”
—Andrea Schlapia, founder/CEO, Ironstone, Inc.
“A must read for advisors who are serious in planning for their clients and their companies future. I use the motto ‘think things through and follow through'. This step-by-step guide will help advisors get their planning completed and enjoy life more!”
—Maureen McAnarney, co-president, VSR Financial Services
“FP Transitions' book gives financial advisors a vital road map for turning a professional practice into an enduring business, which will serve their own financial security while it preserves the well-being of their clients.”
—James “Chip” Mahan, CEO, Live Oak Bank
“I have followed David's and FP Transitions' articles for years. His statistical research and, more importantly, his first-hand experience provide an uncanny insight as to how a financial service firm typically evolves and what it takes to create a market for that firm. He and the FP Transitions' team unmask the shortcomings of the traditional compensation arrangements promoted by insurance companies and brokerage houses and provide producers a better way to compensate themselves and ultimately monetize their many years of hard work. This book is a must-read for all financial service professionals.”
—Donald L. Reichert, MSFS, CLU, ChFC, AEP®, CAP; president, Capital Design Associates
“You must read this book as one of the first steps in creating your succession plan and embarking on such a significant venture. We all can acknowledge how so many advisors are unprepared in this vital area. Arm yourself with this valuable information gleaned from years of experience in just this arena. David and FP Transitions have examined so many elements to the challenge making it far more possible to execute a viable transition for your firm. Why stumble along yourself with no plan in mind when a professional has created a game plan for you? Buy this book and get started!”
—Diane MacPhee, CFP® PCC, nationally recognized business coach for Financial Advisors, www.dmacconsulting.org
“Being a financial planner/advisor requires a multitude of skills that are not necessarily innate or part of our professional training. Through the evolution from sales person to fiduciary the demand for a consistent, perpetuating organization has grown and will continue to grow in the future. David and FP Transitions' book Succession Planning: Building an Enduring Business is not simply about reaping the benefits from past labors (although that is part of it), but about fulfilling the promise we have made to our clients that we will be there when they need us. Truly keeping our clients interest's first.”
—Martin Kurtz, CFP, president, CEO, The Planning Center, Inc.; past president, Financial Planning Association (2011)
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.
The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more.
For a list of available titles, visit our website at www.WileyFinance.com.
Succession Planning for Financial Advisors
Building an Enduring Business
DAVID GRAU SR., JD AND THE FP TRANSITIONS® TEAM
Cover Design: Wiley Cover Image: © iStock.com/PPAMPicture
Copyright © 2014 by FP Transitions, LLC. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Grau, David, Sr. Succession planning for financial advisors : building an enduring business / David Grau, Sr. pages cm Includes index. ISBN 978-1-118-86647-4 (cloth); ISBN 978-1-118-86641-2 (ePDF); ISBN 978-1-118-86642-9 (ePub) 1. Financial planners. 2. Executive succession. 3. Financial services industry— Management. I. Title. HG179.5.G727 2014 658.1′6—dc23 2014012693
CONTENTS
Preface
Acknowledgments
Introduction
Chapter 1: The Succession Conundrum
Practices Built to Die
What Exactly Is a Succession Plan?
Why You Need to Create a Succession Plan Now
Your Clients Are Watching You!
Why This Industry Struggles with This Concept
The Evolution of the Solution
Mind Your Own Business
The Opportunity at Hand
Chapter 2: How to Start Creating Your Succession Plan
Defining Your Goals
Building a Foundation for Success
Facing Your Biggest Challenges
Equity—A Powerful Business-Building Tool
Valuing a Financial Services Practice
Practicing Equity Management
Building Profit-Driven Businesses
Chapter 3: Transforming Your Practice into a Business
Assessing What You Have Built
A Building Problem, Not a Planning Problem
A Parable
Building Your Ship
Rethinking Your Compensation System
Balancing Revenue Strength and Enterprise Strength
Selecting the Right Entity Structure
Remodeling Your Cash Flow
Production Model versus Business Model
Chapter 4: Creating Your Succession Team
The People Problem
The Secret Formula: G-1 + G-2 + G-3
Plan Before You Build and Hire
Mining the Talent Pool
Turning Employees into Equity Partners
Onboarding Talent with a Book of Business
The Case of the Super Producer
Help Wanted Ad
Solving the Talent Crisis in This Industry
A Conversation with the Next Generation
Chapter 5: The First Step—A Continuity Plan
A Dress Rehearsal for Succession Planning
What Exactly Is a Continuity Plan?
