Skip navigation
Succeeding At Succession

Succeeding At Succession

Have you thought seriously about when and how you're going to retire? And who'll take over the practice? You haven't? Well, you're in good company. A quarter of firm owners lack an exit plan, according to a 2009 survey by Rydex/SGI's AdvisorBenchmarking. And more than one-third don't have a timeline for when they're going to leave the business. But, the fact is, you are probably going to retire one

Have you thought seriously about when and how you're going to retire? And who'll take over the practice? You haven't? Well, you're in good company. A quarter of firm owners lack an exit plan, according to a 2009 survey by Rydex/SGI's AdvisorBenchmarking. And more than one-third don't have a timeline for when they're going to leave the business.

But, the fact is, you are probably going to retire one day. And the longer you spend fine-tuning your plan, grooming successors and tweaking your practice to make it more saleable, the better your chances of exiting with a great deal. That's also true if you intend only to partially retire. “Succession is not an event. It's a process,” says Philip Palaveev, president of Fusion Advisor Network in Elmsford, N.Y. “And if you want as many options as possible, you have to start planning early.”

That said, here's a look at three typical time frames and what you can do to make the best of each one. While your first step in all cases is to get your practice valued, your other potential moves will tend to vary, sometimes dramatically, depending on your timeline.

10-15 Years To Go

Bigger firms with many advisors tend to sell for the highest valuations, says Palaveev. But creating such an enterprise takes years. That's why the ideal scenario is having a timeframe of at least a decade before you exit, so you can create the most bankable practice possible.

It's all about creating a sustainable, well-oiled machine capable of functioning at full throttle without you. “You can ask a premium for a practice that's able to go on without the owner being present,” says Matt Ransom, assistant regional director of Raymond James Financial Services in St. Petersburg, Fla. And that involves several elements.

For one thing, you need to put in motion a mechanism for increasing revenues and attracting clients. In other words, just because you're thinking about retirement doesn't mean you can let up on client recruitment.

Case in point: Penny Marchand. The owner of Cambridge Financial Group in Tucson, Ariz., which is part of the Alliance of Cambridge Advisors, she bought the practice 10 years ago, after joining in 1994. In short order, tired of the hassles of managing a staff, Marchand decided to downsize from about seven people to just two administrative assistants and to pare down her book of business. “I was working day and night,” she says. “I wanted more of a lifestyle practice.”

But about a year ago, she heard a succession planning expert speak and realized that, while her approach was more satisfying personally, it wouldn't help her when it came time to retire. So she launched a program to build the practice back up, including bringing on more clients. “Who would want to buy something that isn't growing,” she says.

She started seeking referrals to younger clients, especially those with the potential to increase their net worth over the next decade. And she formed a relationship with a colleague, who is now heading up a wealth management division offering services to high-net-worth clients; Marchand sees that as a complement to her own expertise in comprehensive financing planning, for which she charges a retainer fee. Assets are now about $44 million.

Part of the process of creating a more profitable client base should also include segmenting your accounts. Even if you've done so already, it's important to take a look again with an eye to which clients can help you build a practice someone else would want to take over. To that end, total assets should only be part of the puzzle. Other factors, such as whether they're good referral sources or you simply enjoy working with them, should also play a role.

You'll also have time to start looking for and slowly grooming junior advisors with the potential to take over — and to make sure the person is the right fit. “You have the leeway to change your mind,” says Sarah Cray, practice plan and acquisitions manager at Raymond James Financial. According to Cray, it's not uncommon to bring on several advisors before you find one who clicks. Best is to set up what David Grau Sr., president of FP Transitions in Portland, Ore., calls a “well-choreographed plan” through which you would sell 10 percent to 20 percent of shares in your business to anywhere from one to three candidates, doing so in several tranches over a period of time.

Ultimately, depending on the agreement, you don't necessarily have to limit yourself to a potential internal successor. But even if you end up selling to an external third party, it's still a good idea to have someone on the inside who knows the business well and can take control. Such firms attract higher prices, according to Palaveev.

Creating a sustainable practice also requires building an infrastructure — a systematic approach to every process, from your first client meeting to how you produce account statements. “You need a more institutionalized model of how you do things at the firm,” says Scott Slater, managing director of business consulting for Schwab Advisor Services. You should focus your efforts on four areas, according to Raymond James' Ransom. First, are the processes you use for marketing to your target client. Next is your method for prospecting. Third is how you introduce new clients to the practice. And fourth, your processes for reviewing strategy and making improvements.

