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Advisors Shouldn't Count On Their Children As Continuity Plans

My succession plan is pretty set – my kids are graduating from college and will be joining the business in 1-2 years.” ― Advisor X.

And this is the most common response in the industry. Advisors believe their children will be the perfect succession plan they and dwell in that false sense of comfort. Below is one such real life example from an advisor I’ll call Tom.*

Tom started his business at the age of 50 after being a successful engineer for about 20 years. He really enjoyed what he did; he enjoyed interacting with his clients, most of whom were his friends and in the same age group. Over 10 years, he built up a very profitable lean business managing around $250 million in client assets and made a conscious decision to not grow it further, since he did not want to deal with the management hassles of a larger team. He had a good lifestyle practice and was very happy. He had one son, Zach, who worked as an equity research analyst on Wall Street after graduating from college but had just gone back to business school to get his MBA. Tom believed that Zach would join his business after graduating and gradually take over so Tom could retire from day-to-day management of the business. Zach had expressed interest as well, and his background in investment management definitely was an asset.

Tom was comfortable with his “plan” and had even begun mentioning it to some of his clients. Zach graduated from business school and moved back to their little suburb in Virginia to help his father manage the business. Zach made significant improvements to the business by implementing new systems and technologies that would improve the client experience and started managing some of his father’s relationships. But, he found it very difficult to engage with his father’s clients, who were all in their 60s, and began to feel that the job was a lot less satisfying than he had anticipated. Additionally, he had also started dating a woman in business school who had taken a high-powered corporate law job in Boston. They were continuing to date long-distance, but things had reached a point where a decision had to be made. Zach proposed to her and made the decision to move to Boston. Tom was not thrilled about it, but he wanted to support his son and they worked out a way for Zach to manage the business remotely while traveling back and forth every 2 weeks. But while in Boston, Zach got in touch with some of his business school classmates and decided to start a new venture with them. He told Tom that he was no longer interested in taking over the business nor managing his clients and business.

Tom was devastated. He knew that Zach had made the right decision, but Tom felt lost. For the last 15 years, he had taken it for granted that Zach would take care of his clients after Tom was gone, and he would pass on the equity value in the business to Zach. Now, all of a sudden, he needed to find a plan that worked not only for his clients, but also for his family in being able to monetize his business’ worth.

He decided to act expeditiously to put together a robust plan for his business. He hired an investment banker to help him evaluate other firms he could merge with and create a retirement path for himself. After several conversations, luckily, he found a firm that shared his market-based investment philosophy, had a strong team of advisors who could gradually take over his clients, robust systems and processes for integration of the businesses and, most importantly, capital to be able to pay him a fair value for his business. He did thorough due diligence on them, brought Zach in on the process to get another perspective and finally ended up merging with the larger firm.

And the plan began to work. The larger firm hired another advisor in Tom’s location to help him transition his clients. Over the next 18 months, he was able to transition all his clients seamlessly, get an attractive value for his business and also ensure his clients were being taken care of in the way he had always done so. Zach was happy as well, since he was able to focus on what he truly wanted to do and no longer felt guilty about leaving his father in the lurch.

Two years after the deal, Tom is now fully retired and glad that he looked for an alternate plan when he did. But he also knows that he got lucky, because he found the right firm. He should have made alternate plans much sooner.

What can advisors learn from Tom’s experience?

  • Having a family member in the business is not a guarantee of a robust succession plan. And it is definitely not a guarantee to preserving business value.
  • Internal family issues can derail so called succession plans, and it is imperative as a fiduciary to clients that advisors have an alternate continuity plan in place.


*All names and locations have been changed to protect privacy

Anita Venkiteswaran is a Vice President at Focus Financial Partners where she is responsible for business development and acquisition activities.

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