Basic Components of a Continuity Plan
Types of Agreements
Funding Your Continuity Plan
Continuity Plan Dos and Don’ts
A Powerful Acquisition Tool
Communicating Your Plan
Chapter 6: Charting Your Succession Course
Exit Strategies versus Succession Plans
Selling Your Practice
Mergers
What Doesn’t Work in This Industry
Employee Stock Ownership Plans
What Does Work? A Lifestyle Succession Plan
Goals of a Lifestyle Succession Plan
The Family Business—A Special Case
“Yes, but . . .” (Obstacles to Overcome)
Chapter 7: Succession Planning Step-by-Step
Where to Start
Assembling Your Support Team
Enjoy the Planning Process
Doing the Math
Establishing a Fair Price
The Nuts and Bolts of a Plan
Documentation
Bank Financing—Expanding Your Options
Beware of Benchmarks and Survey Results
Chapter 8: A Tale of Ownership
Succession Planning Case Study
Chapter 9: Course Corrections
Returning to the Harbor
Empowering the Next Generation
Growth Is a Sign That Your Plan Is Working
What to Do When Your Plans Change
What to Do When Their Plans Change
Handling the Culture Shift
Conclusion
About the Companion Website
About the Author
Index
End User License Agreement
List of Illustrations
Chapter 2
Figure 2.1 Workweek Trajectory
Figure 2.2 Balancing Revenue Strength and Enterprise Strength
Figure 2.3 Fracture Lines
Figure 2.4 Business-Building Tools
Figure 2.5 Valuation Indexes
Figure 2.6 Managing the Equity in Your Practice
Chapter 3
Figure 3.1 Four Industry Categories
Figure 3.2 Basic Organizational Structure
Figure 3.3 Basic Organizational Structure
Figure 3.4 Individual Books Organizational Structure
Figure 3.5 Equity-Centric Organizational Structure
Figure 3.6 Gross Recurring Revenue Multiple
Figure 3.7 Cash Flow Modeling
Figure 3.8 Typical Production Model
Figure 3.9 Creating a Bottom Line: Current Production Model
Figure 3.10 Creating a Bottom Line: Business Model in Five Years
Chapter 4
Figure 4.1 Building a Multi-Generational Business
Figure 4.2 Succession Planning Schematic
Chapter 6
Figure 6.1 Compensation-Based Strategies
Figure 6.2 Lifestyle Succession Plan Schematic
Chapter 7
Figure 7.1 Growth Rates of Financial Practices from 2002 to 2011
Figure 7.2 Application of Minority Discounts to Sale of Stock
Figure 7.3 Succession Planning with Bank Financing
Guide
Cover
Table of Contents
Preface
Pages
ix
x
xi
xii
xiii
xiv
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
Preface
This book is going to challenge you and everything you think you know about succession planning. As an independent advisor, you own what you do, you are unique, and you are responsible for building something that will outlive you—something that is tied to the lifetimes of the clients you serve. We’re going to show you how to do just that.
Along the way, we are going to point out the challenges that lie in your path to building a multigenerational business. But we’re also going to help you build the bridges to get there. As a guide, you need to know something more about the sources of knowledge and data that support the findings and conclusions and recommendations in the pages that follow.
FP Transitions is now 16 years old. I work there, and along with my partner Brad Bueermann, we are the first-generation owners and caretakers of our business. During our time together and aided by a fantastic cast and crew, here is what we have done with you and for you: (1) More than 5,000 valuations of independent financial services and advisory practices have been completed (at the current and increasing rate of about 120 valuations per month), all with five-year histories of revenue and growth; (2) more than 1,000 personalized benchmarking studies have been completed and delivered using the data from the valuation intake process (not survey data); (3) more than 1,200 closed transactions (sales or mergers to third parties) have been completed; (4) more than 1,750 continuity plans have been implemented and supported annually with valuations and updated agreements and funding mechanisms; (5) more than 300 internal ownership tracks have been set up and maintained for businesses and firms in this industry; (6) more than 400 new, next-generation advisors have been made owners through these internal ownership tracks; and (7) more than 1,000 speaking engagements and workshops have been completed to date. In addition, we have been hired to set up entities or to consult on the adjustments or recapitalization of more than 250 entity structures per year to make them work in this industry. There are 20,000 current registered clients who use FP Transitions’ site and information sources at any given time, 1,500 of whom now pay monthly subscription fees (a service first offered just five years ago), with another 500 signing up or renewing each year. In our “shipbuilding program” (more on that later), we spend thousands upon thousands of hours every year going over the details of your practices and your business dreams and goals.