Five Years To Go

With this time frame, if there's an advisor already working in the firm who could take over, you have plenty of time to start introducing that person to clients. Should you not have someone on board who can fill these shoes, five years also will give you the leeway to find and bring on board a new advisor who is interested in buying the practice from you.

Of course, since you have fewer years to play with, your choices will be narrower. You'll need to find a more experienced advisor who not only already has the same approach you do, but also requires a minimum of time to get up to speed. You'll be looking for someone with experience working with clients, of course, but also a background in management, recruitment, employee supervision, dealing with vendors, “all the things a business owner needs to have,” says Palaveev. According to Ransom, you can give yourself three to four years to find the right person, then spend the rest of the time introducing the person to clients and the firm.

You'll be in the best position if you're affiliated with a b/d that is able to help introduce you to likely candidates. That's especially useful if you're in a small town and don't want to advertise too publicly what you're doing. Or, if you're lucky, you might already have a working relationship with someone connected to your b/d who could be a contender.

Take Joan Marie McDermott. An advisor with Raymond James Financial Services in Bloomington, Minn., she decided about five years ago, after 25 years in the business, that she needed to start thinking about moving on. But with just one employee, an administrative assistant, she didn't have an internal candidate to take over the firm, which had $60 million in assets under management.

Paul Bennett, a colleague at Raymond James, approached her about setting up a succession arrangement through which he would take over if something were to happen to her. His lease was ending, so he agreed to join her branch. Not long after, however, when McDermott turned 60, she decided she wanted to speed up her retirement. They started forming a full-fledged transition plan, at the end of which McDermott would start receiving monthly and quarterly payments over a five-year-period, based on the net value of the firm's income and assets. Bennett began taking over more branch management responsibilities and, he says, “That gave us the opportunity to make sure her clients would be comfortable with me.”

In 2008, they sent a letter to clients explaining the transition and Bennett began working in earnest with “the bottom half” of McDermott's book; they split the revenues from those clients. Gradually McDermott went from working four days a week to two. In August, she officially retired, although she plans to remain available until the end of 2011, especially for long-time, elderly clients.

As for boosting your firm's value in a five-year span, that's also still possible. Although you may be in for a kind of “crash course,” says Ransom. Most important is taking steps to strengthen your firm's relationships with clients, the better to increase the chances they'll stay after you leave. That means taking another look at your client segmentation and, perhaps, winnowing down your book, so you can boost your service level to the most profitable accounts. What's more, if you've been slowing down on business development, start speeding it up again.

One- To Two-Year Horizon

With just one to two years before your exit, you won't have time to find and groom a successor if you don't already have one installed. So your only option is to sell to an outsider. “You're running on a very short clock,” says Palaveev.

Trouble is, you won't be able to take steps to boost the value of the practice. As a result, “The terms of the sale are no longer in your control,” says Palaveev. Chances are, buyers will want a purchase-now, pay-later deal, according to Palaveev. That means taking over the client base and paying for the practice as they realize revenues.

The bottom line: you'll likely have to settle for a buyer who's not a perfect fit. That's particularly true because, while there's a surfeit of buyers at the moment — about eight buyers to every seller, according to Cray — “There aren't a lot of buyers actually pulling out their checkbooks,” says Palaveev.

Take Jackie Kleinman. The owner of KB Financial Advisory in San Francisco, she and her husband, a CPA, decided about a year and a half ago it was time to retire. Now 61, she also had recently become a grandmother and decided she wanted the freedom to enjoy the experience. But, as a solo practitioner charging a retainer fee rather than a percentage of assets under management, she didn't have many options. In short order, she was unpleasantly surprised to find that numerous potential acquirers weren't doing more than giving her firm a casual look.

“There are a lot of buyers, but no one has any money and they can't get a loan,” she says. “I've seen a lot of ‘lookiloos,’” she adds, a term for the kind of person who is constantly on the open house circuit, without any intention of buying a property. Now, she's considering bringing in a younger advisor from the Alliance of Cambridge Advisors, with which she is affiliated, and working part-time. Says Kleinman: “It looks like I'll be working with some of my clients for longer than I initially planned.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.