That’s a lot of information and data, and our Research and Analytics team is charged with organizing it so that our collective experiences and knowledge can be channeled through this book and subsequently focused on helping you achieve your succession planning goals. To that end, we spend our days working with independent advisors to help you build valuable and enduring business models. We’re learning with you, in a young and dynamic industry. Sharing these experiences as we explore the path forward is the purpose of this book.
Acknowledgments
First, let me thank the only girlfriend I’ve ever had, my wife of 35 years, Penny. She has supported every dream I’ve ever had whether they made sense or not. Every day she shares with me her special gifts—a smile and a great attitude, and endless patience. Being married to an entrepreneur means a lot of time alone, not just the time to write this book, but the preceding decades it took to amass the knowledge and experience and education. As I work through yet another million miles of travel across the country on behalf of FP Transitions, I am thankful that she has been rescued by our four small dogs that don’t believe in alone time.
One of the points we make in this book is that businesses are not built alone. My business partner, Brad Bueermann, is nothing short of my coauthor. When he joined FP Transitions, it was to serve as our second stage rocket booster. We had gotten off the ground, as you’ll read, but we likely would never have achieved orbit but for his wisdom and foresight—Brad showed me firsthand that it often takes a different set of skills to transition from a job or a practice into a business of enduring value. There is not one page of this book that he has not touched or improved. He was also the only person courageous enough to suggest that the book’s first draft would make a wonderful contribution to Oregon’s renowned recycling efforts.
Brad lives a simple, but sophisticated business life based on two fundamental tenets: (1) constantly explore new territory, and (2) have fun doing it. It has been my honor over the past decade to have known him and worked alongside him.
The authors of this book also include the FP Transitions team. You’ll notice that the common voice in this book is not “I,” but “we,” and that reflects the people who make up our own enduring business. We have learned, firsthand, that working as a team allows us to learn more and to learn faster; we avoid mistakes by questioning and challenging each other. We fight, we scrap, and we work for every last detail and ounce of success, and when we find it, we share it and then immediately look to the horizon for what’s next, and what’s possible. Sometimes we bump our heads, and sometimes we just collectively start over, but ordinary and run-of-the-mill are bad words to us. We like to push the boundaries and challenge people and each other, and that is what makes our work fun. Like the readers of this book, we’re building a business to make a difference.
Finally, thanks must go to all of the independent advisors out there who let us practice on them—there has been a steep learning curve, to be sure. People often credit us with being pioneers in this industry, and, while Brad and I and our team smile and offer humble thanks, deep down we’re thinking, “If they only knew. . . .”
Introduction
Being an independent financial professional necessarily implies a commitment to a profession that surpasses a single career; the element of planning, or at least focusing on the future, implies that you’re starting something that will not and should not end with your own career.
Ninety-five percent of independent financial services professionals are one-owner practices. To the positive, these practices are among the most valuable professional service models in the United States. But almost all are assembling their practices using the wrong tools—tools borrowed from historically successful, but vastly different models, including wirehouses, broker-dealers, and even offices of supervisory jurisdiction (OSJs) and branch managers. Revenue-sharing, commission-splitting and other eat-what-you-kill compensation methods dominate the independent sector and virtually ensure that today’s independent practices, if left unchanged, will not survive the end of their founder’s career. Independent business models need different building and assembly tools, because of one major difference—independent advisors own the value they’re building, not their broker-dealers or the custodian they associate with—and that ownership carries with it significant rewards, and opportunities, and obligations. It’s no longer about having a job, yet that’s exactly how most independent owners approach their practices. Why create a succession plan for a practice designed all along to be just one-generational?
Of course, much of this problem could be solved, or at least substantially mitigated, if one were to assume that independent practice owners would eventually sell or otherwise intentionally transfer their client relationships to another, younger advisor or to a larger firm upon retirement. But the data on this point are clear as well. Entrepreneurs rarely sell. Financial services practice owners strongly prefer to hold on to their predictable revenue-producing practices as long as possible, even as they decline and begin to wind down on their own. Advisors unnecessarily opt for the ongoing cash flow associated with their work in exchange for the equity value and ability—perhaps duty is the better word—of professionally transferring the relationships and assets to a handpicked successor who could perpetuate the services for another generation.
There is a solution, and all of the tools and knowledge to implement it already exist. Simply stated, the solution requires the coordination of a proper ownership-level compensation system and the ability to gradually monetize the equity value of every business in this industry as part of a long-term, multiple-generational growth strategy, part of a process we call equity management. The concept of equity management is as new and young as the independent side of this industry, and it is just as powerful. To build a sustainable business, you have to manage cash flow and equity professionally, and helping you take the first important steps to mastering that concept is one of the most important goals of this book.
This book and the instruction it provides are intended for use by the following four groups:
Practices that want to take the next step and grow into a business
Owners who are looking to create long-term cash flow or a legacy
Intrepid employees and junior partners (and sons and daughters) who want to initiate a discussion about succession planning and an ownership opportunity
Independent broker-dealers, custodians, and insurance companies that need to understand how to create enduring businesses and why that is every bit as important as generating production and recruiting more producers
That said, the lessons provided in this book are applicable to a much wider audience, including wirehouse or captive advisors who are contemplating the move to independence, insurance agents who understand the value of predictable revenue and the equity it generates, as well as the attorneys, accountants, coaches, and recruiters for all of the aforementioned. Finally, as a former securities regulator, I suggest that those who write and enforce the myriad rules and regulations for this industry (state and federal regulators, and the compliance officers at the independent broker-dealers, custodians, and insurance companies) can gain a much better understanding of the differences between captive and independent advisors, enabling them to gradually adjust the regulatory scheme to support the building of strong and enduring businesses that can, in turn, support a client’s needs well beyond the advisor’s career.
With the aim clear and steady, let’s focus on the goal: The independent financial services industry should be the leader, the best of all professional service models when it comes to planning for the future. As an industry, we have to work together to reset the table and get this process started. With this book, we’ll give you the tools to succeed.
Chapter 1The Succession Conundrum
Practices Built to Die
As an industry, we have a problem to solve: 99 percent of today’s independent financial services and advisory practices will not survive their founder’s retirement or the end of the founder’s individual career. When the advisor leaves, for whatever reason, it’s over. And that has to change.
In many professions and in most businesses, this is not a problem. You don’t need a multigenerational dentist or dental firm, for instance. Who cares if your neighborhood hamburger stand has a succession plan? But in this industry, it is different. Wealth doesn’t have a lifetime. Even so, clients have a clear expectation of advice tailored to the length of their lives, not to the length of their advisor’s career. Clients do have a choice—they can choose between a career-length practice (or possibly even shorter upon the death or disability of a single owner) and the multigenerational wirehouse (think Bank of America/Merrill Lynch, Wells Fargo, UBS). The independent industry seized the momentum from the wirehouses (at least in terms of popularity) over the course of the recession, but may well cede it back in years to come unless this problem is resolved.
So, specifically, who are we talking about—to whom does this “99 percent” statement apply? The list certainly includes independent registered representatives and advisors, whether under an independent broker-dealer or custodian or insurance company. The list includes stand-alone Registered Investment Advisers (RIAs), as well as the investment advisor representatives (IARs) who work under someone else’s RIA and own their own practices or books (in the pages that follow, we collectively refer to all these professionals as “advisors”). The list also includes investment professionals who are fee-only, fee-based, or commission-based. The list includes the smallest of the lot with annual production or gross revenues of $100,000 to $150,000 a year, as well as the largest we’ve worked with to date at around $20 million in annual production or gross revenues, and everything and everyone in between. The list includes new start-ups, as well as older, established businesses and firms whose tenures match their founders’ many years in the industry. The list also includes most accountants, tax professionals, and estate planners who are licensed or authorized to provide investment advisory or other financial services. All are equally unprepared. All their practices are built to die or fade away after one generation of ownership.
While encompassed in the preceding list, it merits pointing out that all the investment professionals who call themselves or otherwise function as silos for practical purposes are the people we’re talking about as well (silo is the term many advisors use when referring to multiple owners/producers under one roof, with each servicing and owning one’s own group of clients). More surprisingly, most ensembles are also included in that 99 percent group (the term ensemble refers to a formal team arrangement); rarely have we come across a group of advisors who call themselves an ensemble that has the ability and the enterprise strength as a business to turn the corner into the second generation of ownership—and those who do are starting the process too late with no clue as to how long it takes to implement an internal ownership transition.
To be clear, we’re not saying for one minute that independent advisors can’t make a very good living (they can and are doing so for the most part); they’re just falling short of building an enduring business. Today’s independent advisors are not failing in their work of providing professional and relevant and much-needed financial services and advice to their clients; they are failing to sustain a business beyond their own careers, leaving their clients to do that portion of the planning on their own, and advisors (and their broker-dealers, custodians, and insurance companies) are leaving an incredible amount of money on the table as a result for no good reason.
As an industry, we’ve arrived at this point together and certainly not as a result of making a lot of mistakes. One of the reasons the independent sector has grown as fast as it has is through competition. Entrepreneurs are great competitors! In terms of number of advisors and annual revenue growth rates, the independent side of this industry just plain works. What’s missing is the endurance factor—businesses that can survive the founder’s retirement, death, or disability—and that will come from collaboration as much as competition. The idea of collaboration is woven throughout a formal succession plan.
What Exactly Is a Succession Plan?
In this industry, and in this book, a succession plan is best defined as a professional, written plan designed to build on top of an existing practice or business and to seamlessly and gradually transition ownership and leadership internally to the next generation of advisors. The business itself continues on, not just the life of many or some of its individual assets. To accomplish these goals, the business has to get stronger, and it has to grow, and that is why conquering this problem is such a tremendous opportunity for this young and evolving industry and everyone associated with it.
In the process of helping you figure out how best to consider and construct your succession plan, we would be remiss not to also cover the related concepts of exit planning and replacement planning, which provide some much-needed relief and realization of value to the late starters or the smaller practice owners who, for one reason or another, will not be building an enduring business. In fact, exit planning is where FP Transitions started back in 1999, and for many years we, like many of you, thought of selling your practice at the end of your career as the solution or at least as something almost as good as a formal succession plan. Based on the number of articles we read every month in the industry publications, it is clear that succession planning and selling are often thought of as one and the same; but they are not.
So we need to set the record straight and come clean on this point as well. Selling your practice to a larger, stronger, multigenerational business can be a good strategy, and for many of today’s older and single-owner advisors, it is quite simply the best and fastest solution when the time comes. But for the rest of this industry, the thought of selling when you’re done working in your practice is not a plan—it is a recipe for procrastination. One of the things we’ve learned from you over the past 16 years is that entrepreneurs rarely sell. The idea of one day walking away and no longer being regulated or depended on by so many clients through the tough economic stretches is exhilarating, and tempting, especially on those bad days in the office. That’s understandable.
Too often, however, the concept of planning gets confused with merely an idea or some evolving thoughts over the years about what you could do when that time comes. In truth, absent a serious health condition or a new passion in your life, “that time” never comes. The cash flow is too tempting and too rewarding to walk away from, the workweeks grow shorter, retirement is postponed, and then, one day, there’s nothing of substantial value left to sell or plan with. We see it all the time—so often, in fact, we have a name for it: attrition. The act of thinking about selling your practice one day in the future most often results in your taking no action steps to strengthen or grow your practice in the meantime, and it continually ends with one result: The practice dies on its own as you get older and spend less time, energy, and money running it. Attrition is the number one exit strategy in the independent industry today, by a wide margin, and is a leading contributor to the 99 percent death rate of independent practices after the first generation of ownership.
Together, we can do better. As we consider how to shift gears from a one-generational practice to an enduring and valuable business, you need to think about the first step in the process—just one single step in the right direction. It’s easy and it is powerful and it starts with a single word: planning. That might seem obvious, but too many advisors start with other words like selling or dying or slowing down or losing control. Those are powerful words, too, but they tend to prompt inaction and fear. Succession planning is about building and strengthening your practice or business; it is about retaining control over an enterprise, and, in time, it really is about working smarter and not harder, and it is about being financially rewarded for a career well spent for the rest of your life.
Planning is about taking stock of your situation. It is about surrounding yourself with the right people who can help you make smart decisions; it is about gathering facts and information and having a thorough understanding of your best choices and the costs and benefits of implementing each one. (Note that executing a buy-sell agreement is not a succession plan or a substitute for planning—more on that later.) As your chosen and purposeful plan unfolds, be it a succession plan, an exit plan, or a replacement plan, you will be creating a pathway into the future that you control, a pathway that you can share and explain to your family and your staff and your clients. Planning is the critical first step, and it is so much more than just an idea.
Why You Need to Create a Succession Plan Now
For many independent advisors, succession planning is becoming the cornerstone to a strategic growth strategy designed to perpetuate their business and their income streams beyond their own lifetimes, and this makes succession planning one of the most important practice management tools, if not the most important one, in this industry today. But for many advisors who have not begun the process or remain unsure of embarking on this course there are three simple reasons why you need a succession plan and you need to start on it now:
It is the best way to realize the value of a lifetime of work.
It is the best way to recruit next-generation talent to grow your business.
It is the best way to preserve and protect what you’ve built.
Succession planning is not an end-game strategy for your business; it is not about shutting things down and calling it a day. If anything, succession planning is about building a bigger, stronger business that can one day work for you. With a good plan, the right people, and enough time, every business can survive its founder’s retirement and many can even prosper. That might sound scary if you’ve built an egocentric practice, but from your clients’ perspective, it makes total sense.
Realizing the Value of a Lifetime of Work
For most independent financial services professionals and advisors, their practices are the single most valuable asset they own, always a six-figure proposition, and many times a seven-figure number or more at its peak. Regardless, it will have a major impact on your own retirement plans even if you hope to work forever. To be certain, it is the one asset you exert almost total control over.
There is little push-back from advisors we talk to regarding the role their business plays in their lives—it is an important asset. But some advisors consider the value of their practices to lie primarily in cash flow, the money they take home every month and year after year in exchange for the work that they do. If the practice is small enough and has no infrastructure around it, this might be true; but for most independent advisors, that approach is too limited. Independent financial services professionals enjoy a distinct and important advantage over captive advisors—they have two kinds of value to work with to reward themselves, to build with, and to use to attract and retain next-generation talent: cash flow + equity.
To build an enduring and transferable business, advisors must learn how to utilize both types of value simultaneously, and that is exactly what a well-constructed succession plan will do. Building a business around both cash flow and equity value is what separates a one-generational job or practice from a more valuable and enduring business. A properly designed succession plan can perpetuate income (cash flow) while gradually realizing equity value (at long-term capital gains rates) as next-generation advisors invest and buy into your business. Cash flow is what advisors work for; equity is what owners invest in.
Most advisors have heard the rules of thumb that a practice is worth about two times trailing 12 months recurring revenue. While that’s in the ballpark, that is the number when selling to a larger, stronger buyer, quite likely a business. Building your own business and selling your stock or ownership interest very gradually to a team of next-generation advisors as the value continually grows is a far more lucrative proposition—if you give it the time it deserves by planning early enough. An internal ownership transition can provide a multiple of five to seven times the starting point (based on trailing 12 months revenue), not including wages and benefits over the course of the plan, which are significant in their own right.
You owe it to yourself and your family to realize the highest value from what you have built at the best possible tax rates. A carefully constructed succession plan will do just that.
Recruiting Next-Generation Talent to Grow Your Business
You have many choices to make as an independent owner. One is whether to focus on growing just your cash flow (think office of supervisory jurisdiction [OSJ], broker-dealer, or wirehouse model); another is growing your equity value prior to exiting. A succession plan will help you grow both cash flow and equity.
Succession plans depend on next-generation talent. If you’re growing a business, odds are you won’t be working on a replacement plan for yourself by finding “another you,” but rather a plan that relies on a team of successors—two, three, maybe four people, all at least 10 to 15 years younger than you are, to work together, to do what each does best, to cumulatively buy out your position over 10 years or more in many cases. You’re going to need a bigger boat and more people. This concept also means that you have another important choice to make when hiring, training, and compensating your staff members, including those already on board: Will you help them become collaborators or competitors?
When younger advisors are recruited into an individual practice that has no future beyond the career or life of its founder and that founder is in the last 10 years of his or her career, the natural tendency is for the new recruits to build their own practices, or books—there is no better choice. If there is no enduring business to invest in, the next generation of advisors will start to build their own practices. This is what most incoming advisors are faced with today, but a business with a succession plan can offer something very different, something much better—a career, and an ownership opportunity that comes with a paycheck and a mentor. That’s an enticing package for someone with a career to invest.
The difference between owning a job as an independent financial services professional and having a job on the captive side of the industry can be hard to distinguish sometimes. The difference is equity, but if the only access to equity value is to start your own business from scratch, the independent side will attract only entrepreneurs and way too few of the very necessary support and role players to give a practice the ability to become a real and enduring business. A succession plan isn’t about your retirement as the founder; it is about empowering you so you can share what you’ve spent a career learning with next-generation advisors who work for you, learn from you, and then invest in what you’ve built—collaborative partners instead of competitive former staff members.
Preserving and Protecting What You’ve Built
Contrary to popular lore, entrepreneurs are not immortal or invincible. One day, one way or another, you will be leaving your practice behind by choice or by fate; plan for both possibilities.
One of the biggest threats to a one-owner advisory practice (the most common ownership structure among independent financial services professionals) is not the lack of a succession or retirement plan or exit strategy for the founding owner, but the lack of a plan to protect the clients and the owner’s value in the event of the owner’s sudden death or disability. Continuity planning seeks to address the question of who will serve as advisor to the clients if their primary advisor is incapacitated; it is an important first step to most comprehensive succession plans.
The challenges and solutions in developing a continuity plan can be very different from those used to create or implement a succession or retirement plan. For some professionals, the first and only solution is to purchase a life insurance policy—a solution that almost completely ignores the welfare of the clients. But in fairness, what choices does a one-owner practice have? How can you protect a one-owner practice against a six-month absence due to a temporary disability resulting from something unforeseen like a car accident or a heart attack or cancer? Succession planning provides the answer; remember the definition of a succession plan is that it incorporates a gradual transition of ownership and leadership to the next generation of advisors, preferably a team of advisors. It doesn’t matter that your younger business partner owns only 10 percent or 20 percent of the business—it matters that he or she is an owner and a collaborative partner. An internal ownership plan, once implemented, is the single best continuity plan available.
Think about it: Who best to protect the value and the relationships you’ve spent a lifetime building than another owner who has invested in the business and who needs to protect this shared value until you return? For most 30-year-olds, that minority ownership position is, or will be, the largest, most valuable asset they own. If they’re part of your succession team, all the better. A succession plan provides answers on many levels.
Your Clients Are Watching You!
Every day, we hear from our 50-, 60-, and 70-year-old advisory clients that they are being repeatedly asked the question: “What happens to me if something happens to you?” In a Time magazine article (July 18, 2013), writer Dan Kadlec addressed these issues, warning clients of independent advisors to start asking questions and exploring their options. Here is his excellent advice, in part:
If you have a financial adviser, odds are this person is contemplating his or her own retirement, as well as yours. If you have an older financial adviser, you need to:
Understand the coming transition. Ask now about your adviser’s retirement date and how he or she intends to handle your account. Do you want to stay with the firm? Do you want to try someplace new? Do you want your adviser to handpick a successor? How quickly will someone new get up to speed?
Look for an upgrade. You may be happy with your adviser but there’s always room for improvement. This is your chance to reset expectations and clarify how your needs are changing. Make this clear and you’ll get something out of the transition besides a headache.
Ask questions. You want to know all your options if you get notified about a transition. That means you have to take charge—and you should always feel free to change the relationship if the balance of fees for service no longer feels right.
Your clients deserve better answers than hearing that you have a good idea on how to handle such events when they arise or that you’ll make a plan when you’re older and have more time. As the information increases on this subject matter, scrutiny will increase, too. You can hope that you’ll retire before it gets too bad, or that you can talk your way through it—but is that enough? Is that a satisfactory set of actions by an independent owner in the financial services industry? In truth, your clients and their children will choose their own answers to these questions, maybe with the help of a competitor across town who owns an enduring business model.
A succession plan will show that you care about their long-term financial future. Your succession plan ensures that your talents and the knowledge and culture that you have built into your practice are being transferred to the next generation and can be relied upon by your clients into the future. To do that, you’re going to need to expand the ownership base to include one or two or three next-generation advisors, and you’re going to need to be their mentor for a long time to come, hiring and retaining only the best so that your clients will enjoy a seamless and professional transition. Along the way, your successors will learn what your clients want for their own children and grandchildren, and that critical knowledge and expertise will make the transition within your business from one generation of ownership to the next.
Why This Industry Struggles with This Concept
So if creating a succession plan carries so many advantages to owners, their clients, and their employees, why do we not have an industry-wide solution? Why are there so few succession plans and so many practices that will die with this generation of owners?
In our experience there are many reasons, but we see four primary issues that help explain why this industry and the independent reps and advisors who populate it are struggling when it comes to building enduring business models capable of multigenerational ownership.
First, the tools and strategies that are being used to assemble today’s independent practices have been borrowed from the wirehouse industry and were never intended for use by independent advisors. These tools, which commonly include some form of a compensation system based solely on production or revenue sharing—what we term an eat-what-you-kill approach—is a central problem preventing owners and their employees from viewing their business as a single enterprise rather than a collection of individual client books.
The original goal of generating greater and greater production is being solved primarily through competition (i.e., many individual books in a produce-or-starve format) rather than collaboration (a group of owners working in concert in a single business), because that is the easier and faster approach in the short run. You can learn to produce something in fairly short order; building a business takes time and skill. The wirehouse model and even most of the insurance company models have thrived on this approach, and it works well because the enduring business still exists—it is the wirehouse or insurance company itself. In the independent space, advisors are tasked with building their own enduring businesses, but the lack of collaborative and prospective equity partners is stopping the process cold. In many ways, advisors’ struggle to create successors has more to do with building than with planning.
Second, a portion of the blame must also be directed at the way the rules governing this industry were written and how they are interpreted and administered. Financial Industry Regulatory Authority (FINRA) rules and regulations make it difficult for many of today’s advisors to operate effectively as their own enterprises; advisors from both sides of the industry (captive and independent) are treated the same even though they are obviously very different—independent advisors own what they do. First-generation independent owners have equity in addition to cash flow, and they can use that equity to attract and provide a long-term, tax-efficient reward to those who invest in their small businesses—what you’ll come to learn is a staple in every succession plan.
Third, today’s independent practice owners come from a sales culture, which is now being passed on to the next generation. The roots of this industry are firmly tied to production and sales. The result of this sales culture has often been to build practices that simply focus on increasing production as efficiently and quickly as possible and not on building enterprise strength or long-term value. Many advisors were encouraged along these lines by their broker-dealers or custodians and still are by many of today’s coaches. Have you ever heard of recognition awards given for highest firm value or strongest service model? Production, as measured in gross revenue or assets under management, remains the primary yardstick of success for advisors. But this is changing as independent practice owners realize that their own goals and those of their practice might be better served by concentrating on building enterprise strength and value resulting in enduring businesses that attract and retain the best of next-generation talent, rather than simply constructing a so-called revenue mill that will stop when they do.
Fourth, independent broker-dealers, custodians, and insurance companies share some of the blame as well and some of the responsibility for helping to fix things. There are two predominant views in the independent space when it comes to succession planning: (1) that it is the advisor’s problem and sole responsibility, and/or (2) that selling is the best and most common exit strategy. Accordingly, broker-dealers and custodians consistently adopt a defensive strategy to keep the assets within the network by putting up a matching site so the advisor can easily sell to another rep or advisor within the same network. Here, too, the thinking is beginning to change as independent broker-dealers realize that they need to help their advisors create enduring businesses in order for the assets to stay within their networks. They also are realizing that it is not in anyone’s best interest to let practices that they have recruited and nurtured simply wither and die when they can be saved and grown for decades to come by creating a succession plan.
A multilevel problem needs a multilevel solution. Said more directly, a broader solution set for the independent advisory industry must involve independent broker-dealers and custodians, and clearing companies, and insurance companies, and industry organizations such as the Financial Planning Association (FPA), National Association of Personal Financial Advisors (NAPFA), Life Insurance Marketing and Research Association (LIMRA), and Investment Management Consultants Association (IMCA), as well as the independent advisors, reps, and insurance agents whose practices are at risk of declining—when they should be growing and multiplying and building upon each generation. Paying more lip service to the idea of a succession plan, and creating more match-making sites, just won’t cut it anymore. But the first step belongs to the advisors, who simply are not in a position to wait for the industry to catch up and adjust and support their real needs. Fortunately, entrepreneurs are perfectly suited to taking on a challenge that provides so many benefits.
The Evolution of the Solution
This is a relatively new industry, at least in terms of having independent practices with substantial equity value. Even RIAs, which by definition are independent, have not, except in the case of the largest businesses, had any realizable value in the past.
I remember receiving a call when I was a new lawyer around 1994 from one of my RIA clients. He said to me, “I think I’m done. It’s time to do something else. I have $50 million in assets under management, 45 great clients. Do you suppose anyone would want them?” In the end, he did find someone who wanted them. The deal structure they agreed to was a zero down, 10-year earn-out arrangement at a multiple of 1.25 times trailing 12 months revenue. It was a fee-only practice.
